corporate governance trends in oecd countries oecd/world bank asian roundtable on corporate...
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Corporate Governance Trends in OECD Countries
OECD/World Bank Asian Roundtable on OECD/World Bank Asian Roundtable on Corporate Governance Corporate Governance
Hong Kong, China 31 May-2 June 2000Hong Kong, China 31 May-2 June 2000
Stephen DavisStephen Davis
DAVIS GLOBAL ADVISORS
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Context of Change
Epic transition in OECD area as the state Epic transition in OECD area as the state withdraws from economieswithdraws from economies
Who replaces the state? To whom are corporations Who replaces the state? To whom are corporations or funds accountable? How can companies be best or funds accountable? How can companies be best shaped to succeed?shaped to succeed?
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Catalysts
Foreign MoneyForeign Money: Transmission belt sending : Transmission belt sending corporate governance values across borderscorporate governance values across borders
Failures & ScandalsFailures & Scandals: Corporate collapses and : Corporate collapses and misdeeds expose need for owner oversightmisdeeds expose need for owner oversight
StagnationStagnation: Unemployment, crony capitalism, : Unemployment, crony capitalism, under-performance turn focus to shareholder valueunder-performance turn focus to shareholder value
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Lowered Trade BarriersLowered Trade Barriers: To survive, firms need : To survive, firms need low-cost capital, forcing appeal to investorslow-cost capital, forcing appeal to investors
PrivatizationPrivatization: Sales of state-owned : Sales of state-owned enterprises enterprises have handed institutional investors new powershave handed institutional investors new powers
Pension BombPension Bomb: Demographic pressure on equity-: Demographic pressure on equity-driven pension funds to boost returns driven pension funds to boost returns
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Key Trends in OECD Corporate Governance
BenchmarksBenchmarks ConvergenceConvergence DisclosureDisclosure Shareowner InterventionShareowner Intervention Fund GovernanceFund Governance
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Benchmarks: International
G7G7—Richest nations name corporate governance —Richest nations name corporate governance newest pillar of global economic architecturenewest pillar of global economic architecture
OECD OECD developed first global standards, but non-developed first global standards, but non-compliance by members is found commoncompliance by members is found common
World Bank/IMF/Financial Stability ForumWorld Bank/IMF/Financial Stability Forum——Good corporate governance part of emerging Good corporate governance part of emerging market recovery market recovery
Asia-Pacific Economic Cooperation Forum,Asia-Pacific Economic Cooperation Forum, PECC, Asian Corporate GovernancePECC, Asian Corporate Governance Assoc. Assoc.
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IOSCOIOSCO IFACIFAC International Corporate Governance NetworkInternational Corporate Governance Network Commonwealth Assoc for Corporate Gov.Commonwealth Assoc for Corporate Gov. EBRDEBRD EASDEASD Euroshareholders GuidelinesEuroshareholders Guidelines Private sector: S&P, Private sector: S&P, Déminor, ISS Australia, Déminor, ISS Australia,
GovernanceMetrics, State StreetGovernanceMetrics, State Street
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Benchmarks: NationalAustraliaAustralia IFSA Blue BookIFSA Blue Book
BoschBoschCanadaCanada PIACPIAC
TSE (Dey)TSE (Dey)
BelgiumBelgium Cardon, CBFCardon, CBF
VBO-FEBVBO-FEBFinlandFinland Confed of Finnish Confed of Finnish
IndustryIndustry
BotswanaBotswana IoDIoD FranceFrance Vienot, Levy-Vienot, Levy-Lang, Esambert, Lang, Esambert, Marini, AFGMarini, AFG
BrazilBrazil Inst. of CGInst. of CG GermanyGermany DSW, StrengerDSW, Strenger
BulgariaBulgaria CG Initiative CG Initiative Recs.Recs.
GhanaGhana IoDIoD
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GreeceGreece Capital Markets Capital Markets CommissionCommission
ItalyItaly PredaPreda
Hong KongHong Kong HKSA, HKSEHKSA, HKSE JapanJapan CGFJ, CGFJ, Kosei Kosei Nenkin RengokaiNenkin Rengokai
IndiaIndia CII, SEBI/Birla,CII, SEBI/Birla, IIMIIM
KenyaKenya Private Sector CG Private Sector CG TrustTrust
IndonesiaIndonesia Jakarta InitiativeJakarta Initiative KoreaKorea CG Reform ComCG Reform Com
IrelandIreland IAIMIAIM KyrgyzKyrgyz Civil CodeCivil Code
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MalaysiaMalaysia Finance Finance Committee CodeCommittee Code
RussiaRussia Shareholder Rights Shareholder Rights DecreeDecree
MexicoMexico Banking & Sec. Banking & Sec. Com CodeCom Code
SingaporeSingapore Stock ExchangeStock Exchange
NetherlandsNetherlands Peters, VEBPeters, VEB South South AfricaAfrica
King CommitteeKing Committee
New New ZealandZealand
IoDIoD SpainSpain CNMVCNMV
PortugalPortugal CMVM CodeCMVM Code SwedenSweden Academy of Academy of DirectorsDirectors
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ThailandThailand Stock ExchangeStock Exchange
U.K.U.K. Combined Code, Combined Code, Turnbull Turnbull
U.S.U.S. CII, NACD, CII, NACD, NYSE/NASD, NYSE/NASD, Business Business Roundtable, GMRoundtable, GM
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Convergence:Shareowners & Stakeholders OECD found common groundOECD found common ground UK: DTI rule forces funds to address social UK: DTI rule forces funds to address social
investing; Turnbull forces firms to weigh and investing; Turnbull forces firms to weigh and disclose social risks; law reform will re-write disclose social risks; law reform will re-write directors’ duties directors’ duties
Germany, Japan, Korea: recognition of Germany, Japan, Korea: recognition of shareowner valueshareowner value
Future Solution: Accounting will measure Future Solution: Accounting will measure human capital for better valuation of firmshuman capital for better valuation of firms
