Following the publication of our global criteria, "Methodology: Management And Governance Credit Factors For Corporate Entities," in January this year, S&P Global Ratings assigned new management and governance (M&G) modifiers to close to 4,500 rated nonfinancial corporate and infrastructure entities worldwide. While for the majority of our rated corporate and infrastructure entities, our M&G modifiers are neutral for credit risk, they have a negative impact in more than one-third of cases.

In this report, we take a closer look at M&G modifiers and the key patterns we see among rated corporate and infrastructure entities globally. For example, we see a higher proportion of moderately negative or negative M&G modifiers in the speculative-grade rating category, while ownership structure is the subfactor that drives most negative M&G modifiers.

The criteria describe our methodology for evaluating the credit risks presented by an entity's M&G framework. Applying the criteria results in an M&G modifier that is one component of our corporate methodology framework. The terms management and governance encompass the broad range of oversight and direction conducted by an entity's owners, board representatives, and executive managers. These activities and practices can affect an entity's creditworthiness and, as such, the M&G modifier is an important component of our analysis.

The Main Changes We Have Made In Assessing The M&G Modifier

The new criteria simplify our assessment of management credit factors

This is because we believe that other parts of our corporate methodology framework (see "Corporate Methodology," published Jan. 7, 2024) largely capture management's performance and operational effectiveness. However, the M&G criteria continue to incorporate our assessment of a set of management attributes that we believe other aspects of our analysis--for example, the anchor or other rating modifiers--do not fully reflect.

We have incorporated more specific scoring guidance to assess each of the M&G subfactors

The scoring guidance details what we typically view as attributes that best characterize each of the three subfactor assessment categories--positive, neutral, and negative.

We consider the credit-risk relevance and impact of the following five M&G subfactors in the aggregate. The first four are governance subfactors and the last one is the management subfactor:

• Ownership structure (neutral/negative);
• Board structure, composition, and effectiveness (positive/neutral/negative);
• Risk management, internal controls, and audit (positive/neutral/negative);
• Transparency and reporting (neutral/negative); and
• Management (positive/neutral/negative).

Within the four governance subfactors, we have increased the emphasis on contingency risk management

We now include cyber security risk, as well as the proactive management of credit-relevant risks relating to social and environmental factors (see "Environmental, Social, And Governance Principles in Credit Ratings," published on Oct. 10, 2021).

We have introduced an optional holistic modifier adjustment as a final layer of analytical judgment

This is to reflect unique M&G characteristics that we believe the analysis of the preliminary M&G modifier does not capture sufficiently.

We assess the final M&G modifier on a four-point scale

The modifier can be negative, moderately negative, neutral, or positive (see table 1 and chart 1).

Table 1

Chart 1

How M&G Modifiers Influence Credit Risk

Some 57% of our rated corporate and infrastructure issuers have a neutral M&G modifier

This also reflects our neutral assessments of the subfactors. The few negatives mostly relate to ownership structure and account for 1% of all neutral M&G modifiers. For these negatives, there are generally some positive features that mitigate the risk, in most cases, a positive assessment of the management subfactor. Our neutral assessment may also reflect M&G practices that may have some positive aspects, but are neutral for credit risk overall.

Over one-third of our rated issuers have a moderately negative M&G modifier

Our moderately negative assessment points to certain M&G weaknesses that increase relative credit risk. Ownership structure drives this moderately negative assessment in close to 80% of cases, notably in entities owned by financial sponsors.

Generally, these moderately negative assessments do not result in a one-notch deduction in our final issuer credit rating, but may do so in some cases. A decision to notch down would reflect our view that the entity is more exposed to certain M&G risks than a typical entity with a moderately negative M&G modifier, but still not as exposed as a typical entity with a negative M&G modifier. In these rare cases (about 1% of moderately negative M&G modifiers), weaknesses in risk management, internal controls, and audit, as well as unusual ownership structures, predominate.

Only 1.5% of our rated issuers, or 67 entities, have a negative M&G modifier

These negative assessments generally translate into a one-notch deduction in our final issuer credit rating, with only two cases seeing a two-notch impact. The 67 entities are well spread across geographies and sectors and generally share several negative subfactor assessments, most commonly, ownership structure and risk management, internal controls, and audit.

Weaknesses in these subfactors may include management deficiencies such as performance missteps; weak cost control; failed integration of acquisitions; material litigation or legal actions; management misconduct; or noncompliance with regulatory requirements. Timeliness or inaccuracy of financial disclosures leading to misrepresentation of the issuer's financial performance also feature.

Only 6% of our rated issuers have positive M&G modifiers

A positive assessment reflects robust M&G that we view as a credit strength. Notably, this would result from two or more positive subfactor assessments and no negative assessments. In almost all cases of positive M&G modifiers, we assess management positively, reflecting continuity in the executive management team alongside a track record of operational effectiveness and creditor friendliness.

The other prominent subfactor is risk management, internal controls, and audit, where there is evidence that the entity has developed detailed and extensive policies and invested in resources that are relevant and pertinent to its business operations. In addition, the entity would have invested in preparedness, including risk materiality mapping and the development of contingency action plans to meet relevant emerging risks.

