restructuring corporate governance

RestructuringCorporate Governance:

The New European Agenda

The Mission

The Europaeum was founded in 1992 as an association of Europeanuniversities, with a mission to:

• Promote excellence in research and teaching collaborationbetween Europaeum partners

• Act as an open academic network linking the Europaeum part-ners and other universities and bodies in the pursuit of study

• Serve as a resource for the general support and promotion ofall European studies

• Function independently in the search for new ideas

• Provide opportunities for the joint pursuit of new pan-European initiatives

• Serve as a high level ‘think tank’ exploring new ideas and newroles for universities in the new Learning Age

• Draw on its ‘pool of talent’ to carry out research and inquiryinto problems and questions confronting Europe today andtomorrow

• Help train and educate future leaders for a new Europe

For further information, see www.europaeum.org

The Europaeum comprises 10 leading European university institu-tions: University of Oxford; Universiteit Leiden; Università diBologna; Rheinische Friedrich-Wilhelms- Universität, Bonn;Institut Universitaire de Hautes Etudes Internationales, Geneva;Université Paris I Panthéon-Sorbonne; Univerzita Karlova VPraze; Universidad Complutense, Madrid; Helsingin Yliopisto,Helsinki; Uniwersytet Jagielloñski, Krakow.

ContentsIntroduction...............................................................2Programme of Events.................................................4The Leiden Oxford Programme..................................5The Said Business School...........................................5

Welcome

Andrew Graham.........................................................6Maurits van Rooijen..................................................6Dr Paul Flather.........................................................7

Session I – Institutional Activism: Pros and Cons

Alastair Ross-Goobey.................................................8Sir Ronald Grierson....................................................9Professor Dan Prentice.............................................12Discussion.................................................................13

Session II – Striking the Right Balance: Prescriptive versusEnabling StrategiesGeorge Dallas............................................................19David Jackson..........................................................23Jonathan Rickford....................................................27Discussion................................................................28

Session III – Which Works Better? Contrasting Anglo-American and European ModelsProfessor Colin Mayer..............................................31Professor Antonio Borges.........................................33Guy Jubb..................................................................36Discussion................................................................40

Session IV – Round Table Discussion

Comparing Regulatory Codes..................................44Tougher Rules?.........................................................44The Rush to Regulation............................................45Active Institutional Involvement.............................45

Conclusion

Dr Paul Flather.........................................................46

Apendices

Conference Participants...........................................48Speaker Biogrpahies.................................................49Participating Universities.........................................51Participating Companies.........................................53

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Contents

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As Enron, WorldCom,Tyco, HealthSouth,Parmalat, Hallinger

and others, entered oureveryday lexicon from thelate 1990s and early2000s, the companycrashes revealed that allwas far from well in the

world of international corporations. CertainCEOs on the make, most non-executives frozenout, shareholders too often treated like cannonfodder, lawyers and auditors duped?

In this climate, the failures of a few had a dis-proportionate, though understandable, impact onmarket confidence. A raft of new reforms andmeasures were designed to rebalance corporategovernance, to bring back trust and integrity, andto lay down clear lines of accountability, to com-pany boards, to shareholders, to governmentsand to international authorities.

Of course in Washington and New York, inLondon and Paris, in Brussels and Tokyo, therewere different approaches reflecting differentperceptions and differing local arrangements.

As new legislation was enacted - regulationafter regulation by the Securities and ExchangeCommission, the Sarbanes Oxley Act in the US,the 2004 amending legislation and the revisedCombined Codes in the UK, derived from theHiggs and Smith’s reviews, and so forth - so thedebates continued.

From this, though, a new focus emerged onwhether good corporate governance was not justprevention against disaster, but could alsostrengthen corporate performance.

Questions arose about whether such regula-tions and new priorities addressed the roots ofcorporate misdeeds or whether they misallocateaccountability and distract board members fromtheir ‘proper responsibilities’.

Against this background, the Europaeumdecided to hold a seminar of policy-makers, com-pany leaders, experts, practitioners and academ-ics to discuss three critical areas of concern in the

field of corporate governance – the balancebetween shareholder activism and boardroomdecision-making; the balance between prescrip-tive and enabling strategies; and the balancebetween ‘European’ and the ‘Anglo-American’policy agendas.

A policy seminar was organised at theUniversity of Oxford, hosted by the fast emergingSaid Business School, and coordinated under theauspices of a new bilateral programme being fos-tered by Leiden and Oxford, which aims, specifi-cally, to mount programmes that aim to ‘bridgethe gap’ between academe and business.

Some 100 key figures from the fields of busi-ness, academe, politics, and policy-making wereinvited, with almost 70 took part, representing atleast 13 major companies, and five majorEuropean universities, all part of the Europaeumassociation, in an all-day seminar.

There were seven key-note speeches by sucheminent figures on the CG landscape as AlastairRoss Goobey, in the forefront of shareholderactivism; Sir Ronnie Grierson, so long at thehelm of one of Europe’s super companies; DavidJackson, distinguished company secretary of BP;George Dallas, head of the Governance ServicesUnit at Standard and Poor’s, particularly wel-come as one of the world leaders in this area,joining us from the US; Guy Jubb, energetic headof corporate governance at Standard Life;Antonio Borges, both Vice-Chair of GoldmannSachs and Chairman of the burgeoning EuropeanInstitute of Corporate Governance, joining usfrom Brussels; not to mention our very ownColin Mayer, one of the driving professors at theSaid Business School (and soon to become thenew Dean of the SBS itself). Each contributionwas dissected, in turn, by a distinguished discus-sant and followed by lively discussion.

By all accounts, it was generally agreed thatthe day had fairly fizzed with ideas. The debatesevoked are now fully reproduced in this report,with the kind permission of all participants.

The following quotes, a random collectiontaken from my own notes during the day, make

Introduction

Dr Paul Flather Secretary-General, theEuropaeum, andFellow, MansfieldCollege,University ofOxford

Introduction

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Introduction

this point most clearly. “Get the tanks off compa-ny lawns!” “Compliance… is all form?” “Trusthas moved away from companies.” “Corporategovernance is most about complex chains.” “Weneed to go beyond a simple theoretical model inEurope.” And finally, “Boards can be too blink-ered to make the necessary changes.”

