PGS reviews proposed Nigerian CG rating system

Recently, PGS Advisors completed an independent evaluation of the proposed Nigerian Corporate Governance Rating System (CGRS). In an ambitious endeavor, the Nigerian Stock Exchange and the Convention on Business Integrity in Nigeria have partnered to develop the CGRS for listed companies. The overarching goal of the CGRS is to influence and change the national corporate governance culture, thereby improving the overall perception of and trust in Nigerian capital market and business practices. Achieving this goal will be instrumental in accomplishing the secondary objectives of enhancing the access of Nigerian companies to international capital markets and offering well-governed companies a platform for differentiation.

We find that the index setup and methodology chosen should serve the CGRS well in achieving its goals. After the test phase in 2014, participation for all listed companies will be mandatory. This will give the rating credibility since companies cannot pick and choose to participate. The chosen rating criteria are an adequate blend of Nigerian and international standards, with the explicit aim of evolving over the years to make them progressively harder to meet. In addition, the CGRS has developed a unique three-component rating setup, consisting of a corporate compliance, a director fiduciary awareness and a corporate integrity component. With the explicit addition of a focus on actual company practices and corporate integrity, of special importance in the Nigerian context of course, the CGRS setup is unique in the international context. The plans for the setup of the CGRS also contain a well-thought through selection process for the evaluators engaged in the CGRS rating process which should  – in theory – work well to prevent conflicts of interest and protect the integrity of the rating process. The proposed governance structure with one steering board and three specialized committees is elaborate when compared to other corporate governance indices, but seems appropriate to ensure the credibility, transparency and integrity of the rating system.

In our previous studies of corporate governance indices we have noted the critical importance of transparent communication about an index’s setup and results. Given the complex CGRS setup, including the incorporation of non-public information in the corporate integrity rating component and the generally negative perception of Nigerian business practices, a very high level of index transparency is crucial for the CGRS. The planned comprehensive disclosure of the full methodology and rating results on a singular website would put the CGRS ahead of all existing corporate governance stock exchange indices by a wide margin. In fact, of the currently existing six stock exchange indices based on rating corporate governance, none discloses the individual company rating results.

The success of the CGRS hinges on the successful implementation of its well-conceptualized setup. We are looking forward to see the completion of the pilot phase with volunteering companies later this year and the subsequent launch of the CGRS. An increasing number of stock exchanges is in the process of launching indices incorporating corporate governance factors, often as part of a sustainability index also factoring in environmental and social factors. The Moscow Stock exchange is still planning to launch Novy Rynok some time in 2014 and the Santiago Stock Exchange in Chile has just commissioned a feasibility study for a sustainability index.  In what is a growing number of stock exchanges with indices incorporating corporate governance factors, the CGRS has the potential to stand out for the transparency of its setup and the attempt to measure implementation.