A MODEL OF EVALUATION AND ASSESSMENT OF CORPORATE GOVERNANCE AND RESPONSIBILITY

A MODEL OF EVALUATION AND ASSESSMENT OF CORPORATE GOVERNANCE AND RESPONSIBILITY

The Entropy model of risk evaluation and assessment of the corporate governance of corporations (public, governmental and private) provides a quantitative estimate of the corporate governance risk in the various issuers in the Israeli capital markets, as is customary in global developed capital markets.

The model aims to evaluate the level of corporate governance risk of an issuer on the basis of a system of quantitative and qualitative parameters that relate to rules and principles from the corporate governance world.

Measuring the parameters facilitates the performance of an assessment of the  potential risk level the issuer, based on the characteristics of the issuer and the conduct of the corporation’s executives and organs towards investors.

To date, the model is comprised of four main categories (soon to come is a fifth category relating to corporate responsibility) that include about 100 different parameters that are collected regarding each corporation:

BOARD OF DIRECTORS

  • The structure of the board of directors and its committees
  • Suitability and competence of the board of directors
  • The level of effectiveness of the work of the board of directors
  • Operation vis-à-vis management

INTERNAL/EXTERNAL AUDITING

  • Auditing accountant
  • Payment structure for the accountancy firm services
  • Occurrences and disputes on accounting and audit matters
  • Internal auditor
  • Other audit topics
  • Risk management

SHAREHOLDERS RIGHTS AND ETHICS

  • Structure of control holding and office holders risk
  • Classes of shares in the articles of association
  • “Poison Pill”
  • Interested party transactions
  • Voting procedures
  • Transparency vis-à-vis investors and communications with shareholders

COMPENSATION POLICY

  • Performance based compensation
  • Structure of compensation
  • Planning of equity components
  • Clarity and transparency of the policy

The parameters and the weight attributed to each one, and which are included in the model, are based on information accumulated in the last couple of years of Entropy’s operations and work, as well as on the basis of work carried out jointly with an advisory committee comprised of representatives of the academia and other professional bodies.

EVALUATING CORPORATE RESPONSIBILITY (A NEW CATEGORY)

We recently introduced a new module to the Entropy model dealing with corporate responsibility of issuers. This service provides an adequate solution to corporations, in effectively managing their relationship with institutional investors and investors in general, that are looking to examine whether their investments constitute responsible investments. A positive evaluation on this topic through the Entropy model of evaluation, will result in the issuer receiving a positive mark, which in turn will improve the issuer’s general risk evaluation. With this category, we aim to encourage issuers, that are currently not adopting measures related to corporate responsibility, to develop this aspect of their business, thus gaining positive marks in their general assessment.

Among the topics examined in this respect: donations/contributions made by the issuer and its reporting of such donations/contributions, management of ethical aspects, labor relationships and diversity in the work force as well as gender equality, responsible procurement, volunteering and environmental activities.

OBJECTIVES AND USES OF THE MODEL

In recent years we have seen accelerated development of all matters related to the field of corporate governance. Institutional investors, usually constituting the minority shareholders, are required to examine their investments not only on the basis of the economic yield embodied therein against the risk such investment entails, but also, on the basis of other aspects pertaining to the quality of the corporate governance in a public company, that de facto reduces the overall level of risk of the company, and in doing so, reducing the level of risk of the investment.

ISSUERS

  • Transparency and increased trust vis-à-vis the investors
  • Creating a “uniform”, communal and simple language used between issuers and investors
  • Structuring of the market’s learning curve in the field of corporate governance and creating an incentive for long term improvement by understanding the components of the marks

INVESTORS

  • Mapping the investment portfolio – creating corporate governance risk zones (to manage the overall level of risk of the portfolio)
  • Investment decision support tool – increasing/decreasing a position
  • Managing the ongoing communications with the issuer and improving the level of transparency
  • Specific examination when carrying out an investment in private companies that have significant scopes of operation
  • A tool to minimize failures and reducing risk – publicity used as a lever (in relation to a benchmark)

REGULATORY FRAMEWORK AND SUPERVISING BODIES

  • A market solution that assists in increasing trust between parties
  • A regulatory solution that is not technical/formal but deals with the martial aspects of an investment
  • A potential tool to create a positive and different ongoing discussion between the market and the issuers – by way of encouraging rather than by way of imposing sanctions
  • Increasing the activities of other players (foreign investors, private investors)