Proceedings culminated in a most enjoyabledinner that seemed to bring key participants clos-er – even while they continued to debate some ofthe finer points raised in the day’s discussions.

We also came up with some important‘answers’ to particular questions in our round-table discussions, and finally we did identifysome key pointers for further thought andresearch. These included looking at the particularrole of independent directors; the relationshipbetween corporate governance and economic per-formance; the role of shareholder sovereigntyand its relation to capital; how to deliver real

transparency; and the continuing need to define aEuropean framework.

The Europaeum hopes, in time, to return tosome of these important themes, perhaps with afollow up event later this year. The Europaeumwould also like to explore setting up an interna-tional research project, linking a number of itsdistinguished universities, to produce collabora-tive, multi-disciplinary, comparative work in thisfield.

Paul FlatherOxford, June 2006

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Programme of Events

Programme of Events

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16.45

Speakers: Andrew Graham, Master, Balliol College,University of Oxford, former Economic Advisor to UKPrime MinistersMaurits van Rooijen, Vice-President forInstitutional Advancement, University of LeidenDr. Paul Flather, Secretary-General, Europaeum

Chairman: Dr. Paul FlatherSpeakers: Alastair Ross Goobey, Chairman, International

Corporate Governance Network; Senior Advisor,Morgan StanleySir Ronald Grierson, European Chairman,Blackstone Group Ltd.; former VP GEC, UK

Discussant: Professor Dan Prentice, Allen & Overy Professorof Corporate Law, University of Oxford; Fellow ofPembroke College, University of Oxford

Chairman: Professor Jacob de Smit, Leiden UniversitySchool of Management and Founder, RotterdamSchool of Management

Speakers: George Dallas, Managing Director and GlobalPractice Leader, Standard & Poor’s GovernanceServices UnitDavid Jackson, Company Secretary, BP

Discussant: Jonathan Rickford, Director, Company LawCentre, British Institute of International andComparative Law

Chair: Professor Colin Mayer, Peter Moores Professor ofManagement Studies; Saïd Business School

Speakers: Antonio Borges, Vice President, Goldman Sachs;Chairman, European Institute of CorporateGovernanceGuy Jubb, Head of Corporate Governance, StandardLife Investments

Discussant: Chris Pierce, CEO, Global Governance ServicesLtd.; former Director of Professional Standards,Institute of Directors (UK); author of Handbook ofInternational Corporate Governance

Speakers: Professor Colin MayerDr. Paul Flather

Welcome

InstitutionalActivism: Pros andCons

Session II: Strikingthe Right Balance: Prescriptive v.Enabling Strategies

Session IV: WhichModel WorksBetter? ContrastingAnglo-Americanand EuropeanModels

Session IV:Summary, Reportbacks,Recommendations

Session III: Round Table Discussion Groups

Introduction

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This event was held at The Said BusinessSchool, Oxford University, established in 1996,and currently Europe’s fastest growing BusinessSchool. It combines the highest standards of aca-demic rigour with a practical understanding ofbusiness and wealth creation. Its faculty areengaged in research on key management issues,in dialogue with the wider intellectual communi-ty and with practitioners.

As part of one of the world’s greatest universi-ties, it is uniquely able to draw on Oxford’sstrengths across a range of subjects, includingsociology, economics, law, psychology, politics

and international relations. Working at the inter-face of disciplines, and collaborating activelywith faculty from other disciplines, faculty andresearchers transcend the traditional functionaldivisions of a business school and reflect thecomplex realities of business and society in ourcontemporary global economy. The school hasalready generated outstanding research in manyareas and all faculty are at firmly at the forefrontof their fields, regularly providing importantintellectual leadership for institutions such as theEuropean Commission, the European CorporateGovernance Institute and the World Bank.

The Said Business School

‘Restructuring Corporate Governance’ wasorganized under the auspices of the Leiden-Oxford Programme. This was created in order tolink two of Europe’s finest historic universitiesand offer a variety of programmes in the form ofsymposia, taught modules, short courses andworkshops, based mainly around the twinthemes of European Business and Culture.

Its special focus is to bridge the two culturesof academia and business. The programmes areaimed primarily at private sector and public sec-tor management-level staff, in Europe or else-

where. Programmes are seen as a special oppor-tunity to ‘return to the university world to deep-en knowledge of the cultures and historical back-grounds’ of Europe.

A series of symposia were held in 2004-5:Europe, Shaping the Future (2004, Leiden),Turkey, Risk or Opportunity? (2004, Leiden),and Restructuring Corporate Governance (2005,Oxford). Another series of symposia on theFuture for Europe planned for 2006-7. The pro-gramme, linked to the Europaeum, is supervisedby an Advisory Board.

The Leiden-Oxford Programme

It’s a great pleasure toopen today’s confer-ence as chairman of

the Oxford end of theEuropaeum Group and asMaster of Balliol, becauseone of the people who wasvery committed to theEuropaeum is the former

Chancellor of the University, Roy Jenkins, whowas a member of Balliol. The current Chancellor,Lord Patten, is also a member of Balliol andgreatly committed to the Europaeum, so it’s aparticular pleasure from both the university sideand the college side to say hello to you all.

I would like to say one or two other quickwords of thanks, particularly to everyone who hasmade it here through the snow. I would also liketo say a special word of thanks to one of the peo-ple whose intellectual energy, personal commit-ment and financial support, helped theEuropaeum come into existence: Sir RonaldGrierson, who is here today. Also to LeidenUniversity, which has been one of the most activemembers of the Europaeum and whose help hasbeen instrumental in putting together today’sconference.

Governance is a word which now seems to beabsolutely everywhere. I think it was first coinedback in Chaucerian times but then fell somewhatinto disuse and, at least in my memory,had almost not been used until in late1970’s when Harold Wilson, when hestood down as Prime Minister, wrote abook called The Governance of Britainand the word suddenly began to comeinto use everywhere. Now you can hard-ly move without running into gover-nance: “corporate governance,” OxfordUniversity has just put out a GreenPaper about governance, we had areport about the BBC’s governance… it issimply everywhere and I am beginning to wonderwhether it needs to be got under control – butthat will be for you to debate.

