GOVERNANCE RATERS

Audit Integrity

The Corporate Library

Governance Metrics International

Institutional Shareholder Services (ISS)

Investor Responsibility Research Center

Over the past year, Compliance Week has published numerous stories about governance ratings firms, including one a few weeks ago in which we questioned those firms' ability to predict problems at Marsh & McLennan and other insurance companies targeted by New York State Attorney General Eliot Spitzer.

However, not much is known about the ratings agencies since the industry is so new. This week, we provide a snapshot of each of the five major governance ratings firms, including information on their model, pricing, and conflicts of interest:

Audit Integrity

History: Co-founded by James Kaplan and David Stoner in 2002.

Business: Evaluates the accounting and governance practices of public corporations using publicly available financial data.

How Companies Are "Rated": Utilizes public companies' SEC filings going back to 1989, as well as SEC litigation and regulatory releases, press releases, and other public documents. This information produces several hundred metrics that are analyzed, as well as custom ratios, like "accounts receivable over revenue." These measures are compared to the company's history and industry peers to measure the likelihood of aggressive accounting and governance practices.

Scope: Claims 10,000 public companies.

Who Buys It: Most subscriptions are purchased by investment firms, insurance firms and accounting firms. Investment firms make up the bulk of clients.

Conflicts of Interest: Company claims it's "not an issue," since Audit Integrity doesn't sell services to corporations.

Rates: Ranges starts at $10,000 annually, up to several hundred thousand dollars.

"Above and Beyond": The company claims that it looks beyond the minimum practices required by GAAP by identifying "outliers" within a peer group. It does this by comparing companies to their own history and their peers. Thus a company may comply with standard practices, but still may be more "volatile" or aggressive than its peers.

Sample Customers:

St. Paul's

AIG

CalSTERS

5 Highly Rated Companies:

AmSouth Bancorporation

Becton, Dickinson & Co.

Coventry Health Care

Exxon Mobil Corp.

The Allstate Corp.

5 Poorly Rated Companies:

Alliance Gaming Corp.

Guidant Corp.

Novatel Wireless

Red Hat

Pfizer

The Corporate Library

History:

Founded in 1999 by Nell Minow, Ric Marshall and Robert A.G. Monks.

Business: Independent investment research firm providing corporate governance data, analysis & risk assessment tools.

How Companies Are Rated:

Companies are rated based on the effectiveness of their board of directors. "TCL" analyzes all SEC filings to identify key indicators of board weakness through review of eight factors, such as board composition, CEO compensation, and take-over defenses, among others. The primary concern isn't good governance, but shareholder value and creditor or underwriter exposure to risk.

Scope:

2,000 U.S. corporations, including those listed on the S&P indices, the Russell 1000 and the Fortune 1000. Also rates a small number of international companies that trade in

the U.S.; may increase international coverage.

Who Buys It:

Clients include investment firms, credit rating firms, and corporate insurers. Subscribers pay for access to the ratings product, Board Analyst. In addition, The Corporate Library provides discounted access to its research to large universities with governance programs.

Conflicts of Interest:

The Corporate Library has a few corporate subscribers, but they pay no special fees and are clearly identified as such. The Corporate Library doesn't provide consulting

services to companies.

Rates:

From $7,000 for single-user, bare-bones access, to

$100,000+ for enterprise access with direct access to

Corporate Library analyst, staff training and other services.

"Above and Beyond":

TCL claims that its standards tend to be stricter than those required by exchanges or SEC regulations, specifically with regard to its standards for independent directors.

Sample Customers:

Morgan Stanley

CalPERS

Calvert Group

PricewaterhouseCoopers

Moody's

Chubb

5 Highly Rated Companies:

TCL would not provide list to Compliance Week.

5 Poorly Rated Companies:

TCL would not provide list to Compliance Week.

Governance Metrics International

History:

Formed in 2000. Co-founders include Stephen Davis, Gary Kraut and Jon Lukomnik. [Editor's Note: Compliance Week recently recruited Davis and Lukomnik to contribute a monthly column. Their first was published November 30.]

Business: Provides a tool to monitor corporate governance by industry, geography, etc.

How Companies Are Rated:

Scores companies on a scale between 1.0 (lowest) and 10.0 on a variety of categories, including board accountability, financial disclosure and internal controls, shareholder rights, executive compensation, and others.

Scope:

More than 2,600 companies are rated about every six months, although GMI expects that number to increase to 3,200 in the first quarter of 2005. The universe of companies is drawn from major equity indices, including the FTSE 350 and the S&P 500.

