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February 14, 2003
Fannie Mae Receives High S&P Corporate Governance Rating
    by William Baue

Fannie Mae becomes the first U.S. company to release its corporate governance score (a 9 out of 10) from Standard & Poor's Governance Services.

Standard & Poor's Governance Services announced the first corporate governance score (CGS) for a U.S. company late last month. Fannie Mae (ticker: FNM), the government-mandated mortgage broker, earned an overall CGS of 9.0 on a 10-point scale, reflecting "strong or very strong" corporate governance practices in all four of the areas analyzed.

"By being the first U.S. company to publish its governance score from Standard & Poor's, Fannie Mae is not only demonstrating its own strong governance practices but is also showing leadership in the U.S. with regard to providing greater openness and disclosure about its corporate governance standards," said S&P Governance Services Managing Director Andrea Esposito.

Companies pay S&P Governance Services to rate the company's corporate governance, and the companies decide whether their scores are made public or kept secret. Fannie Mae is the first U.S. company to publicly disclose its score.

Fannie Mae scored highest (9.3) in board structure and process and lowest (8.7) in investor rights and relations. It split the difference with a score of 9.0 in ownership structure and external stakeholder influence and in transparency and disclosure.

S&P Governance Services applauded the structure of Fannie Mae's board of directors, which meets the rules recently proposed by the New York Stock Exchange (NYSE). S&P also praised the board's independence. The rating showed mixed reviews regarding the presence of five directors appointed by the U.S. President, which is in accordance with the company's Congressional charter. There were also mixed reviews relating to the combined CEO/Chair position.

"Standard & Poor's is agnostic as to the relative merits of a split chairman and CEO, believing there are potential risks to board effectiveness and oversight under both systems . . . ," the report states. "In January 2003, the Fannie Mae board chose to establish a formal presiding director structure that Standard & Poor's believes could provide a counterbalance to the combined Chairman/CEO role."

In the area of disclosure, S&P noted the concerns raised by competitors, media sources, and Congressional leaders about the company's historical exemption from registering and filing disclosures with the Securities and Exchange Commission (SEC).

"In response to some of these criticisms and the market's increased focus on issues of corporate disclosure, Fannie Mae has decided to voluntarily register its common stock with the SEC but not its unsecured debt and mortgage backed securities (MBS) . . . ," the report states. "Fannie Mae's first SEC filings will occur in the first quarter of 2003. These filings will end the anomaly that gives Fannie Mae more discretion than other listed companies regarding its disclosure obligations."

Fannie Mae CEO/Chair Franklin D. Raines expounded on the company's commitment to openness and transparency.

"Our standard is to be a model 'glass box' company," said Mr. Raines. "And as the record shows, we are always willing to do more to keep our disclosures and corporate governance at the cutting-edge of best practices."

However, the rating did note a high percentage (87.16 percent) of non-audit fees ($7.13 million out of $8.18 million) paid in 2001 to the company's auditor, KPMG. Fannie Mae's explanation satisfied S&P that this does not represent an actual conflict of interest, although the situation does invite the perception of one.

Fannie Mae's lower score in financial stakeholder rights and relations resulted primarily from the inability of shareholders to vote for or against the five board members appointed by the President.

Standard & Poor's launched its U.S. Governance Services in October 2002, although it has been assessing CGSs globally since 2000. BP, the first UK company to make its CGS public, scored a 9.6 in January 2002. Hong Kong Exchange earned an 8.3 in September 2002, and Japan-based ORIX Corporation scored a 7.8 in August 2002. Numerous Russian companies have publicized their scores, which range from 7.4 for OJSC Mobile Telesystems to 4.5 for MDM Bank.

S&P stresses that its corporate governance scores are globally comparable and relevant while they also accommodate local governance philosophies and conditions. In the spirit of full disclosure, S&P also notes that its corporate governance score is conducted independently and separately from its credit rating operations.


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