I bumped into governance quite early in life;whether it was really governance or whether itwould now be regarded as the province of theNolan committee on the standards in public life,

I’m not sure. I had a mentor – an extremelybright, rather irascible Hungarian economistcalled Tommy Balogh – when I was very youngman in the Ministry of Power. He was theAdviser to the Prime Minister and I was his assis-tant, and we were in the Ministry of Power in theearly days when North Sea Oil and North Sea Gaswere just being discovered. I remember sittingnext to him at a fairly small table, with theUnder-Secretary from the Ministry of Power andother Ministry of Power staff. About one third ofthe way through the meeting, Balogh said in atotally audible whisper: “You will note, they’re allin the pay of the oil companies.” He then turnedand left me to conduct the rest of the meeting…which was when I really confronted the issue ofstandards in public life.

On a slightly more serious note, the thoughtthat I would like to leave you with today is that,speaking as an Economist, I am not a greatbeliever in what I would regard as “transplant”theories, but I do think that we can learn a greatdeal by looking at how experiences compare andcontrast across different systems. I don not thinkwe should think of taking one model and plug-ging it into another context, because models arealmost always embedded in complex history,complex institutional structures and cultural sur-roundings. But I think we can learn a great dealfrom looking at other systems.

My apologies onbehalf of myUniversity’s

President, Mr A W Kist,who is not here this morn-ing. He made it up toSchiphol airport and thenit started snowing, and assoon as there is a bit ofsnow in the Netherlands,everything comes to a

stop. It would not happen in a country like this,of course!

Leiden and Oxford have been working togeth-er for centuries, and the partnership is stillstrong. We collaborate on research projects, andhave a successful student exchange programme,particularly in Law. More importantly, in the

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Welcome

Welcome

AndrewGrahamMaster, BalliolCollege, andChairman,OxfordEuropaeumGroup

Maurits vanRooijen Vice-Presidentfor InstitutionalAdvancement,University ofLeiden, andVice-President

for International and InstitutionalDevelopment, University ofWestminster

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Welcome

context of the Europaeum, we are collaboratingon the new Master’s degree in European Historyand Civilisation, which is jointly offered byLeiden, Oxford and Paris I Panthéon-Sorbonne.

The idea of the Leiden-Oxford Programme isto bring together future and current leaders insociety, the private sector, the public sector, andacademia to discuss prominent issues in Europe.It is an idea which came from one of our alumni,Prince Constantijn, who attended our Universitybut also spent some time at Oxford University.He felt there was a great need, and he is right, tobring people together to discuss European affairs– not just to listen to speeches, but to discusswhat is happening.

This is the third seminar organised under theLeiden-Oxford programme. The first two were inthe Netherlands, starting in June of 2004. Thetiming was intentional – that was the start of theDutch presidency of the European Union.

The first event was about the Shaping theFuture of Europe. I can remember especially thelast session with Wim Duisenberg, who, when hewas President of the European Central Bank, wasknown for making comments which sometimescaused a bit of turbulence for the European cur-rency. I can assure you that after he retired, hewas even more outspoken in his comments.There was an extremely interesting session wherehe gave a particularly frank assessment of Europeas a monetary union and the role of Europe.

We had a second seminar in December, on thepossibility of Turkey joining the European Union,another interesting topic for discussion. Bothconferences were extremely well attended and wewere pleased with the outcome.

The theme of this today’s conference was sug-gested by Morris Tabaksblat, chairman of ReedElsevier, and formerly of Unilever, and author ofa recent report on the Dutch CorporateGovernance Code. He was looking very muchforward to being with us today to discuss corpo-rate governance, which he feels passionate about,

and it was with deep regret that he had to with-draw for personal reasons at the last moment.

I am not going to say much about the themeof the conference for the simple reason that Idon’t know anything about it, except that corpo-rate governance in Europe – please don’t quoteme – seems to be rather a mess. But maybe thatis something you want to discuss, rather than me.

It has been our greatplease to help coordi-nate this event. Our

Europaeum project beganin the 1990’s, when wewere launched to help pro-mote international debate,research, and study oncurrent issues, with thenotion of giving scholars, future leaders, intellec-tuals, and politicians a fuller sense of Europe.Thinking about this conference, it struck me thatthere are few themes which fulfil our mission aswell as the topic of today’s discussions. In a glob-alised economy it seems that corporate gover-nance is a live international issue; and as Europecontinues to become more integrated, I think wemust consider developing rules and regulationsacross borders. How and why is that best done?

The Europaeum now has ten university mem-bers, one from each of ten different Europeancountries. We sometimes like to characteriseourselves as a “university without walls,” but inthis new Internet age we are all operating withoutwalls. At the same time, when you think of it, weare in a very nice set of walls here in the SaïdBusiness School, and we are delighted to be here.

There are active links between Oxford andLeiden in many disciplines: notably law, but alsohistory, where we are running a joint MA.Students on the programme spent the first termin Leiden, the second in Paris, and are about tocome to Oxford for the third term.


For this first sessionwe have two verywell-known speak-

ers: Alastair Ross Goobeyand Sir Ronnie Grierson.Both have been active inthe field of corporate gov-ernance and I am going toask Alastair if he might

kick off. Alastair has developed a powerful repu-tation travelling in America and Europe, talkingabout notions of institutional involvement andshareholder activism, and has developed a coher-ent philosophy which is relevant for our discus-sions today.

It is an unusual pleas-ure for me to be here.It is also an unusual

position for me to be onthe extreme left and SirRonnie Grierson on theextreme right! The title ofthis session is“Institutional Activism:

Pros and Cons,” and when I talk about institu-tional activism I mean going well beyond whatyou would call normal corporate monitoring, andactually intervening in companies in some way.Let us look at this concept from four angles:Why should the institutions do this? Whereshould they intervene? How should they makethis intervention? Who should actually inter-vene?

What is the role for shareholders (by which Imean institutional shareholders or their clients)?It is widely understood that companies must becontrolled and directed by the board. Boardshave different roles and different structuresunder the different regulatory regimes we havewithin Europe, but whether they are supervisoryor unitary, what happens when these boards areineffective, when they are not structured in anappropriate way, or where the company seems tobe drifting or worse? The only people that canintervene are the shareholders. I do think thereare times where the institutional shareholders(who are the only ones with sufficient resources)have to step up and question the boards.

