You are on page 1of 4

CRISIL CORPORATE GOVERNANCE RATING

To make the analysis of corporate governance complete and more


meaningful, CRISIL has added two aspects which are unique to its criteria
and methodology. The first is an assessment of management quality, an
indicator of value creation potential. The second is the measurement of the
value created for various stakeholders. Thus, in addition to a detailed
analysis and evaluation of corporate governance practices, CRISIL evaluates
the benefits of following good governance: whether it is adding value to the
various stakeholders of a company, and if so to what extent. CRISIL
measures and captures this element in its analysis to make it a genuine 360
degree evaluation rather than an analysis of one aspect alone.

CRISIL's rating criteria:


Equitable treatment of shareholders:
wnership structure is a key factor in assessing the treatment given to
shareholders. While the presence of a large or majority shareholder is not
necessarily a negative governance issue, CRISIL analyses companies with
such concentrated shareholding in detail to ascertain the extent to which the
majority shareholder acts in the interest of minority shareholders and all
other stakeholders. The other aspects that are analyzed here are the extent
of disclosure of shareholding pattern, presence of any disproportionate
control provision, and the systems in place to detect and prevent insider
trading.
nership rights of shareholders
CRISIL examines what a company does in articulating and protecting
shareholder rights: to what extent it is complying with the law, and where
its practices go beyond laws and regulations to address the spirit of
governance. The emphasis is on what a company does, rather than its
compliance with the minimum required by the law. CRISIL analyses the
provisions of the companys charter, viz. memorandum and articles of
association, for voting rights, classes of shares, presence of anti-takeover
provisions, and preferential rights for any section of shareholders. The
analysis also focuses on ease and effectiveness of shareholder participation
at meetings.
%ransparency & Disclosure
Transparency means timely disclosure of adequate information on the
companys operating and financial performance and its corporate
governance practices. This helps stakeholders to monitor the operation and
performance of the management. Good disclosure in a transparent manner
is a reflection of the quality of a companys corporate governance
practices.

CRISIL examines the content of public disclosure for completeness, quality
and clarity of reporting. The degree of disclosure in financial statements, on
related party transactions, on operational performance, and on governance,
is one key aspect that CRISIL looks into. The other aspect of disclosure is
the timing - whether the company communicates material events and
performance in a timely manner to reach the largest possible number of
relevant stakeholders.

CRISIL looks at the independence of the auditor, adequacy of internal audit,
and effectiveness of the audit process. The composition and functioning of
the audit committee, quality and type of issues discussed at the audit
committee, the nature and adequacy of oversight provided with respect to
the companys financial statement, and the internal control and risk
management functions, are some of the aspects examined under this
parameter.

Composition of Board
CRISIL looks at the composition of the Board and its sub-committees.
Boards should be structured in such a way that the interests of all the
shareholders and stakeholders are respected, represented and protected.
CRISIL evaluates whether the Board contains a good balance of independent
and executive directors, and whether the Board has the right mix of various
capabilities required for governing the company, taking into account the
size, industry nature and growth objectives. The analysis also includes
aspects like selection process for Board members, succession policies for
Board members, processes for ensuring availability of relevant competencies
on the Board, and Board compensation.
unctioning of Board
CRISIL examines the functioning of the Board and its sub-committees and
assesses the Boards role in providing independent oversight of
management performance. Effective Boards are active, engaged,
challenging and questioning in attitude, and exhibit true independence in
action. CRISIL assesses Board effectiveness in terms of the role the Board
has played in directing, articulating and implementing the companys
strategy, overseeing the performance of management, and monitoring
operational controls and risk management systems. CRISIL also examines
the role and contribution of independent directors.

anagement assessment
CRISIL looks at the reputation, experience, performance and skills of the
management. These enable the management to create value for
stakeholders. The success of past strategies, proactive nature of
management in identifying threats and opportunities in the operating
environment, integrity of the senior management, and risk appetite of the
management, are some of the key areas CRISIL examines while carrying
out a management assessment.

'alue creation for various stakeholders


The strength of a companys relationship with all its stakeholders (including
shareholders) is an important determinant of its ability to create economic
value on a sustainable basis. CRISIL has devised parameters to quantify the
delivery of value to each stakeholder. The key parameters that CRISIL
considers while analyzing the value delivered to various categories of
stakeholders are given below:

Stakeholder Key parameters


Shareholder Return on invested capital compared to the eighted
average cost of capital, dividend track record, and
payout ratio
Debt holder Debt protection measures, credit ratings
Customer arket share, assessment of customer satisfaction
Employee Absolute salary levels, adjusted groth in average
annual salaries, stock option programmes, attrition
rates, and intangible factors like ork environment
and facilities provided by employer
Supplier Credit terms, support provided, and transparent
dealings
Society Social projects taken up by the company, care for the
environment, taxes paid to Government

Benefits of CRISIL G'C Rating


CRISIL GVC Rating would help a company to:
- Highlight the effectiveness of corporate governance practices to investors
- ssess the existing level of governance practices and benchmark against
peers
- Create visibility across all stakeholders
- Broaden the appeal of the company to investors who are interested in long
term
sustainability
CRISIL Rating Symbols for Governance and 'alue Creation Ratings
CRISIL G'C
Level 1
The capability of firms rated CRISIL GVC Level 1
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is the highest.
CRISIL G'C
Level 2
The capability of firms rated CRISIL GVC Level 2
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is high.
CRISIL G'C
Level 3
The capability of firms rated CRISIL GVC Level 3
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is strong.
CRISIL G'C
Level 4
The capability of firms rated CRISIL GVC Level 4
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is moderate.
CRISIL G'C
Level 5
The capability of firms rated CRISIL GVC Level 5
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is adequate.
CRISIL G'C
Level 6
The capability of firms rated CRISIL GVC Level 6
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is inadequate.
CRISIL G'C
Level 7
The capability of firms rated CRISIL GVC Level 7
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is poor.
CRISIL G'C
Level 8
The capability of firms rated CRISIL GVC Level 8
with respect to wealth creation for all their
stakeholders while adopting sound corporate
governance practices is the lowest.

Source: www.crisil.com