We see some correlation between the M&G modifier and rating level

There is a higher proportion of positive M&G modifiers in the investment-grade rating category and a higher proportion of moderately negative or negative M&G modifiers in the speculative-grade category (see chart 2).

Chart 2

A Deep Dive Into Our Subfactor Assessments

Negative modifiers

Ownership structure is by far the main subfactor that drives our moderately negative and negative M&G modifiers

Ownership structure is a factor in 78% of cases (see chart 3), while about 29% of total global ownership structure assessments are negative. A negative assessment of this subfactor applies notably when an entity is controlled by owners, such as financial sponsors, who have an aggressive agenda of maximizing shareholder returns or promoting their own interests above those of other stakeholders, including debtholders.

Chart 3

Moderately negative and negative M&G modifiers are concentrated in the U.S. and Europe, the Middle East, and Africa

These two regions account for 86% of total moderately negative and negative M&G modifiers (see chart 4). This is notably because these regions have a greater proportion of organizations owned by private-equity firms. A particularly high proportion of negative assessments in the rated universes in Luxemburg (66% of total Luxemburg-based rated issuers), Italy (59%), Spain (52%), the Netherlands (51%), and the U.K. (51%) is largely due to the presence of financial sponsors in their ownership structures. In the U.S., moderately negative or negative M&G modifiers apply to 40% of the rated universe.

Conversely, Asia-Pacific (11%) has a much lower percentage of negative M&G modifiers. Korea (7%), China (11%), Japan (12%), and India (20%) all have relatively low proportions of negative M&G modifiers. This is primarily due to their rated universes having more investment-grade entities, which tend to have fewer negative M&G assessments.

Chart 4

We see the greatest concentration of negative M&G modifiers in sectors where financial sponsors are generally more active

Over 60% of moderately negative or negative M&G modifiers are in business and consumer services, containers and packaging, health care services, and technology software and services.

Risk management, internal controls, and audit is the second most common negative subfactor globally

This subfactor appears in 11% of cases of negative M&G modifiers. Management deficiencies, misconduct, or exposure to litigation can drive a negative assessment because they may affect an issuer's operations, license to operate, or balance-sheet flexibility, and ultimately weaken its creditworthiness.

Positive modifiers

We see robust M&G as a credit strength in just over 6% of rated entities (285)

These entities are, in the main, highly rated. In such cases, a positive assessment of the management team's track record, including operational effectiveness, creditor friendliness, and effective internal risk controls, is common. We see these positive characteristics as credit strengths that can support operating resilience or allow the entity to seize growth opportunities.

The pharmaceutical sector has the highest proportion of positive M&G modifiers

We have positive M&G modifiers on 20% of the 69 rated entities in the sector, a high proportion of which are based in the U.S. This is the only sector that materially exceeds the average of all corporate and infrastructure entities in terms of positive M&G modifiers. We often cite management breadth and expertise, a track record of consistently solid performance and strategic planning, and comprehensive risk management standards as key strengths for these pharmaceutical groups. We also consider these positive assessments in the context of a highly regulated sector.

The highest proportions of positive M&G modifiers in jurisdictions where we rate more than 30 corporate entities are Hong Kong (30%), Mexico (29%), Switzerland (29%), and Japan (19%)

The lower share of speculative-grade ratings, but also the specific strengths of the individual entities, explain the concentration of positive M&G modifiers in these jurisdictions (see chart 5). Management teams' solid track records, above-average governance structures, and internal controls predominate.

Chart 5

In absolute terms, however, the jurisdiction with the largest number of rated entities with a positive M&G modifier is the U.S. (123 entities, or 43% of all positive M&G modifiers), followed by France (23; 8%).

How M&G Issues Have Directly Influenced Our Credit Rating Actions

From January to April 2024, eight rating actions cited M&G as a factor

Four of these rating actions were positive and four negative, and they were driven by multiple M&G-related subfactors. Risk, management, culture, and oversight are mentioned in three instances, transparency and reporting in two, and governance structure in one. The four negative rating actions each cite risk management, culture, and oversight.

For example, on Feb. 20, 2024, we upgraded Gates Global LLC to 'BB-' from 'B+' (see "Gates Global LLC Upgraded To 'BB-' Following Reduction In Blackstone's Ownership Stake, Outlook Stable"). We cited governance structure as a factor in the upgrade as we believed that the reduction of private-equity owner Blackstone's ownership stake below 40% would allow the company to follow a more conservative financial policy and manage stakeholders' interests in a more balanced way.

We cited risk management, culture, and oversight as a factor in the downgrade of Sandvine L.P. on March 26, 2024 (see "Sandvine L.P. Downgraded To 'CCC' On U.S. Commerce Department Entity List Placement; Outlook Negative"). We believe that government scrutiny on how certain authoritarian countries misuse the company's products indicate a higher business risk tolerance than at most of the other companies we rate. We also believe that the company's highly leveraged financial risk profile points to corporate decision-making that prioritizes the interests of its controlling owners, as is the case for most financial sponsor-owned companies.