What are they entitled to question? It couldbe purely the governance of the company: if theboard is made up of the chief executive, his wife,his brother, the core shareholders, and govern-ment shareholders, then the outside shareholderhas very little chance of getting a fair crack of thewhip. Shareholders may equally want to inter-vene regarding the company’s strategy, its man-agement, or its capital structure (or a combina-tion of all four of those things).

How should they intervene? There is a lot tobe said for both sides of this debate, and SirRonald may use the word ‘micro-management’when he replies. There is, naturally, a greatresistance amongst corporate boards and corpo-rate management to the idea that shareholdersshould come and tell them how to run their com-pany, because shareholders simply don’t have thedepth of knowledge about the company and theenvironment in which it works.

Nonetheless, I see absolutely no reason whythe institutional shareholder, properly resourced,should not be able to go to a board and say:“This is our analysis of the problems you face,and here are some ideas about what you mightdo about. The decision is over to you, this isyour responsibility, you are the board of direc-tors. We are just giving you some ideas; ourresponsibility stops at the boardroom door.Yours starts behind the boardroom door. But ifwe do not like what you are doing, we will useour opportunity to vote you off.”

In the UK, and in most European countriesnow, you have that option. In the United States,on the other hand, you do not have the opportu-nity because the board does not have a simplemajority vote for individual directors. That iswhy American shareholders are very concernedabout staggered board terms, because they canprevent the change of control over a board.

In practice, to do this, you start off by maybetalking to the management about your concernsabout the strategy, or the corporate governanceor the capital structure. You don’t talk to themanagement about your concerns about themanagement – you talk to the non-executivedirectors about that. You can then escalatethings to put the matter before a meeting of thewhole board. If that is ineffective, you can start

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Institutional Activism

SESSION IInstitutional Activism: Pros and Cons

Alastair RossGoobeyChairman of theInternationalCorporateGovernanceNetwork, and aSenior Advisor

for Morgan Stanley bank


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talking to other investors, and ultimately you cango public and you can, certainly in some environ-ments, call meetings to dismiss the board.

This is one of the great fears the Americanshave about opening the proxy to shareholders:there will be constant demands, and votes againstthe whole board. My reply is that it has happenedvery, very rarely in the UK, although we do havea fairly “open” system for doing such things. Inmy experience, we only voted off one board, andthat was only an investment trust, not a hugecommercial organisation. When it comes to it,most people put their hands up and say: “If theshareholders are against this sufficiently, we willgo quietly rather than make a fuss.” Institutionalinvestors can be a catalyst for change and a cata-lyst for improved performance in companies, asthe board themselves can be too blinkered to seethat change is necessary.

This brings us to my fourth question, which iswho should do this? As many people have point-ed out, institutional fund managers are not quali-fied to manage companies (arguably, many ofthem are not qualified to manage institutionalfunds!) – at any rate, they are certainly not busi-ness people. What we found when we set up theHermes Focus Fund, which I still chair, was thatin order to do this in a professional, commercialway, it is no good just having fund managers try-ing to intervene. For one thing the executives orthe boards of companies will say, “what do youknow about it? You couldn’t run a candy flossstall.” So that’s what we worked on at Hermes.We built up a skills base of business people andstrategic consultants, in addition to fund man-agement analysis people (because you have to dothe fundamental analysis of the company in anormal investment way, to make sure there is avalue gap there that might be addressed by thechanges you are seeking to catalyse).

This is a very interesting change in the waythat institutional investors can address the situa-tion, and the great problem for the institutions isto be properly resourced. Very, very few of themare properly resourced in this, and corporate gov-ernance monitoring tends to be done by very fewpeople within the organisation. We’ve got GuyJubb coming this afternoon from Standard Life. Ithink he has three or four people who work forhim, and he has a larger department than many.At the Pru (Prudential), you have Hugh Jones,whose job title is Corporate Finance Executive.He is behind the Chinese wall, so we can talk inconfidence to him about these issues because heis not involved in buying and selling the shares.But there are very few institutions which havesufficient resources and the right sort of people tobe proficient in the kind of activism that I am dis-cussing. Hermes now has 47 people involved inall this, and it’s only because we set up these

commercial funds, in order to earn hedge-typefees, that we have been able to allocate theresources that we require.

I say that we are only scratching the surface,but that is because it is very difficult to do thisright. I talk to a lot of institutions about thiswearing my Morgan Stanley hat, and many of theinvesting institutions say, “Well, it’s not going toadd one basis point to my performance, so whyshould I invest in all this? There is a huge freerider problem. We do all the work, at our cost,and every investor gets the benefit.” It is aconundrum for the institutions, and I don’t thinkthe institutions are doing better than, say, six outof ten (possibly seven out of ten) in theirattempts at appropriate interventions in compa-nies. It is better than it used to be, but we’re notdoing a great job, and if you look around theworld at all the companies that institutions investin, there are really too many companies to look atand not enough people looking at them in thiscontext.

Well, I’ve taken my fifteen minutes, but thoseare the four questions, and I hope I haveanswered my own questions too. There are prob-ably lots of other questions I hope you will askaside from the “why,” “what,” “how” and “who.” Iwould also be interested to hear whether Ronniethinks this is a reasonable approach or whetherhe thinks this is outrageous and that we shouldget our tanks off his lawn.

Sir Ronald Grierson, our nextspeaker, has had anextremely distinguished

career in British corporate life,but I always think of him as a sort of EuropeanBritisher, or a British European, as he is soinvolved in so many different projects – not leastours, of course. Ronnie, do you think boards are“too blinkered”? I heard “not qualified” and then“tanks on the lawn” - what do you think?

Thank you for thatover-generous intro-duction. I would

like, first, to express mypleasure that theEuropaeum, which Ihelped to co-found withmy friend GeorgeWeidenfeld, has flourishedso remarkably under Dr Flather’s leadership. Hehas done a fantastic job and we’re all enjoying thefruits of it in this room today.

