Weak corporate governance detrimental to rating: Fitch

Fitch, the rating agency, said in a new report that while corporate governance is just one of many inputs into its ratings process. If not adequately implemented and carried out, it can be detrimental to the overall health of an enterprise, it said.

The rating agency also found that while strong governance practices generally will help ensure the likelihood of timely contractual payment, a fundamental governance weakness can have crippling consequences for a company's viability, and may therefore constrain its ratings.

Dina Maher of Fitch's credit policy group commented: 'While exceptionally strong corporate governance, in and of itself, does not generally benefit a rating, it may warrant other positive recognition in the credit analysis of the company.’

“There can be discrepancies between the interests of bond and equity holders particularly around questions of promoting short-term performance over long-term stability.

Dina Maher of Fitch's credit policy group

She added: ‘Credit investors need to be aware that while sound governance generally serves the interests of all stakeholders, there can be discrepancies between the interests of bond and equity holders particularly around questions of promoting short-term performance over long-term stability.'

‘For example…stock options that vest in the medium term give management incentives that are more in line with creditors' interests.’