Fitch warns corporate communication is not the same as corporate governance

Fitch takes into consideration various factors, ranging from systemic country issues, to issuer-specific management and board effectiveness.

In a release, Fitch Ratings says that while open and transparent communication forms a key part of corporate best practice, sound corporate governance involves much more than just communication. Fitch's comment comes after recent meetings with a number of prospective corporate issuers in China and south-east Asia.

Many of the issuers met were at pains to stress the strong communication practices that they employ (both with regard to their stakeholders, and also internally with regard to their treatment and training of staff), and were quick to equate these with sound corporate governance.

Fitch highlights that the risk to investors is, to some extent, captive to the jurisdictional environment in which the issuer operates. Systemic characteristics can influence the rating of specific debt issues, or an individual issuer's credit rating, as well as affecting creditor protection through the regulatory environment and rule of law in a particular country.

Most companies operate within the standards of their local framework, but some entities (particularly those looking to access international capital markets where different standards and requirements may apply) aspire to achieve a higher standard.

For its analysis Fitch uses a two-layer approach. Firstly it categorises countries into four groupings, and then uses these groupings to differentiate between those countries that have neutral ratings characteristics and those where systemic governance characteristics have a constraining or negative impact on ratings.

Secondly, when looking at issuer-specific governance characteristics, Fitch focuses on four key factors in its assessment of an entity's corporate governance: board effectiveness; management effectiveness; transparency of financial information; and related-party transactions.

When examining each issuer's specific corporate governance factors, Fitch again classifies it as being; neutral, constraining, or negative for the rating. The rating proposed is then considered by a committee in the context of a peer group of similar businesses, at similar rating levels both in country and worldwide, taking account of any potential constraining or negative corporate governance factors.