I hope it is not too disappointing, but I don’tdisagree with anything that Alastair has said. Ihave never taken the view that it is wrong forshareholders to make their wishes known, inwhatever form is most appropriate and most

Dr PaulFlather

Sir RonaldGriersonEuropeanChairman,BlackstoneGroup, and for-mer VicePresident, GEC

effective. However, several things bother me; what

bothers me particularly is that he makes an arti-ficial distinction between institutional sharehold-ers and other shareholders, and I don’t actuallysee that distinction. The institutional sharehold-ers, I admit, own, on the whole, more shares perinvestor than the private investors. Otherwise, asfar as the perspective of a company managergoes, there is no distinction between an institu-tional investor and a private investor. In fact,there is a danger in it quite apart from logicality:there is a danger in it because, by law, companymangers or company boards are not supposed tobring, or even to reveal accidentally, informationto one shareholder which they are not giving toothers. So I perceive a very considerable dangerin cosy talks between shareholders (be they insti-tutionalised or anything else) and companyboards. The same is true, of course, of financialelders and financial columnists and so forth. Ithink this is an important point to watch, and heseems to have ignored that completely. To me, itis a slightly dangerous area.

I have no problem with activism as such,either. Capitalism seems to expose a lot of flanks,which have been under attack ever since capital-ism started – don’t forget, capitalism was incred-ibly unpopular in the United States in the early19th century. Banks have been unpopular in theUnited States throughout the 19th and early 20thcenturies, especially during the recession in the20th century when several thousand banks sud-denly disappeared and millions of people’s sav-ings were lost. There is nothing wrong withactivism against corporate malpractice or corpo-rate stupidity – I have no problem with that at alland one really has to go back to the origins of thelimited liability company to get the right perspec-tive on this.

The limited liability company, if I’m not mis-taken, was created in the 19th century when fam-ilies ran out of money with which to developtheir businesses and did not have enough cousinsand uncles and others to go to for additionalfunds. Instead, they went out to the general pub-lic. The limited liability company was created inorder to protect the company, and protect theshareholders from the consequences of any stu-pidities committed on their behalf by the busi-nesses.

When the public gave its money to corpora-tions for better or worse, they made some invest-ments that were bad, others that were not so bad,and others that were very good: but in all cases,they handed over a sum of money for a piece ofpaper which entitled them to go to an annualgeneral meeting and vote, and to receive a divi-dend, if there was any. They were talking one hellof a risk and they must have known they were

taking a risk – this is as true now as when thelimited liability company was first born. There isan essentially fraught relationship betweenshareholders and the businesses in which theyinvest, because the shareholder is very weak andthe company is very strong. Alastair is quiterightly proposing to redress the balance a bitmore in favour of the shareholder, but I empha-sise that I don’t believe it is suitable for institu-tional or private shareholders to be moreassertive in order to cover the essential weaknessof their position vis à vis the company.

I also have difficulty in becoming as obsessedwith the role of the non-executive director assome people appear to have done. This is notwholly irrelevant to this part of the discussion, soif I may digress for a moment: There appears tobe a feeling that if one works hard enough at it,one could make all non-executives directors per-fect, and that by making them perfect one couldachieve perfection throughout the companieswhich they serve, and there will be no longer bebadly-run companies.

This thought, which underlies much of thediscussion going on today, seems to me like non-sense. There will always be good and bad non-executive directors, and there will always be goodand bad executive directors. That is one of therisks which the investor runs, and one of the rea-sons why he diversifies his investments: he does-n’t invest all the money in one company or twocompanies because he knows there is this risk.Training non-executive directors in order tomake them “fit for their job” seems to me to bevery ill-conceived because I cannot actually see anon-executive director of a large company, forinstance GEC in the old days, mastering the intri-cacies of every single part of the business. Whyshould he attempt to do something which ispatently impossible? He should be what the lawcalls a “reasonable man” and he should have rea-sonable instincts, and that is about as far as onecould go on the subject of who is and who is notsuitable to be a non-executive director.

As for the function of company boards, I’mstraying slightly outside the strict boundaries ofthis discussion, but it is not irrelevant: Therewas a reference already that boards work differ-ently in different countries. We have a big prob-lem in this country, because we are the onlycountry (apart from one or two commonwealthcountries) which has unitary boards, and there-fore we have the situation in this country wherethe directors of the company are both the moni-tors and the practitioners. Directors are the peo-ple who are supposed to run the company, but atthe same time they are supposed to keep an eyeon it… one eye runs into the other and, basically,it is an impossible situation. This does not hap-pen in any other country that I have ever been

10


associated with, and it creates all sorts of prob-lems. For instance, I read in a recent code of cor-porate governance (I think it is the e-code of cor-porate governance) that it is the duty of a boardto drive the company’s enterprise forward – orwords to that effect. Now, that is something thatnobody in America or Germany would even beginto understand.

It is not, in my opinion, the duty of the boardto drive a company forward. That is the duty ofthe management, and by having unitary boardswe fail to make this distinction between the man-agement and the board. This is a very seriousshortcoming and I am not sure how we can reme-dy it, but it is something which is the kernel ofthis whole discussion.

So this is another problem which comes fromthe fact that we have unitary boards in this coun-try. It is quite difficult to know exactly which hata director is wearing at any particular moment.In the United States, he knows exactly which hathe wears because there is a distinction betweenthe management and the board. For instance, Iserved on the boards of a number of very largeAmerican corporations, bigger than GEC, and Iremember that I used to receive the companyaccounts, which were submitted to the stockexchange by fax, the same day that the pressreceive them. They were not shown to the board,and board did not vote to pass the accounts. Theaudit committee did, but the board as a whole didnot pass them because it was not the function of

the board, it was the function of the managementof the company. This may no longer be so underthe new rules, but certainly it was so some timeago.

In conclusion, can I just say this: I am sorry Ihave rambled across the borders of the subject aswell as the core of it, but I want to be clear on onepoint. We have to be very careful in using thisword “governance.” I think Alastair and Paulhave both drawn attention to the fact that it is aword dredged up from the distant past.Governance means wielding authority, whichprobably should be delegated, and this is a verycomplicated subject because once you delegateauthority you have to be fairly vigilant in pursu-ing those to whom you have delegated it. Yet youmust not go too far in this, as you could startdestroying a business by constantly attacking it.

