Shareowners in Global Corporate Governance

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Shareowners in Global Corporate Governance

• OECD/World Bank South East Europe Corporate
  Governance Roundtable
• Bucharest, Romania September 2001
• Stephen Davis, Ph.D.

2
Why Corporate Governance?

• Emerging investor consensus Activism pays
• Emerging company response investor rights and
  protections are perceived to lower risk, bringing
  more capital at lower cost
• Better performance

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Activism Findings McKinsey

• Investors would pay an 18-28 premium for
  superior board and disclosure practices
• Board quality is often more important than
  financial issues in stock selection
• The less investors trust shareholder protections,
  the more they value governance. Companies with
  poor governance face a steep barrier in gaining
  access to capital.

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UK 17.9 Chile 20.8
Switzerland 18.0 Argentina 21.2
Sweden 18.2 Mexico 21.5
U.S. 18.3 Italy 22.0
Netherlands 18.5 Brazil 22.9
Spain 19.2 Korea 24.2
Belgium 19.6 Malaysia 24.9
France 19.8 Thailand 25.7
Germany 20.2 Indonesia 27.1
Japan 20.2 Columbia 27.2
Taiwan 20.2 Venezuela 27.6
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Other Recent Evidence

• Stanford U Strong link between governance and
  value in Russia (Bernard Black)
• CLSA Best governance yields double value in
  emerging markets
• Univ. of Vienna shareowner monitoring critical
  where blockholders wield control (Klaus Gugler)
• Wilshire 2001 CalPERS Effect activism made
  companies jump from 96 under to 14 over market

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And still more

• ANZ study Poor governance cost NZ 7
• Stiglitz/World Bank Privatization only works in
  combination with good corporate governance
• Millstein/MacAvoy Good boardspremium
• Harvard Business School Activist institutions
  associated with positive corporate performance

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Shareowner Trends

• Routine Voting More monitoring, less expense
• Benchmarks Codes, pressure on indexers and
  analysts, ratings
• International Alliances CalPERS/Hermes, ICGN,
  World Bank/OECD GCGF Investor Taskforce, , GIGN,
  ACGA
• Cross-Pollination of Tactics, Ideas Web
• Disclosure Rules Policy statements required UK,
  Australia, Germany,
• Stakeholder Issues, Unions ICFTU, Rio Tinto,
  climate change
• Focus Funds Target under-performing,
  under-governed companies or tilt toward
  well-governed

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Case Studies Costly Errors

• PetroChina
• Poor governance profile damaged IPO
• Tomkins
• Imperial CEO suppressed value, triggering
  rebellion

9
Case Studies Success Stories

• Daewoo Securities and Grupo Elektra
• Open governance reform dialogue with foreign
  investor
• Shell
• Investor rebellion spurs IR overhaul
• Pfizer
• Focus on governance wins merger backing
• Vivendi
• Governance initiative gains investor support for
  merger

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What Shareowners Want Companies to Do

• Create a Corporate Governance Balance Sheet
• Identify CG assets and liabilities
• Consider a CG rating
• Overhaul Investor Relations
• Add research developmentfind best new ideas
• Re-position road shows to reach right investors
• Gather intelligence on investor priorities
• Modernize the proxy/AGM noticeuse web
• Introduce a code, IAS, governance disclosure

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What Shareowners Want Policymakers to Do

• McKinsey 2001 improve law, regulation and attack
  corruption
• 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
  valueincentive pay, end to cross-holdings, fair
  takeover rules

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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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• Davis Global Advisors, Inc.
• 57 Hancock Street Newton MA 02466-2308 USA
• T 1 617 630 8792 F 1 617 630 0398 E
  dga_at_davisglobal.com www.davisglobal.com