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13/06/2002

Corporate Governance Rating (CGR) -- A More Efficient Approach to Corporate Monitoring

Keisuke Nitta 

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1. Introduction

The term “corporate governance,” which has become widely used in corporate management discussions, defies a simple definition. The concept of governance covers a broad range of fields from economics and management to law and accounting, and thus varies depending on the particular focus. Yet despite differences in context, a common theme running throughout these disciplines is that good governance is indispensable to good companies.

Following the collapse of the bubble economy, Japanese companies have performed dismally, while a series of improprieties has rocked the foundations of many. With the lack of management discipline brought into sharp relief, the lack of governance has is regarded as a major contributor to the present state of business affairs. From the late 1990s, various attempts have been made to address this problem, including the structural reform of management for companies to autonomously achieve good governance. Measures include the introduction of executive officers and independent outside directors (Figure 1).

But given the limited effect of such autonomous measures, good governance ultimately depends on the external monitoring of management. Indeed, information disclosure is important for governance precisely because it strengthens monitoring functions. However, despite disclosure improvements, external monitoring is still riddled with problems such as the considerable expense of learning how to gather and analyze massive amounts of information. We propose the corporate governance rating (CGR) approach as a way to reduce the cost of evaluating governance. While not yet ready for practical implementation, it promises to be an important new approach to improving the efficiency of corporate monitoring.

Since April 2001, NLI Research Institute has collaborated with the Waseda University Institute of Financial Studies2 to research and develop the CGR approach.3 This paper introduces the development background, and proposes the CGR approach as a means of improving monitoring efficiency.

1 This paper is part of a joint research project on corporate governance rating between NLI Research Institute and the Waseda University Institute of Financial Studies (headed by Prof. Hideaki Miyajima).

2 Waseda University Institute of Financial Studies web site: http://www.waseda.ac.jp/finance/index.html.

3 Governance ratings are also being developed by S&P and the Japan Corporate Governance Index Research Committee (headed by Prof. Takaaki Wakasugi of the University of Tokyo). However, unlike our quantitative approach, these approaches are qualitative.

 

Keisuke Nitta

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