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Amid the media attention to the recent Dodd-Frank Wall Street Reform and Consumer Protection Act, largely unnoticed was the quiet release in the past few weeks by RiskMetrics Group, Inc., the proxy advisory firm, of its GRId assessment scores for publicly traded companies.

Earlier this year, RiskMetrics introduced a new tool that it believes will help investors better assess the level of governance-related risk at publicly traded companies.  The new tool, known as Governance Risk Indicators (GRId®), replaces the Corporate Governance Quotient (CGQ®) rankings previously assigned by RiskMetrics.  You can locate each company’s GRId assessment scores on the company’s profile page of Yahoo! Finance, among other places.

What does GRId assess?  Through use of its new GRId system, RiskMetrics evaluates a company across variables in four categories of corporate governance:  (i) audit, (ii) board structure, (iii) shareholder rights and (iv) compensation/remuneration.  Based on a series of approximately 65 data points, each governance category is scored as providing a low, medium or high level of concern.  Unlike the previous CGQ scores, which were based on relative rankings and provided a single, overall score for each company, the GRId assessment scores are assigned separately for each corporate governance category and are determined on an absolute basis compared to RiskMetrics’ view of best practices.  Like the CGQ scores, GRId assessment scores are assigned to a company based on RiskMetrics’ broad-based view of prudent governance with no consideration given to a company’s unique circumstances, its life cycle stage, its industry or the business environment in which it operates.

The GRId best practices are aligned with RiskMetrics’ proxy voting policies and will be updated annually in connection with updates to those proxy voting policies.  Nevertheless, RiskMetrics has indicated that it will not use the GRId assessment scores as a determinant for its proxy voting recommendations.  It will instead continue to use its benchmark proxy voting policies.  While these basic standards are the same, they employ different scoring systems and offsetting factors.  This means that a “low risk” GRId assessment score (which is a good thing) will not automatically trigger a positive vote recommendation from RiskMetrics.  Similarly, a company with poor pay practices that has otherwise adopted many of the GRId offsetting best practices could still receive a negative vote recommendation on an equity compensation plan proposal or against reelection of compensation committee members despite receiving a low risk GRId assessment score.

Companies are able to view and verify, at no charge, the information used by RiskMetrics to assign the GRId assessment scores here.  Companies may submit requests for data corrections and updates to be made through an online process where the company notes the needed change and provides the location of the source document that supports the request.  To obtain a user name and password to access the RiskMetrics verification site, North American issuers may contact the RiskMetrics corporate services support team at 301.556.0570 or by email .  Issuers in the UK, Continental Europe and Asia Pacific markets may contact the RiskMetrics support team at +32.2.679.20.01 or by email .

Whether company boards view GRId as the latest marketing gimmick from RiskMetrics or as a viable tool that will be used by investors to gain insight into the corporate governance of a company, each company and its advisors should take time to understand how the company’s assessments were derived by RiskMetrics and what actions by the board might influence those assessments.  In some cases, a company may be able to improve its GRId assessment scores through careful drafting of its proxy statement or annual report, being certain to touch on the hot-button disclosure items sought by RiskMetrics, without otherwise modifying the company’s corporate governance practices.  For example, assessment scores may be positively or negatively influenced based on the answers to the following questions and the extent of the disclosure: 

• Does the company disclose board/governance guidelines?
• Does the company disclose the performance measures, hurdle rates, and target payout thresholds for the short-term cash incentive plan that generated the awards reported?
• Did the company disclose a clawback provision?

Companies should consult their advisors to understand their GRId assessment scores, verify and troubleshoot the information used by RiskMetrics to assign the GRId assessment scores, and discuss whether changes in corporate governance practices are appropriate or desirable in light of the company’s particular circumstances, notwithstanding the GRId assessment scores that may have been assigned.

For further information about this Alert, please contact:

Linda Marotta Thomas
Partner
Executive Compensation and Employee Benefits

Sanjay Shirodkar
Of Counsel
Public Company and Corporate Governance