Who Buys It:

Majority of subscribers are institutional investors; others include law and accounting firms, insurance underwriters and regulators.

Conflicts of Interest:

Claims to be avoided, as company does not consult with firms it rates or is likely to rate in the coming 12 months. While there is no charge for a company to learn its GMI rating, a more complete 10-12-page report costs $1,000.

Rates:

Minimum annual charge of $7,500 for reports on 50 companies. From there, rates reach six figures.

"Above and Beyond":

GMI claims to focus more on global "best practices" than basic regulatory requirements. For instance, Australian companies tend to disclose more employment information, such as employee turnover, when compared to companies elsewhere.

Sample Customers:

Lazard Asset Management

Ohio Public Employees Retirement System

ABN Amro Holding

5 Highly Rated Companies:

3M

PepsiCo

Praxair

Westpac Banking Corp.

Wisconsin Energy Corp.

5 Poorly Rated Companies:

American National Insurance

AP Moeller Maersk

Kelly Services

King Pharmaceuticals

Mitsubishi Motors

Institutional Shareholder Services, Inc. (ISS)

History:

Founded in 1985 as proxy advisory firm. In 2002, added corporate governance ratings service.

Business:

Tool for monitoring and comparing the corporate governance structures of public companies.

How Companies Are Rated:

Companies are evaluated against both their industry peer group and other companies of a similar size. Evaluation based on 61 criteria, including board structure, laws and

state of incorporation, audit rotation practices, and more.

Scope:

Rates 7,500 companies worldwide; 5,000 in the U.S., including the Russell 3000.

Who Buys It:

ISS' governance evaluation product, Corporate Governance Quotient, is sold to asset managers, credit rating

companies, and custodian banks, among other financial institutions. Corporations, which account for about 15 percent of ISS' revenue, can subscribe to a service that allows them to analyze their firm against their peer group. Financial institutions use the CGQ to analyze and manage portfolio risk; some credit ratings agencies use it to assign ratings.

Conflicts of Interest:

ISS has received the lion's share of criticism levied against governance raters, specifically for charging investors to see the ratings, and then consulting with companies to improve those ratings. Nevertheless, ISS claims that companies cannot raise their CGQ score unless they implement improvements in governance and publicly

disclose it. In addition, the company claims now that the corporate and financial institutions of the business are under separate leadership and work from separate databases. Still, companies can pay to perform "what if" analyses to see how their score might change if, for example, they altered their board structure.

Rates:

Rates on institutional side are individually negotiated. On the corporate side, rates range from $15,000 to $25,000.

"Above and Beyond":

ISS claims that it evaluates companies based on "best practices," not regulatory compliance.

Sample Customers:

State Board of Administration-Florida

National City Private Client Group

TAL Global Asset Management

Northern Trust Corp.

Fitch Ratings

5 Highly Rated Companies:

The AES Corp.

MBIA

Family Dollar Stores

General Motors Corp.

The Home Depot

5 Poorly Rated Companies:

ISS would not provide list to Compliance Week.

Investor Responsibility Research Center (IRRC)

History:

Founded in 1972 to provide information on pending shareholder resolutions with social policy implication. Added corporate governance service in 1981.

Business:

Provides data and research on corporate governance and social responsibility metrics.

How Companies Are Rated:

IRRC doesn't provide a numerical rating, but compares a number of attributes to companies' industry peer group and peers within the appropriate S&P index. Attributes examined

include board structure, executive compensation, and shareholder rights. All information taken from public disclosures in SEC filings.

Scope:

Evaluates 4,000 U.S. companies, including those in the Russell 3000, S&P 500 and other indices. Also analyzes 3,000 non-U.S. companies.

Who Buys It:

Subscribers include more than 500 institutional investors, corporations, law firms, foundations, academics, and other organizations. Also used for corporate benchmarking services; corporate governance services; social issues research.

Conflicts of Interest:

IRRC claims that companies can obtain their governance profile, but they can't modify it—short of making a change and disclosing it publicly. In addition, the companies are only accessing a

comparison of their company to a peer group, not a numerical rating.

Rates:

IRRC would not provide rate information to Compliance Week.

"Above and Beyond":

Like ISS and other firms, the IRRC claims to look at "best practices" instead of regulatory requirements. For example, in reviewing "director independence" status, IRRC does not consider any former employees of a company independent, no matter how long ago they left the firm. IRRC also does not consider any board member who receives income for services rendered independent.

Sample Customers:

IRRC would not provide rate information to Compliance Week.

5 Highly Rated Companies:

TCL would not provide list to Compliance Week.

5 Poorly Rated Companies:

TCL would not provide list to Compliance Week.