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Is there a proven link between corporate governance, ratings, and corporate performance?

In my IIA blog, I review a book on corporate governance (or at least a 5 page excerpt I find interesting). In the post, I quote sections where linkage is discussed, especially related to the HealthSouth Corp. financial statement manipulation case.

In HealthSouth, a company that received high ratings for its apparent governance excellence was engaged in fraud (the CFO and other senior executives plead guilty to earnings manipulation). The audit committee was not meeting, and the external auditors were receiving consulting fees double the size of the audit fee.

How is it that third party ratings, whether of governance or risk management, can be so wrong?

Well, it’s because they can only see the veneer of internal processes. They are not in the board and committee meetings. They don’t see whether the non-executive directors are challenging management and asking the right questions. They don’t see whether the agenda is sufficient to cover all key areas, or whether the directors have the information – and time – they need to be effective.

As I say in the post, over the long term there may be a solid link between effective governance and corporate performance. But, certainly in the short term, cowboys often perform.

Do you think there is a link? Do you believe in governance or risk management ratings?

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