The people who run a business are as good asthey are, and in the capitalist word there arealways good managers and bad managers. Theonly way you could improve a company from theoutside is by changing the management, which isagain a risk because you may find that the manyou put in, whom you thought better than theone you turf out, is in the end a worse post-hold-er. I think this element of risk pervades the wholeof the discussion. There is a risk in investing,there is a risk in teaching from the outside, as itwere; there is a risk even in replacing becauseyou may find that the replacement is less goodthan what he or she is replacing.

11


DiscussionThis is an edited version of the conference

transcript. The editors apologise for any possiblemisinterpretations.

Iwould like to invite ProfessorDan Prentice to join us, tohelp kick off the discussion by

serving as discussant. In case youare relaxing and you think that two “knights ofthe realm” in this world of corporate governanceare beginning to agree, I sense actually quite afundamental difference emerging. Alastair, in away, is arguing that there is a net good frominstitutional activism and involvement, and (per-haps I am going too far with this) there is even anet benefit to economic performance. I thinkRonnie is pointing out that there are huge risksto jumping into the fray and that managers haveto be allowed to get on with their job. Dan – whathave you to say?

Icame across the word“governance” a consid-erable period of time

ago, when I first marriedmy beautiful wife and shesaid to me: “Dan, we haveto organise the governanceof the family. You will dealwith the important ques-

tions: should China be admitted to the UnitedNations, should we have nuclear disarmament…questions of that magnitude are for you. I willdeal with the trivial questions: where should welive, what car should we drive, where will we takeour holiday, should we privately educate the chil-dren… small matters like that.” This is part ofthe problem with executive and non-executivedirectors. Who decides what?

Now let us look at some points. One of thethings that come out in both speeches is the rela-tionship between board structure and perform-ance. Alastair did not go into that in considerabledetail, but it seems to be an important question.Perhaps the unitary board presents difficulties inallowing for a non-executive performance withinthe board. The second point that comes out is thequestion of how to deal with a board that isunder-performing. We can say to them, “theseare our suggestions and, by the way, if you don’timplement them we are going to remove you.”That is not much of an option and it seems to bea very crude instrument indeed. It is the work-ings of the interaction process which most inter-ests me – the option of death or suicide does not

seem to me to be a sensitive regulatory device. The third point that comes out is the question

of resources for institutional involvement in thecorporate governance issue. It is quite clear that alot more needs to be done, but the ultimate resultmay be that we simply have shadow boards, and Ido not know how the shadow boards run by theinvestors will interact with the board itself. Weknow about the exit problem, the free-rider prob-lem and problems of expertise, but another pointthat came out for both – and as a practicinglawyer I have noticed it is a considerable issue –is disclosure of inside information. However, Ithink its menace has been exaggerated. If it is abarrier, and we are always told it is a barrier, wecan get round disclosure by simply altering therelevant legislation. There would be no difficultywhatsoever in drafting a piece of legislation stat-ing that, in certain circumstances, it is proper todisclose confidential information. With fuller dis-closure, the board can receive fuller investor con-fidence and well-performing boards can be left toget on with business.

The last point is this problem of board struc-ture. There are two aspects to it: one is the dutiesof the directors, and other is the structure of theboard. There is a piece of legislation called theCompany Directors Disqualification Act. It is themost active piece of regulatory legislation used bythe Department of Trade and Industry. It is usedpredominately by small companies which havebeen run in a highly improper manner, but hasalso been used against one or two major players.The Barings litigation is one, and if you look atthat legislation and the case law under it, this is aregion in which directors’ duties are being active-ly developed by the Court. The model they putforward is not a model of active participation inthe management of company; it is a supervisorymodel. What the directors must do is ensure thatthey have in place systems (which were not inplace at Barings) to provide adequate supervisionof what is going on.

Moving on to Sir Ronnie’s point about unitaryboards, with the Combined Code, I think you getvery close to a two-tier board system. You havesupervision and internal board structure, whichare the two important ingredients. Its best pointis that it manages (partly) to avoid one of theproblems with two-tier boards which, all the con-tinentals will tell you, is information flow: what isgoing up to the supervisor board and what iscoming down.

This information-flow problem was highlight-ed by the most brilliant student I have evertaught: I said to him, “what does managementmean to you,” and he said, “one over archingprinciple, Dan: no surprises.” The combinedcode model overcomes many of the two-tier

12


Professor DanPrenticeAllen & OveryProfessor ofCorporate Law,Saïd BusinessSchool,

University of Oxford

Dr PaulFlather

13


information problems because the structure isslightly divided but you get all the informationflows to all of the board. It seems to me that weare moving towards a very sophisticated system,with boards becoming more supervisory.

Is shareholder “activism”becoming “terrorism”?

Ithink my position may havebeen made to seem a bitmore radical than it is by Sir

Ronnie. We do not go to boardssaying, “if you don’t do this, wewill fire you.” We say, “there is clearly a problemin your company, because your company hasbeen underperforming in its peer-group for fiveyears. What are you going to do about it? Hereare some ideas,” and then we monitor them. Ifthey say, “we are going to do absolutely nothingat all,” then we might start suggesting their posi-tions are at risk, but there is an escalation strate-gy in these things. I do not think this is terror-ism, I think it is proper stewardship – part ofstewardship is making sure that the board isappropriately structured.

I understand Sir Ronnie’s point about “theperfect non-executive director,” but sometimeswe have to intervene and say, “look, you have acompletely deadbeat board. Do you want to dosomething about this?” I think that activism isan extension of stewardship, but when you getinto activism, as I say, the recommendations stopat the boardroom door. It is for boards to exe-cute the changes, and they may have completelydifferent idea of how to change things, which weare happy to listen to. We effectively end upbeing free consultants.

There is no need to be dismissive of adviceoffered by people who used to work in the busi-ness world and end up working in the activistfunds. It is not an insignificant business to beinvolved in and we have very highly qualifiedpeople with a lot of experience of PLC manage-ment doing this: we can look these boards in theeye and say, “don’t tell us we cannot managecandy floss stalls because we do manage candyfloss stalls.”

The great problem for the institutionalinvestors, though, is that they are looking atthousands of companies around the world.

