Exclusive: Ten high-risk U.S. companies named by governance firm
News Corp
Education company Apollo Group Inc
Less than 5 percent of companies receive an F grade, said GMI. On average, the ten stocks on the list are down 9.81 percent in 2011, compared with a 3.5 percent drop for the S&P 500.
Paul Hodgson, senior research associate for the New York-based GMI, which was formed from the merger of GovernanceMetrics International, Audit Integrity and well-known corporate governance monitor Corporate Library, said the firm was not making specific calls on share price performance.
GMI did not contact the listed companies for responses prior to compiling the list.
What we're doing is to indicate that if someone has an investment in a company on this list, they need to address the risk that these issues represent to their portfolios, Hodgson said.
GMI noted that a number of major corporate blowups, such as the collapse of Lehman Brothers and Bear Stearns, were presaged by failing governance ratings.
With a market capitalization of about $44.3 billion, media giant News Corp
GMI cited the recent phone-hacking scandal at News Corp, which brought additional scrutiny of the company's journalist standards and ethics, as well as its relationships with various government agencies. The company's now closed News of the World newspaper has been accused of paying bribes to British police officers in exchange for information.
Although there have been some high-profile management resignations and a few name changes at the board level since the recent scandal, there is little indication that the quality of the company's governance is improving -- particularly in the crucial area of the relationship between the board and
News Corp didn't immediately respond to requests for a comment. News Corp is the best performer among the 10 companies with its stock up 18.5 percent so far this year.
EXECUTIVE COMPENSATION
The other media company, Discovery Communications
Footwear company K-Swiss Inc
According to GMI, the company may be under-reserving for doubtful accounts and its business may thus be doing even worse than is immediately apparent. K-Swiss was not immediately available to comment.
GMI said an analysis of Apollo's financial statements suggested it may be inappropriately capitalizing assets, noting about $400 million in impaired assets on the company's books and deferred income tax assets that have been growing as a percentage of operating expenses.
This may point to an understatement of current period expenses that have instead been capitalized as assets, said Agnes Grunfeld, managing director at GMI.
GMI also expressed concern over the company's governance, which it said gave little influence to investors outside the company's founding family.
Apollo declined to comment on the report.
Other criteria used for evaluation of companies include executive compensation issues, poor disclosure of environment or health or safety risks, and high leverage.
Hodgson noted that many GMI clients were indirectly invested in Apollo, News Corp and Discovery though index funds because they are components of the S&P 500 <.SPX>.
Scientific Games Corp
The ten companies on the GMI list, all of which were graded F, include two energy companies, SandRidge Energy Inc
(Editing by Martin Howell)
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