In defense of ratings - Feedback - Letter to the Editor

Chief Executive, The, Jan-Feb, 2004

Professor Jeffrey Sonnenfeld's recent column, "The 'Compliance Industry' is Going Too Far" (Thought Leader, November 2003), suffers from several inaccuracies and misplaced conclusions.

Sonnenfeld claims that our governance ratings firm, GovernanceMetrics International, has a conflict of interest because only companies that pay us get to see the facts they're being assessed on. That is not true. Every company that we rate is given the chance to review and comment on the information we collect, prior to our ratings being assigned, at no cost. Our clients are our subscribers, the vast majority of which are institutional investors.

Sonnenfeld also states that Wal-Mart, Southwest Airlines, eBay, Dell and UPS are among the lowest-ranking companies of those that we rate. This also is untrue. In fact, each of these companies received ratings in July 2003 that were average or above average among all the companies we rate. A year ago--at a time when some companies were already Sarbanes-Oxley compliant in many respects--these companies did score below average. But they were far from the bottom. Sonnenfeld does these companies a disservice by claiming otherwise.

In addition, Sonnenfeld argues that there is more to governance than structural mechanisms, such as separating the roles of chairman and CEO and maintaining a high percentage of outside directors. The professor implies that GMI relies only on such mechanisms in devising its governance ratings. In truth, these are only two of hundreds of criteria we examine to assess a company's culture of accountability and transparency.

Gavin Anderson

President and CEO

GovernanceMetrics International

New York

Sonnenfeld replies: While Gavin Anderson refers to GovernanceMetrics International's clients as "subscribers," the firm's Web site describes its company ratings service as "a level of review only possible at the invitation of the company, which is required to pay a fee to GMI." This is somewhat ironic, because a company's "independence" is part of the assessment. Imagine if Consumer Reports or JD Power and Associates used a similar model comparing the goods of manufacturers that paid them for ratings with those of manufacturers that did not.

As for GMI's governance ratings of Wal-Mart, Southwest Airlines, eBay, Dell and UPS, until recently, a person only had to punch up the GMI Web site to discover a section that reported "Below Average Ratings" for these widely admired and top-performing companies. One can only hope that no investors or regulators used these misleading ratings as guidelines.