I do not normally make a distinction betweenthe institutional shareholders and small share-holders: small shareholders have equal rights.However, they don’t have the resources; onlyinstitutions have the resources to do these things.Actually, though, in 1993 over the issue of three-year rolling contracts, we used the small share-holders as the shock troops – and that really was

terrorism because they used to turn up at annualgeneral meetings and get up and ask the chiefexecutive, “why do you need a three-year rollingcontract? Surely you are not that lacking in con-fidence in yourself?” The one thing that execu-tives hate is questions about their own remunera-tion or their own contracts at annual meetings.In this case, small shareholders were highlyinstrumental in getting policies changed – it wasan alliance between all shareholders. But I dothink that we are not generally “terrorists” in thenormal way.

Coming from East Asia, I amespecially aware of thestructural differences

between East Asian companiesand Western European ones. For example,shareholding patterns are very different in Asia(family ownership, etc.) and board structures canbe radically different. To what extent do youthink these differences are driven by endogenousfactors and to what extent do you think we’llcome to look more like each other in time?

There is considerable litera-ture dealing with regula-tions of security markets

and corporate governance, called“convergence literature.” I think the jury is outon the accuracy of the various theories, but onecertain characteristic in Europe and NorthAmerica is that the driver for convergence hasbeen the large law firms. One of the greatchanges over the last decade has been the way inwhich the large firms operate out of every juris-diction. I know more about Allen & Overy thanany others, but I think they are a fairly represen-tative firm. I think they have about four hundredand twenty partners, and about a year ago, forthe first time, about fifty percent of their partnerswere non-English-trained lawyers. That is a mas-sive statistic and I believe the role of law firmsdeserves to be explored further.

Following on from the gentleman’s question, Iwould like to point out that, while we are dis-cussing shareholder activities in a fairly narrowEuropean – or even British – sense, it is impor-tant to remember that there are other structuresfor corporate governance and ownership in theworld.

I have a graduate student who has just fin-ished a thesis on corporate governance inThailand, and course the board structure there isfamily-dominated companies. They do not havethe type of agency problems we have, becausemanagement and shareholders are the same.They have other types of problems, but they donot have the agency problem that we would iden-tify in the United Kingdom. I think there is cer-

Colin WallCopley Wall &Associates

AlastairRossGoobey

Guy LiuBrunelUniversity

ProfessorDanPrentice

tainly a minority shareholder oppression prob-lem, but not the classic “agency” problem thateconomics point out here.

That’s extremely important to the youngwoman who just finished, because she belongs toone of these very wealthy families. In her thesis,she put a footnote saying “interview with theMinister of Finance.” I asked, “oh how did youget an interview?” and she replied, “oh, that’s myuncle.”

Actually, when looking atthe lack of “agency prob-lem” in large shareholder

concentrations, I do not thinkthere is necessarily an identity of

interest between the outside shareholders andcontrolling shareholders of family-owned compa-nies. What we have found as investors is thatthese families don’t seem to understand thatswapping assets from their private interest to thepublic company at the wrong price is not in theinterest of the outside shareholders, maybe eventhe interest of the insider shareholders.

The agenda of the controlling shareholderscan be very different from the agenda of long-term external institutional shareholders. Theymay be more concerned about maintaining con-trol of the company than they are, necessarily,with maximising long-term shareholder returns.We have seen this in Europe now, of course, withthe takeover directive in which the Swedes man-aged to maintain super voting structures to pro-tect the Wallenberg family control over most ofSwedish industry. That system is not necessarilyto the advantage of outside investors because itprotects Swedish industry from normal marketforces in some ways.

At Hermes we have had to face the questionof how to engage with large dominant sharehold-ers, whether governments or families. Before weset up our European focus fund, we found thatmany of these companies, when you get intothem, have disagreements within the families orwithin the core shareholders which an externalstimulus helps draw to a conclusion. We havevery rarely been told, “go away, we are not goingto talk to you,” and we have seen some reallysubstantial achievements. You can take anexample like Orkla in Norway, a sort of holdingbig holding company which had a huge holdingin Carlsberg. It was not an efficient holding inCarlsberg and we were pressing them to dosomething about the inefficient way they wereusing a Norwegian holding company. Orkla didactually unwind that, to the great advantage ofOrkla shareholders, and we would say that wedid not have any real levers other than beinglarge shareholders. Norway is probably evenmore protective of its own companies than

Sweden, so we found this result very encourag-ing. You can approach these companies, and youwould be surprised how often you can actuallyget through the door and get some traction.

Iwould just like to comequickly to the defence ofdominant directors in busi-

nesses. If you look back on thehistory of capitalism, in this country alone, youwill find that most successful business werestarted by people who remained dominant, andsometimes their children and grandchildrenremained dominant, and the moment theydeparted from the scene – Marks & Spencer’s,Sainsbury’s, you name it – things started tounwind. So before we start being too unkind tothe memory (and indeed the current observa-tion) of dominant personalities in business, Ithink we need to remember that I have onlyrecently retired from typical example of it: until acouple of years ago, I was a director of the DailyMail, which is probably the only – not probably –is the only company in the FT100 which still hasdifferential voting rights. But it is very well runand the shareholders are satisfied, so you need tobe careful: if ever the family sold out, I am not sosure the business would go on being quite as suc-cessful as it is now – but that’s a subjective viewand you would expect me to say that.

There have certainly been dominant personal-ities in business that turned out to be eithercrooks or incompetent. Of course, that is true.But rather than individuals, I was talking aboutfamily businesses which were created by familiesand carried on in some cases for generations.When you bring up examples like Marconi orVivendi, these are all cases of irresponsible peo-ple who seized control of the companies – butmay I point out that in every single one of theseexamples, incompetent leaders were followedenthusiastically by institutional investors.

Corporate Governance, inthe sense covered by thisconference, is a new addi-

tion to the business landscape –I think you could genuinelyargue that we are only interested

because of the impending pension crisis. Inresponse to Sir Ronald’s point about the “perfectnon-executive director,” I train non-execs regu-larly, and it can be done. His approach seemssomewhat outmoded to me. Therefore, my ques-tion is more to Alastair Ross Goobey: how far doyou think you can go with activism?

