Moody's Investors Service may consider extending its new corporate governance ratings to not-for-profit hospitals and health systems, Modern Healthcare has learned.
Moody's announced in August that it would issue qualitative, scoreless governance reports on public companies and research ways to improve its scrutiny of governance practices.
Rating agencies haven't escaped criticism for failing to detect governance problems that fostered the recent wave of corporate scandals. "We're using this to create a discipline on the corporate side, to make sure that the questions (about governance practices) get asked," Moody's Director Kenneth Bertsch said.
Bertsch said the firm aims to have published reports on at least 100 public companies by year-end, possibly including some in healthcare. As of last week, governance reports had been issued on 18 companies, none in healthcare.
Bertsch said the rating agency is putting a priority on issuing reports for companies with the most debt.
Moody's said board quality is its top criterion, and that it will examine deviations from generally accepted best practices, using public information and later talking to company executives and outside directors to examine such areas as the audit function, director and executive conflicts of interest, executive compensation and shareholder rights. Criteria would be adjusted for companies that are not publicly held, such as not-for-profit hospitals.
A spokesman for one Moody's client, Tenet Healthcare Corp., said it is difficult to assess the potential impact of the initiative. Tenet has strengthened governance standards since a scandal late last year, requiring annual elections of its board members, adopting director independence rules and accounting for stock options as expenses on its income statement.
Citing cash flow concerns, Moody's lowered Tenet's debt ratings last week. "We have welcomed reviews of our corporate governance by outside agencies," Tenet spokesman Harry Anderson said. Earlier this year, Tenet announced that it had received the highest rating of any hospital company from investor research firm Institutional Shareholder Services.
Moody's not-for-profit healthcare group is "just starting to talk about" the possibility of issuing separate governance reports, analyst Lisa Martin confirmed. The group rates about 560 hospitals and systems with about $105 billion worth of bonds outstanding, Moody's said. "In general, there is more awareness of governance (as a credit issue), but whether we actually go through and do that separate assessment is to be determined," she said. "We're in the process of identifying where we might probe a little more."
Moody's spelled out the framework of corporate governance assessments in a seven-page "Rating Methodology" published in August. But rating governance quality is subjective, particularly with regard to not-for-profit boards, according to experts. Whereas directors of public companies are accountable to shareholders, the accountability of directors of not-for-profits is less clear-cut, Bertsch said.
A separate governance rating might add work for hospitals and systems that do not already assess and modify their governance according to best practices, said Anthony Grzyb, an associate in the Chicago office of the law firm Katten Muchin Zavis Rosenman. "They may actually have to revise internal documents and make personnel changes. I think it would mean increased costs," he said. "This would be a big step in applying the public company principles to not-for-profits."
But Ed Malmstrom, a managing director at Merrill Lynch & Co., said he doubts that additional governance assessments would significantly affect overall ratings and marketability of healthcare bonds.
Malmstrom said governance improvement initiatives have sprung from hospitals themselves, not analyst scrutiny. "It's not risen to where we're saying (to hospitals) make sure you really zero in on this or you're going to have a hard time with the rating," he said.