NEW YORK - The companies in the S&P 500 all appear to be above average in terms of corporate governance, according to a new ranking by Standard & Poor's.
Baker-Hughes Inc., Bausch & Lomb Inc. and Progress Energy Inc. were ranked highest, each receiving a 9, on a scale of 1 to 10. American Power Conversion Corp., Apollo Group Inc. and Bed Bath & Beyond Inc. each received the lowest rating, a 6. The other companies rated 7 or 8.
S&P also rated about 1,000 non-U.S. companies, releasing those ratings in Asia and Latin America.
"U.S. and U.K. companies are on par in disclosure and ahead of other regulator regimes," said Sandeep A. Patel, managing director-portfolio services, who oversaw the project.
Disclosure most lacking in U.S. companies concerned investor rights and structures of board, management and ownership.
And while the ratings offer some insight on investment strategy, Mr. Patel cautions, "How much can you do with one year's data?"
Higher rating, lower beta
Mr. Patel used the three-factor model, involving beta, price-to-book ratio and market value of Professors Eugene F. Fama and Kenneth R. French. He said he found that the higher the rating, the lower the beta. That finding conforms to the expectation that a high level of disclosure lowers risk and lowers a corporation's cost of both capital and return to shareholders.
Price-to-book ratios correlated only somewhat with annual report disclosure and less with disclosure including proxy statements and 10-Ks. Highly rated companies had higher price-to-book ratios, raising their market values, again consistent with expectation.
Small companies generally had lower ratings, again agreeing with expectations, as there is generally less information available about smaller companies, he said.
The ratings are based on transparency and disclosure in annual reports, 10-K filings and proxy statements on factors such as ownership structure, investor rights, financial transparency and board and management structure and process.
The S&P rates companies only on disclosure of these corporate governance attributes, based on objective criteria, and doesn't judge the practices or policies, he said.
S&P plans to update and make the ratings publicly available annually, he added.