(Written by Alexander Crawford)
How well are your favourite companies being run? How can you tell? Famous cases of corporate fraud such as Enron and now the scandal surrounding Olympus have made these questions even more important today.
For a look at how companies are being run, look to their corporate governance policies. These policies represent how the company’s board operates, how the company is audited, how the board exerts control over management, and how shareholder rights are protected.
These policies are vital to the long-term health of a company’s operations. They manage the inherent conflict of interest between shareholders (who wish to maximise the value of the company) and management (who wish to maximise their personal wealth). If a company’s corporate governance policies are lax, the company may fall due to the greed of management.
Business Section: Investing Ideas
To illustrate these ideas, we ran a screen in the search for companies with riskier corporate governance policies. Institutional Shareholder Services (ISS) gives ratings for four areas of corporate governance, on risks related to: the board, the audit committee, the compensation committee, and shareholder rights.
We ran a screen on the S&P 500 for stocks with “high concern” ratings on at least two corporate governance ratings from ISS.
Do you think these companies are at risk?
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1. Cablevision Systems Corporation (CVC): Operates as a telecommunications, media, and entertainment company. Market cap of $4.13B. According to ISS, the company has a ‘high concern’ rating in Compensation Risk and a ‘high concern’ rating in Audit Risk.
2. Hudson City Bancorp, Inc. (HCBK): Operates as the bank holding company for Hudson City Savings Bank that provides a range of retail banking services. Market cap of $3.40B. According to ISS, the company has a ‘high concern’ rating in Compensation Risk and a ‘high concern’ rating in Shareholder Rights Risk.
3. The Charles Schwab Corporation (SCHW): Provides securities brokerage, banking, and related financial services to individuals and institutional clients. Market cap of $14.87B. According to ISS, the company has a ‘high concern’ rating in Compensation Risk and a ‘high concern’ rating in Shareholder Rights Risk.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.