Yardsticks for Boards?

Amid all the hand-wringing about boards of directors, several well-known--and some not so well-known--players in corporate governance have introduced board-ratings systems.

Last month, for example, GovernanceMetrics International Inc. was scheduled to launch its GMI Ratings. According to CEO Gavin Anderson, the more than 600 metrics in the start-up's database rate companies in seven categories ranging from board accountability to shareholder rights. "We issue eight scores per company--one overall and one for every subcategory," says Anderson. Subscribers pay a flat fee of $18,000 for the rating, which is accompanied by a written analysis that "red flags" areas of weakness.

GMI's offering is the latest in a crowded field. Last June, Institutional Shareholder Services introduced the Corporate Governance Quotient into its proxy reports for the Russell 3,000. Standard & Poor's jumped into the game in October, offering both governance-transparency ratings for the S&P 500 and individualized company assessments. Next year, The Corporate Library and the Investor Responsibility Research Center (in conjunction with TrueCourse Inc.) are set to offer systems.

Most of the systems are geared toward giving investors an overview of a firm's corporate-governance practices. For firms, however, they offer different insights. Aside from benchmarking a firm's own governance practices, says Anderson, GMI's rating offers a glimpse into "the governance practices of [potential acquisition] targets." And for anyone thinking of joining a board, the system is a useful due-diligence tool, he adds.

Skeptics worry about the snapshot nature of many of the ratings. Because most use only public information, says Richard M. Steinberg, corporate-governance leader at PricewaterhouseCoopers LLP, they cannot "capture how the board operates inside the boardroom." Still, says Patrick McGurn, vice president of ISS, the best thing that could come out of the flurry of mechanisms would be if companies "adopted better standards.".

Advisory Grades

Who's rating whom?

*Soon to be expanded
**Soon to be released

Credit Climate

Thanks a Lot, Enron!
It's the best of times and the worst of times for growth-oriented companies in troubled sectors. One dramatic example: energy trading and management company TBC Consolidated Fuels Marketing & Management Corp.

Thanks to the problems of big players like Enron, El Paso, and Dynegy, the $21 million company now has scads of new clients to chase. "There has never been a [better] opportunity to grow our market share," says TBC ConFuels president and CEO Peter Bryant, who has seen his annual revenues increase steadily from $300,000 since entering the sector in 1997. Based on his pipeline of potential clients, he says he could easily buy 10 times the $1.5 million worth of energy he's now purchasing monthly for Fortune 500 clients like Miller Brewing and Texas Instruments.

On the other hand, the loss of competition has also spooked the bankers, leaving TBC ConFuels without the credit financing it needs to expand business. Even armed with signed contracts from customers, bank statements, and details about the company's hedging strategy to keep cash flow strong, TBC ConFuels was refused credit by 37 banks. Thanks to Enron, "we have found that domestic lenders are still a little gun-shy about commodity lending," says Jacqueline Arthur, TBC ConFuels's part-time CFO. "It's a bit of a herd mentality."

Indeed, "the banks are just fleeing the sector," says Peter Rigby, an energy analyst for Standard & Poor's. "They're looking at an enormous number of nonperforming loans, so it's a brave banker that brings a new loan to a credit in this sector." Moreover, small companies are at a disadvantage, he notes, since they are more vulnerable to liquidity crunches when systemic breakdowns like energy shortages or delivery delays occur.

Patrick Von Bargen, executive director for the National Commission on Entrepreneurship, argues that it's not Enron's fault, and that TBC ConFuels's problems with banks are typical for asset-light start-ups. Credit conditions "have always been bad," he says. "When you think about entrepreneurial ventures, where the assets are often people or a brand, how does a bank foreclose on those things?"

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