Risky business: GMI identifies danger in some companies

Corporate governance watchdog Governance Metrics International (GMI) recently issued a report which highlights companies that exhibit ‘patterns of risk,’ and urges investors and corporate stakeholders to avoid investing in these ‘risky’ businesses.   

GMI rates companies based on their environmental, social and governance policies and most recently it added accounting transparency criteria to its ratings. According to the report, investors should avoid companies with the lowest ratings – at all costs.

Companies making it onto GMI’s ‘Risk List’ include NewsCorp, Discovery Communications, EZCORP and Comstock Resources.

GMI says there is little indication that NewsCorp has shown any signs of improved governance.

‘Unlike Discovery, which until now has been regarded as a Wall Street darling, NewsCorp has a long history as a governance problem child,’ confirms Anne Wright, a former chief ethics counsel and associate general counsel at the Financial Industry Regulatory Authority (FINRA). For years, [NewsCorp] has been graded ‘F’ by GMI (and GMI’s predecessor, Corporate Library) ‘only because there is no lower grade’ according to Nell Minow.’  

The report raises concerns about executive remuneration problems, board independence issues and ownership structure at the companies listed.

GMI is telling fiduciaries – like pension fund managers – that red flags are flying. They need to consider whether holding these stocks is consistent with their fiduciary duties, adds Wright (pictured left).

‘As we have seen from several recent notable scandals and blow ups, corporate failures are often driven by non-financial issues, in areas where management is not sufficiently addressing risks or has interests that are not aligned with long-term performance and sustainability,’ says Jack Zwingli, CEO of GMI. ‘ESG risk factors impact long-term company valuations and the cost of capital, and are being used by investors and others – including corporations – to complement traditional valuation models and company disclosures.’

It is unclear whether the GMI Risk List will expand over the years, says Wright, who now runs her own practice. ‘There are up to 200 additional companies that could be added.’

The GMI Risk List highlights the following 10 companies: