Governance, Conduct, Compliance and Ethical Standard are now major qualitative considerations for Rating evaluations.
Investors’ growing focus on Environmental, Social and Governance (ESG) Compliance and related disclosure means any failures will have a more rapid impact on the way an entity is perceived.
Governance embodies the system of rules and standards in which an organization operates and mechanism by which it, and its people, are held to account. Firms with better Corporate Governance attracts higher credit rating, lower yield and stakeholders’ trust.
For example, a leading Credit Rater has placed an Energy Company and one of its solar energy affiliate’s ratings on downgrade because “Governance risks are material to the rating action, and the company has also experienced senior management turnover recently. The internal review and the delay in filing necessary regulatory reports are additional governance considerations material to the rating action”.
Subsequently shares in the quoted Energy Company declined by 41% recently, its biggest intra-day fall since its 2016 listing – after the company announced the new CEO has resigned within two months of joining. This was after a series of resignations in top management and the Board.
The resignation comes at a time when closing of the company’s accounts for FY22 has not been completed. In its statement to the Regulator, the Company expressed inability to give a timeline for submission of its annual report for the financial year ending March 2022.
The original deadline for filing of the annual report with the Regulator was August 1 and the extended deadline was August 16. Such delays have already led to some global Stock Exchanges claiming the company is “noncompliant with quantitative/qualitative continued listing standards or has delayed in filing an annual or interim report required pursuant to regulation’’.
So far this year, the stock is down 62%. The company’s current market capitalization stands at $405.5 million.
This suggests that good Governance practices have become an important determinant of credit ratings.