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Disclosure
Race to overhaul company law, listing rulesRace to overhaul company law, listing rules
Accounting Standards (Germany, Japan)Accounting Standards (Germany, Japan) Audit Oversight/Integrity (US, Canada, Japan, Audit Oversight/Integrity (US, Canada, Japan,
Italy, Korea)Italy, Korea) Executive Pay (UK, Ireland, Australia, France)Executive Pay (UK, Ireland, Australia, France) Corporate Governance StatementsCorporate Governance Statements
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Shareholder Intervention
Consensus among investors: Activism paysConsensus among investors: Activism pays
Emerging view among governments and Emerging view among governments and corporate boards: More rights bring more corporate boards: More rights bring more capital, better performancecapital, better performance
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Recent Evidence ANZ studyANZ study: : Poor governance cost NZ 7%Poor governance cost NZ 7% KangKang: A: Activist institutions associated with ctivist institutions associated with
positive corporate performancepositive corporate performance Stiglitz/World BankStiglitz/World Bank: : Privatization only works in Privatization only works in
combination with good corporate governancecombination with good corporate governance Millstein/MacAvoyMillstein/MacAvoy: Good boards=premium: Good boards=premium McKinseyMcKinsey: : 11% premium on governance11% premium on governance WilshireWilshire: CalPERS reaped $609m for $2.5m: CalPERS reaped $609m for $2.5m
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Trends in Activism Focus FundsFocus Funds: Target under-performing, under-: Target under-performing, under-
governed companies or tilt toward well-governed governed companies or tilt toward well-governed ((AV, Hermes Lens, Relational Investors, ABF Euro VA, Russia fundAV, Hermes Lens, Relational Investors, ABF Euro VA, Russia fund))
Routine VotingRoutine Voting: : More monitoring, less expenseMore monitoring, less expense BenchmarksBenchmarks: Pressure on indexers and analysts: Pressure on indexers and analysts International AlliancesInternational Alliances——CalPERS/Hermes, ICGN, CalPERS/Hermes, ICGN,
World Bank/OECD GCGF Investor Taskforce, ACGAWorld Bank/OECD GCGF Investor Taskforce, ACGA
Cross-Pollination of Tactics, IdeasCross-Pollination of Tactics, Ideas——WebWeb
Stakeholder Issues, UnionsStakeholder Issues, Unions——ICFTU, Rio Tinto ICFTU, Rio Tinto
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Expanding Rights
Company law reform: Expanding shareowner Company law reform: Expanding shareowner communicationcommunication
Greater ballot powers—Canada, UK (though Greater ballot powers—Canada, UK (though Japan is debating limits)Japan is debating limits)
Electronic voting near: Electronic voting near: UK steps (NAPF panel, e-UK steps (NAPF panel, e-commerce bill, commercial ventures); laws in Australia, the commerce bill, commercial ventures); laws in Australia, the Netherlands, France, Germany; pressure on EU Netherlands, France, Germany; pressure on EU
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Fund Governance
How many fund managers would pass standards? How many fund managers would pass standards? Few fund governance rules: PIAC, U.S. CII, IFSAFew fund governance rules: PIAC, U.S. CII, IFSA UK: Financial equivalent of a nutrition label. UK: Financial equivalent of a nutrition label.
Theory: Accountable owners will be activistTheory: Accountable owners will be activist Kirby Canadian Senate report on accountability Kirby Canadian Senate report on accountability AFL-CIO tactics are a taste of the future AFL-CIO tactics are a taste of the future
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What Shareowners Expect of Public Policy Local benchmarks reflecting global standardsLocal benchmarks reflecting global standards Disclosure rules to allow application of Disclosure rules to allow application of
benchmarks and promote integritybenchmarks and promote integrity Law & regulation empowering shareowners—Law & regulation empowering shareowners—easier easier
voting and communication, protection of minoritiesvoting and communication, protection of minorities
Tax and statutes to spur shareowner valueTax and statutes to spur shareowner value—share —share options, end to cross-holdings, fair takeover rulesoptions, end to cross-holdings, fair takeover rules
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What Shareowners Expect of Company Practice Prepare a corporate governance balance sheet. Prepare a corporate governance balance sheet. Put R&D into governance. Put R&D into governance. Incorporate the best new Incorporate the best new
ideas and emerging standards.ideas and emerging standards.
Overhaul voting agenda as a critical link to Overhaul voting agenda as a critical link to investors. investors. Utilize the Internet.Utilize the Internet.
Collect information as much as disseminate itCollect information as much as disseminate it . . Early intelligence of worldwide shareholder concerns allows management to Early intelligence of worldwide shareholder concerns allows management to anticipate criticism and best compete for international equity capital.anticipate criticism and best compete for international equity capital.
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Conclusion
Assume there are no borders in corporate Assume there are no borders in corporate governancegovernance. . Institutional investors from any part of the globe Institutional investors from any part of the globe are monitoring markets and companies everywhere and basing are monitoring markets and companies everywhere and basing decisions, in part, on how they rank with global competitors on decisions, in part, on how they rank with global competitors on governance criteria.. governance criteria..
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