Corporate Governance Trends in OECD Countries

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Corporate Governance Trends in OECD Countries

• OECD/World Bank Asian Roundtable on Corporate
  Governance
• Hong Kong, China 31 May-2 June 2000
• Stephen Davis

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Context of Change

• Epic transition in OECD area as the state
  withdraws from economies
• Who replaces the state? To whom are corporations
  or funds accountable? How can companies be best
  shaped to succeed?

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Catalysts

• Foreign Money Transmission belt sending
  corporate governance values across borders
• Failures Scandals Corporate collapses and
  misdeeds expose need for owner oversight
• Stagnation Unemployment, crony capitalism,
  under-performance turn focus to shareholder value
  

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• Lowered Trade Barriers To survive, firms need
  low-cost capital, forcing appeal to investors
• Privatization Sales of state-owned enterprises
  have handed institutional investors new powers
• Pension Bomb Demographic pressure on
  equity-driven pension funds to boost returns

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Key Trends in OECD Corporate Governance

• Benchmarks
• Convergence
• Disclosure
• Shareowner Intervention
• Fund Governance

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Benchmarks International

• G7Richest nations name corporate governance
  newest pillar of global economic architecture
• OECD developed first global standards, but
  non-compliance by members is found common
• World Bank/IMF/Financial Stability ForumGood
  corporate governance part of emerging market
  recovery
• Asia-Pacific Economic Cooperation Forum, PECC,
  Asian Corporate Governance Assoc.

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• IOSCO
• IFAC
• International Corporate Governance Network
• Commonwealth Assoc for Corporate Gov.
• EBRD
• EASD
• Euroshareholders Guidelines
• Private sector SP, Déminor, ISS Australia,
  GovernanceMetrics, State Street

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Benchmarks National
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ConvergenceShareowners Stakeholders

• OECD found common ground
• UK DTI rule forces funds to address social
  investing Turnbull forces firms to weigh and
  disclose social risks law reform will re-write
  directors duties
• Germany, Japan, Korea recognition of shareowner
  value
• Future Solution Accounting will measure human
  capital for better valuation of firms

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Disclosure

• Race to overhaul company law, listing rules
• Accounting Standards (Germany, Japan)
• Audit Oversight/Integrity (US, Canada, Japan,
  Italy, Korea)
• Executive Pay (UK, Ireland, Australia, France)
• Corporate Governance Statements

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Shareholder Intervention

• Consensus among investors Activism pays
• Emerging view among governments and corporate
  boards More rights bring more capital, better
  performance

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Recent Evidence

• ANZ study Poor governance cost NZ 7
• Kang Activist institutions associated with
  positive corporate performance
• Stiglitz/World Bank Privatization only works in
  combination with good corporate governance
• Millstein/MacAvoy Good boardspremium
• McKinsey 11 premium on governance
• Wilshire CalPERS reaped 609m for 2.5m

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Trends in Activism

• Focus Funds Target under-performing,
  under-governed companies or tilt toward
  well-governed (AV, Hermes Lens, Relational
  Investors, ABF Euro VA, Russia fund)
• Routine Voting More monitoring, less expense
• Benchmarks Pressure on indexers and analysts
• International AlliancesCalPERS/Hermes, ICGN,
  World Bank/OECD GCGF Investor Taskforce, ACGA
• Cross-Pollination of Tactics, IdeasWeb
• Stakeholder Issues, UnionsICFTU, Rio Tinto

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Expanding Rights

• Company law reform Expanding shareowner
  communication
• Greater ballot powersCanada, UK (though Japan is
  debating limits)
• Electronic voting near UK steps (NAPF panel,
  e-commerce bill, commercial ventures) laws in
  Australia, the Netherlands, France, Germany
  pressure on EU

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Fund Governance

• How many fund managers would pass standards?
• Few fund governance rules PIAC, U.S. CII, IFSA
• UK Financial equivalent of a nutrition label.
  Theory Accountable owners will be activist
• Kirby Canadian Senate report on accountability
• AFL-CIO tactics are a taste of the future

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What Shareowners Expect of Public Policy

• Local benchmarks reflecting global standards
• Disclosure rules to allow application of
  benchmarks and promote integrity
• Law regulation empowering shareownerseasier
  voting and communication, protection of
  minorities
• Tax and statutes to spur shareowner valueshare
  options, end to cross-holdings, fair takeover
  rules

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What Shareowners Expect of Company Practice

• Prepare a corporate governance balance sheet.
• Put RD into governance. Incorporate the best new
  ideas and emerging standards.
• Overhaul voting agenda as a critical link to
  investors. Utilize the Internet.
• Collect information as much as disseminate it.
  Early intelligence of worldwide shareholder
  concerns allows management to anticipate
  criticism and best compete for international
  equity capital.

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Conclusion

• Assume there are no borders in corporate
  governance. Institutional investors from any part
  of the globe are monitoring markets and companies
  everywhere and basing decisions, in part, on how
  they rank with global competitors on governance
  criteria..

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• 57 Hancock Street Newton MA 02466-2308 USA
• T 1 617 630 8792 F 1 617 630 0398 E
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