On the heels of its recently published governance assessment framework (reported on here), Moody's announced the results of a report indicating that companies' corporate governance practices and their credit quality are inextricably linked. The report aims to provide a framework to understand the key governance considerations that Moody's incorporates into its credit ratings and analysis.
For private sector issuers (i.e., non-financial corporates, financial institutions, infrastructure, structured finance, and certain competitive government-owned enterprises), the key governance considerations most relevant to Moody's credit analysis are: 1) Financial Strategy & Risk Management; 2) Management Credibility & Track Record; 3) Organizational Structure; 4) Compliance & Reporting; and 5) Board Structure, Policies & Procedures. For public sector issuers (i.e , sovereign, sub-sovereign and municipal issuers), the key factors are: 1) Institutional Structure; 2) Policy Credibility & Effectiveness; 3) Budget Management; and 4) Transparency & Disclosure. Each of the foregoing governance considerations is supported by a number of explanatory bullet points and further elaborated on in the report.
Moody's VP & Senior Analyst Brendan Sheehan commented:
Governance failures can lead to severe reputational and financial risks, including increased debt financing costs or, at the extreme, complete loss of access to capital markets. Conversely, strong governance practices can enhance a company's credit quality by ensuring that proper risk management and controls are in place.
The report asserts that - unlike E&S risks, which tend to be sector-oriented - governance considerations tend to be issuer or transaction-specific; however, governance practices can help mitigate or may intensify E&S risks. This post first appeared in the weekly Society Alert!