We find out about RiskMetrics' new Governance Risk Indicators (GRIds), which are due out from March for the new proxy season
RiskMetrics has unveiled its new governance rating tool: the Governance Risk Indicators (GRIds). The new system, touted as more transparent and comprehensive than its predecessor, will use answers to more than 70 questions to identify a company’s ‘level of concern’ across four categories: audit, board, compensation and shareholder rights. In a departure from the previous approach, GRIds will rate firms according to their jurisdiction’s best practices, as defined by RiskMetrics, rather than according to their peer group. RiskMetrics will also link GRIds to its proxy voting recommendations.
A data verification site where issuers can review their scores will be accessible by early March. By late March, companies that have not yet held their annual meetings will see their GRIds on proxy research reports; companies with an earlier meeting date will see their scores by June 30.
Given the relatively quick implementation, David Berger, partner at law firm Wilson Sonsini & Goodrich, recommends companies start to familiarize themselves with the risk indicators now. Once company information is available, Berger suggests a thorough review to ensure accuracy. David Drake, president of proxy solicitation firm Georgeson, seconds the advice. ‘Even if the impact of governance ratings on voting is marginal, the ratings are still very public,’ he notes ‘It makes sense to closely monitor the scores, and the data used to derive them, to ensure you are not downgraded in error.’
Despite the marketing buzz, GRIds are not anticipated to substantially increase a recommendation’s weight. But both Drake and Berger counsel against completely ignoring the new system. ‘For better or for worse, RiskMetrics is the dominant player among proxy advisory services,’ Berger says. ‘It would be foolhardy for a board to put its head in the sand and ignore what RiskMetrics is saying.’
Although the full impact of GRIds remains to be seen, support for the new system has been measured. Critics of RiskMetrics are not hard to come by, and it may not be much of a stretch to imagine GRIds as little more than cleverly disguised CGQs. But Michael Ryan, president and COO at Proxy Governance, admits that, with GRIds, RiskMetrics at least appears to be making changes. ‘Given its market influence and lack of transparency, I think it’s trying to change people’s perception and address concerns,’ he says.
But Berger wonders whether the new system is more stylistic than substantive. ‘It changes the packaging and the presentation is nice,’ he says. ‘But I think what it has done is more of a marketing effort to avoid some of the criticism it received about the prior system.’