The U.S. Commerce Department has placed Sandvine on its entity list, which restricts the transfer of components and technology to the company. This is because the Department alleges that the government of Egypt uses Sandvine's products in mass web-monitoring and censorship to block news, as well as target political actors and human rights activists.

Governance factors drove 28% of ESG-related rating actions on nonfinancial corporates in 2023

Earlier this year, we published a review of rating actions on nonfinancial corporate and infrastructure issuers that related to environmental, social, and governance (ESG) credit factors between April 2020 and December 2023 (see "ESG In Credit Ratings Deep Dive: ESG Factors Drove 13% of Corporate and Infrastructure Rating Actions Since 2020," published on March 13, 2024). April 2020 was when S&P Global Ratings began tagging ESG factors in its rating actions.

This review identified that 28% of ESG-related corporate and infrastructure rating actions related to governance factors in 2023 (see chart 6). Governance factors also featured in 65% of ESG-related downgrades that weren't linked to health and safety. Moreover, governance factors--rather than environmental or social factors--were the main driver of multiple-notch downgrades, although we acknowledge that the dataset is limited.

Chart 6

During April 2020 and December 2023, seven entities saw downgrades of three or more notches in which a governance factor was the primary ESG factor driving the downgrade. Each of these downgrades involved an issuer with a speculative-grade rating at the time of the action, and nearly all were from the 'B' rating category or below.

In 2023, governance drove 23 rating actions on nonfinancial corporate and infrastructure entities

Two-thirds, or 15, of these rating actions were negative, and over half of these cited risk management, culture, and oversight as the primary ESG credit factor, with four citing transparency and reporting as a secondary driver. The majority of these negative rating actions were in the speculative-grade rating category, with the exception of two issuers rated 'BBB-' at the time, Advance Auto Parts Inc. (Advance) and Adani Ports and Special Economic Zone Ltd. (Adani Group).

Our negative outlook revision on Advance was due to weaker operating performance than we expected (see "Advance Auto Parts Inc. Outlook Revised To Negative On Weaker-Than-Expected Performance; 'BBB-' Ratings Affirmed," published on June 5, 2023). At the time, Advance was struggling with execution issues around strengthening its supply chain, implementing system improvements to improve customer engagement, and merchandise pricing. In our view, Advance had miscalculated the impact of the pricing actions that its competitors had taken to expand their penetration among professional customers.

Our negative outlook revision on Adani Group on Feb. 3, 2023, followed a short-seller report alleging significant governance issues for the group, many of which related to disclosures and actions at the shareholder level (see "Outlook On Adani Ports And Adani Electricity Revised To Negative; Ratings Affirmed). This triggered a sharp fall in group entities' equity and bond prices. We saw a risk that investor concerns about the group's governance and disclosures were larger than we had factored into our ratings, or that new investigations and negative market sentiment could increase the cost of capital and reduce funding access.

Of the seven positive rating actions driven by governance credit factors in 2023, four cited governance structure as the primary ESG credit factor driving the rating action, followed by three citing risk management, culture, and oversight, and one citing transparency and reporting.

Our upgrade of Rodan & Fields LLC to 'CCC' on May 16, 2023, cited governance structure as the ESG credit factor driving the rating action, thanks to the company's recapitalization and extension of debt maturities following a default on its entire capital structure (see "Rodan & Fields LLC Upgraded To 'CCC' On Extended Maturities; Outlook Negative").

Our upgrade of Commonwealth Edison Co. to 'A-' on July 26, 2023, followed the dismissal by the U.S. District Court for the Northern District of Illinois Eastern Division of its bribery charge against Commonwealth Edison (see "Exelon Corp. Subsidiary Commonwealth Edison Co. Upgraded To 'A-' On Dismissed Bribery Charge; Outlook Stable"). Since 2020, the company had increased oversight, guidance, and training to improve its internal controls and code of conduct. Combined with the dismissal of the bribery charge, we believed that the enhancement in internal controls had mitigated what we viewed as a material deficiency in the company's governance.

Related Criteria

• Corporate Methodology, Jan. 7, 2024
• Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
• Environmental, Social, And Governance Principles in Credit Ratings, Oct. 10, 2021

Related Research

• ESG In Credit Ratings Deep Dive: ESG Factors Drove 13% of Corporate and Infrastructure Rating Actions Since 2020, March 13, 2024
• Gates Global LLC Upgraded To 'BB-' Following Reduction In Blackstone's Ownership Stake, Outlook Stable, Feb. 20, 2024
• Exelon Corp. Subsidiary Commonwealth Edison Co. Upgraded To 'A-' On Dismissed Bribery Charge; Outlook Stable, July 26, 2023
• Advance Auto Parts Inc. Outlook Revised To Negative On Weaker-Than-Expected Performance; 'BBB-' Ratings Affirmed, June 5, 2023
• Sandvine L.P. Downgraded To 'CCC' On U.S. Commerce Department Entity List Placement; Outlook Negative, March 26, 2024
• Rodan & Fields LLC Upgraded To 'CCC' On Extended Maturities; Outlook Negative, May 16, 2023
• Outlook On Adani Ports And Adani Electricity Revised To Negative; Ratings Affirmed, Feb. 3, 2023