GMI Ratings Governance Issue | Moody's Corp.
Industry: Business Support / Supplies
Market Cap: $9,307.8mm (Large Cap)
ESG Rating: F
AGR: Average (36)
Moody's Corp. deserves credit for recently splitting the roles of Raymond W. McDaniel, who had been its chairman and CEO since April 2005. But the New York ratings agency also elected Henry McKinnell as its new chairman, and he lacks the faultless past that one might have expected in the circumstances.
Moody's shareholders had recommended last year that the company's chairman have independence whenever possible, and the board decided earlier this year to change McDaniel's position. While taking away his power as chairman, Moody's elected McDaniel as president and kept him as CEO. He'll also continue to serve as a member of the board.
McDaniel explained the decision to make McKinnell chairman in a statement on April 19. McKinnell's "extensive business experience and perspectives on corporate governance are strong assets to the board and will continue to serve Moody's well," McDaniel said.
McKinnell has been on Moody's board since the company went public in 2000, having joined from the company's former parent Dun & Bradstreet Corp. He was also the chairman and CEO of the pharmaceutical giant Pfizer Inc. from 2001 until 2006.
On the bright side, Pfizer was already undertaking many of the governance practices prescribed by the Sarbanes-Oxley Act of 2002 long before it became a law. For example, Pfizer had been disclosing its processes on nominating directors and communicating with shareholders for years. The company also included all three of the charters for its audit, compensation and corporate governance committees in its proxy statements. And a year before the Securities and Exchange Commission required companies to notify the regulator about their insider trades, Pfizer had already implemented the two-day electronic filing of those SEC Form 4s.
That said, McKinnell didn't manage to keep Pfizer spotless. For example, the company withdrew Bextra from the market in 2005, and in September 2009 said it settled allegations that it had illegally marketed the painkiller as well as other medicines such as Geodon, Zyvox and Lyrica. Also, the Pennsylvania Attorney General's office said in September 2011 that Pfizer was one among other pharmaceutical companies to settle allegations made in 2004 over artificially inflated drug prices. Between October 2002 and December 2005, Pfizer's leak detection and repair program allegedly failed at a former manufacturing plant in Groton, resulting in the June 2008 settlement with the Justice Department and Environmental Protection Agency that Pfizer had violated the Clean Air Act.
Meanwhile McKinnell also made moves such as buying the U.S. drugmaker Pharmacia in April 2003. Fortune Magazine wrote in July 2011 that Pfizer's stock had plunged by 46% after McKinnell took over, yet he received an $83 million pension. Protesters picketed and blitzed Pfizer shareholders with an airplane bearing a banner that read "Give it back, Hank," before he left the firm, according to Fortune.
Given Moody's is one of the poster children for what went wrong during the financial crisis of 2008, it seems unclear why the company would name a chairman that has received such unambiguously harsh criticism for his history of poor performance. If Moody's is trying to distance itself from its recent governance failings, this hire is a clear step in the wrong direction.
To be sure, Moody's deserves some credit. The company's financial statements reflect that its AGR improved to average in March this year from aggressive in September, and one of the red flags on its accounting and governance risk had been that McDaniel was serving as both chairman and CEO. Nonetheless, GMI Ratings continues to give Moody's an F on its corporate governance.