Corporate Governance Trends in OECD Countries

Corporate Governance Trends in OECD Countries

Corporate Governance Trends in OECD Countries OECD/World Bank Asian Roundtable on Corporate Governance Hong Kong, China 31 May-2 June 2000 Stephen Davis DAVISGLOBAL ADVISORS 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?

DAVISGLOBAL ADVISORS 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 DAVISGLOBAL ADVISORS

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 equitydriven pension funds to boost returns DAVISGLOBAL ADVISORS Key Trends in OECD Corporate Governance

Benchmarks Convergence Disclosure Shareowner Intervention Fund Governance DAVISGLOBAL ADVISORS Benchmarks: International G7Richest nations name corporate governance newest pillar of global economic architecture OECD developed first global standards, but noncompliance by members is found common World Bank/IMF/Financial Stability Forum Good corporate governance part of emerging market recovery

Asia-Pacific Economic Cooperation Forum, PECC, Asian Corporate Governance Assoc. DAVISGLOBAL ADVISORS IOSCO IFAC International Corporate Governance Network Commonwealth Assoc for Corporate Gov. EBRD EASD Euroshareholders Guidelines Private sector: S&P, Dminor, ISS Australia,

GovernanceMetrics, State Street DAVISGLOBAL ADVISORS Benchmarks: National Australia IFSA Blue Book Bosch Canada PIAC TSE (Dey) Belgium Cardon, CBF VBO-FEB Finland

Confed of Finnish Industry Botswana IoD France Vienot, LevyLang, Esambert, Marini, AFG Brazil Inst. of CG Germany DSW, Strenger

Bulgaria CG Initiative Recs. Ghana IoD DAVISGLOBAL ADVISORS Greece Capital Markets Commission Italy Preda Hong Kong

HKSA, HKSE Japan CGFJ, Kosei Nenkin Rengokai India CII, SEBI/Birla, IIM Kenya Private Sector CG Trust Indonesia Jakarta Initiative

Korea CG Reform Com Ireland IAIM Kyrgyz Civil Code DAVISGLOBAL ADVISORS Malaysia Finance Committee Code Russia

Shareholder Rights Decree Mexico Banking & Sec. Com Code Singapore Stock Exchange Netherlands Peters, VEB South Africa King Committee

New Zealand IoD Spain CNMV Portugal CMVM Code Sweden Academy of Directors DAVISGLOBAL ADVISORS

Thailand Stock Exchange U.K. Combined Code, Turnbull U.S. CII, NACD, NYSE/NASD, Business Roundtable, GM DAVISGLOBAL ADVISORS Convergence: Shareowners & 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 DAVISGLOBAL ADVISORS 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 DAVISGLOBAL ADVISORS Shareholder Intervention Consensus among investors: Activism pays Emerging view among governments and corporate boards: More rights bring more capital, better performance

DAVISGLOBAL ADVISORS 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 boards=premium McKinsey: 11% premium on governance Wilshire: CalPERS reaped $609m for $2.5m DAVISGLOBAL ADVISORS

Trends in Activism Focus Funds: Target under-performing, undergoverned 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

DAVISGLOBAL ADVISORS Expanding Rights Company law reform: Expanding shareowner communication Greater ballot powersCanada, UK (though Japan is debating limits) Electronic voting near: UK steps (NAPF panel, ecommerce bill, commercial ventures); laws in Australia, the Netherlands, France, Germany; pressure on EU DAVISGLOBAL ADVISORS 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 DAVISGLOBAL ADVISORS 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 DAVISGLOBAL ADVISORS What Shareowners Expect of Company Practice Prepare a corporate governance balance sheet. Put R&D 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. DAVISGLOBAL ADVISORS 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.. DAVISGLOBAL ADVISORS Davis Global Advisors, Inc. 57 Hancock Street Newton MA 02466-2308 USA T +1 617 630 8792 F +1 617 630 0398 E [email protected] DAVISGLOBAL ADVISORS

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