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Industry Lawyer Gives Morningstar’s Stewardship Grades a C+

In a recent article, Paulita Pike, a partner and Ropes and Gray, examines the effectiveness of Morningstar’s Stewardship grades, giving the overall effort by Morningstar a C+.  Ms. Pike’s op-ed summarizes Morningstar’s methodology for assigning the grades and looked in detail at each component of the grade.  She highlights the tension inherent in the rankings between a qualitative analysis, on which the grades are intended to focus, and the quantitative nature of a number of the categories that they examine. 

Of the criteria that provide input into the ultimate grade, she gives the highest grade, an A-, to the “corporate culture” category.   She notes “Morningstar deserves credit for pursuing a process that could result in a meaningful, qualitative evaluation of corporate culture.”  Further, this category according to Pike “is the one that “most involves its historic bread and butter.”  The article is most critical of Morningstar’s evaluation of fund board quality, finding that “its methodology has structural and practical impediments that obfuscate rather than facilitate its evaluation of fund boards.”  Rather than the current criteria, Ms. Pike suggests that Morningstar consider  “(i) the number and types of board committees, (ii) the amount of time spent in meetings in light of the size of the fund group, (iii) the expertise of the directors on the board and the likelihood, in light of that expertise, that a director is able to exercise prudent business judgment, (iv) the process followed by boards to identify and select new directors, and (v) the manner in which a board oversees various aspects of fund operations. “