Analysts Evaluate Behavior of Corporate Leaders in Ratings Process

One area of qualitative characteristics that Standard & Poor’s evaluates in its ratings process is the actions and attributes of a company’s management team and board of directors.  The analysis of those individuals charged with governance offers S&P valuable information about the nature of the subject company and its leadership that could impact the company’s overall risk profile and creditworthiness.  In a July 2013 article issued by Standard & Poor’s Ratings Services, the credit rating agency discusses a particular feature of its analysis of management and governance – consideration of the impact of activist investors on a company’s leadership team and board of directors.

S&P notes that today’s activist investors are often highly sophisticated and can thus be extremely influential, even when they don’t hold a substantial stake in a company.  Investor activism can lead a company’s leadership to question its decision-making process and even change course in some circumstances.  This unique interaction between investors, management, and the board of directors offers S&P the opportunity to see corporate leaders under pressure.

From a risk management perspective, this article reveals several points to consider:

• Stakeholder groups are interested in the way a management team and board of directors evaluate risks and make decisions.  As shown by the article, S&P is an example of a stakeholder that uses investor activism scenarios as a means to qualitatively evaluate a company’s decision-makers and its decision-making processes; that evaluation ultimately impacts S&P’s overall decisions about the risks surrounding a particular company.

• Investor activism is a potential risk event for any organization to consider as a part of its own risk universe. 

• Organizations that hold their own portfolio of investments may find it beneficial to monitor investor activity at company’s in which they hold stock.  That type of information could serve as a risk indicator in one area of the overall risk management process.

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Original Article Source: “Enterprise Risk Management: Standard & Poor’s To Apply Enterprise Risk Analysis To Corporate Ratings,” Standard & Poor’s, May 2008