Agencies downgrade Damodaran's view on governance rating

Rating agencies refuse to endorse the view put forth by M Damodaran, chairman of UTI Mutual Fund and CMD of Industrial Development Bank of India, that the process of corporate governance rating ought to be halted.

Leading rating agencies pointed out that through the process of rating India Inc based on their corporate governance, they are able to add value to the management and help companies to overcome their shortcomings.

"Broadly the usage of governance ratings has helped as issues get highlighted, and the management tends to make necessary changes. This thus brings additional value to the management, the business and business processes," R Ravimohan, managing director and CEO, Crisil, said.

Questioning Damodaran's statement that the idea of governance rating is premature, a senior executive with another leading rating agency said: "With corporate India tapping international markets and going global, it is important for them to assess governance practices to get a better standing overseas."

Damodaran pointed out on March 24 at a breakfast briefing that until companies actually implement corporate governance more in content than as a checklist compliance with the listing agreement, such ratings ought not to be undertaken.

Ravimohan agreed with Damodaran's contention that financial institutions depend solely on these ratings and should rather make their own independent valuations.

Icra Ltd chief rating officer and joint managing director, Naresh Takkar, though said that it may be early days for most corporates to undertake governance ratings, "there are some progressive corporates which view these rating as a diagonistic assessment of the governance norms adopted by them, and the same enables them to improve on their shortcomings".

The Delhi-based agency on March 24 upgraded the corporate governance and stakeholders value creation ratings of Godrej Consumer Products.

Ravimohan cited a number of cases where governance ratings have seen a positive impact on the management. In one instance, even though the remuneration package to employees was fairly high, there was no proper communication channel between the management and its employees.

This was brought into light from corporate governance rating and since then the management has stepped up communications considerably, he said.

Crisil chief further cited an example wherein the management thought it wise not to engage in business with a minority shareholder fearing competition.

However, following the corporate governance rating undertaken, it was found that the stakeholders were being denied the benefit of venturing into the business and the management decision thus failed to create adequate wealth.

The decision was thus reversed and today all the stakeholders benefit from the additional business.

Care Ltd executive director Rajesh Mokashi said it is a healthy practice that corporates try to improve their corporate governance rating by adopting better internal processes. Today governance rating is in its early stages of development as it is a voluntary exercise with no regulatory compulsion.

To date, Icra has assigned governance rating to Infosys Technology, ITC, Godrej Consumer Products, PNB Gilts and Esab Industries. Crisil has assigned ratings to 22 companies, of which only six have accepted the ratings.

These include HDFC Ltd, HDFC Bank, Hero Honda Motors Ltd, Infosys Technology, Bharti-Televentures Ltd and Dabur India Ltd.