Governance risks far higher at “junk” issuers, study finds

In North America, corporate governance risks are far higher at issuers rated as high yield, compared with investment-grade companies, according to a new study by Fitch Ratings.

The rating agency reported that a review of 585 North American non-financial companies found that speculative-grade issuers have governance risk scores that are almost four times worse than investment grade issuers.

“The most common risks relate to concentrated or private ownership and decision making being reliant on a single individual,” Fitch reported. “Risks linked to financial reporting and auditing were the least common.”

While higher scores indicate a greater number of potential governance risks, they don’t necessarily imply that a governance-related event will actually materialize for a specific company, Fitch noted.

Of the companies that it reviewed, 20.8% of investment grade issuers had at least one weakness, compared with 57.8% of speculative grade issuers, the study also found.

Additionally, the research indicated that North American investment-grade issuers tend to have fewer potential governance weaknesses than companies in other regions, where the gap between investment grade and speculative companies is much closer.

For instance, in Latin America, 81.5% of investment-grade issuers had at least one governance weakness, and 87.3% of speculative issuers had least one potential weakness.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.