14


MurraySteeleCranfieldSchool ofManagement

AlastairRossGoobey

Sir RonaldGrierson

Ihave been described as anti-quated, which I regard as acomplement, of course. It

says that I am mature. But Ibegan my remarks by saying that I did not quar-rel with the basic proposition put to me byAlastair; I merely pointed out some of the dan-gers inherent in it, and some of the drawbacksand some of the limitations. I am all for activism.I have nothing at all against activism as long as itis within the law and so long as the legal nicetiesare being observed. The burden of my remarksreally was that there is an asymmetrical relation-ship between shareholders and the companies inwhich they invest. The shareholders have a veryweak position and what Alastair is doing success-fully – and others are doing not quite so success-fully – is to strengthen the weak side in this rela-tionship.

Such activism is entirely legitimate, so long asit is done sensibly, within the law, and peoplerealise that there is a limit and that the ultimatesanction of the shareholder is to sell his shares --I admit, this is more difficult when you own tenpercent of a company than when you own onethousandth of one percent, but that is the ulti-mate sanction that you have, and that is why youdiversify. If one company goes wrong, you sellthose shares and reinvest in another company.But none of what I have just said in any wayreduces my admiration for activism.

However, following on from a point raisedearlier in the discussion, I hasten to point outthat there is a danger in giving different informa-tion to one group of shareholders than one givesto another.

That is the point: do share-holders sell when they getdesperate? The reason that

Hermes have taken the path wehave is because many years ago we decided tohave a core index portfolio, rather than a multi-tude of more active portfolios. In doing this, weforeswore the option of selling up and moving on.At any rate, institutions that do sell are just sell-ing to another institution, passing the problem tosomebody else. Somebody at some stage has gotto intervene and that is what really drove us.After we built the resources to a certain level, mytrustees and owners felt that the free rider prob-lem was huge. You cannot prove that benevolentactivism reduces the cost of capital by improvingour returns – we could assert it but we could notprove it – so we came up with the idea of “focusfunds,” which enabled us to earn some fees inorder to build up our resource to the level that wenow have.

We can go quite a long way with this: we havejust announced a sort of quasi-focus fund that is

going to be set up in Japan with Nippon Life. Ofcourse, being Japanese it will be done in anentirely different way. We are not going to gobanging on the doors of boards and saying, “dothis or we will vote you out.” That would not godown terribly well in Japan. But it is a step in thedirection of becoming a pure governance fund,trying to encourage better governance.

It saddens me to hear in twoof the original presentationssome questioning of the prac-

ticality of the unitary board. Ihave always seen the unitaryboard, and so have the authors ofthe combined codes that we have had fromCadbury down to Higgs, as being the realstrength of the UK system of board structures. Ithink we may be at risk of talking ourselves out ofthat structure.

I do not think there has been a change in thedirectors’ fundamental balancing act betweenmanagement and supervisory duties. Of course,it must be closely defined, in a quasi-legal way,what those fiduciary duties are: when do theyhave a supervisory responsibility, and when arethey responsible for driving the performance ofthe business?

I do disagree with Sir Ronnie, in that I dothink it is the board – and it must be the board –which is responsible for the performance of thebusiness; otherwise the institutions and theinvestors are wasting their time having a dialoguewith the board if the company is underperform-ing. I think it would be a great shame if wetalked ourselves out of that position entirely.However, you are not the only people to point outthat the burden on non-executive directors issuch that, in practice, we may creating a two-tierboard system within a unitary board, and if thatis so I think it needs to be looked at.

If I may make one other point: where I funda-mentally agree with Sir Ronnie is that we mustnot differentiate between institutional and pri-vate investors. In my days as a regulator I leantover backwards to make sure that the rights andresponsibilities owed by companies were owed toall investors and in fact I would like to say twothings on that. Dan Prentice says, “if the law getsin the way, easy enough, change the law.” I don’tactually think there is any problem with the lawin this area of disclosure, but I would point outthat changing the law is not such an easy matterbecause a lot of it is European law, and the lawhas been changing, although it is changing toresemble the UK model more than any othermodel.

Finally: Dan Prentice raised the issue of direc-tors’ responsibilities under law. He mentionedthat under the Company Directors

15


Sir RonaldGrierson

AlastairRossGoobey

KenRushtonCorporateGovernanceConsultant

Disqualification Act – it’s no secret I would liketo see that act extended to breaches by directorsof disclosure rules, which are not necessarilyhappening – if directors deliberately favour onegroup of shareholders against or above anothergroup in terms of sharing information, thosedirectors are not fit to be on a board and theyought to be subject to the possibility of a disqual-ification order.

Idon’t know why this view hasgot about that unitary boardsare somehow failing. I don’t

think they are. Of course in prac-tice, it almost works out to a two-tier system: Idon’t know of a single serious company wherethe executives don’t meet separately before theboard meeting, to make sure that they are allspeaking the same language to the board whenthey get in front of the non-executives. But inGermany, for instance, you have, in effect, three-tier boards – I don’t know a single serious com-pany there where the management nominees onthe supervisory board don’t meet separately fromthe union representative on the managementboard, before the supervisory board meets.

It is not just in the UK and other English-speaking countries that you have unitary boards:France boasts the unique opportunity of doingthings in three different ways. You can have aunitary board in the sort of Anglo-American way,or you can have a two-tier board, or you can havesomething which is dominated by the PDG(Président Directeur Générale), who has morepower than Napoleon had. Of course there aregood PDGs – there are good strong executives,Ronnie – and there are bad ones. The only peo-ple who could try and intervene when an execu-tive has been identified as not a very good one, ornot acting in the interest of shareholders, are theshareholders, through their voting. I don’t thinkthere is a conclusive answer to whether the sin-gle-tier board is a good thing or a bad thing. Ithink it works pretty well, and if it works, don’tfix it – but I agree with Ken Rushton that weshould come up with a better approach tobreaches of disclosure.

Ihave no problem extendingthe Disqualification Act tobreaches of confidential

information. It seems that whatMr Rushton wants to do is extend it in such away that breach of the regulatory provisionswould automatically result in (or at least could bethe basis for) disqualification.

Idon’t want to prolong the dis-cussion too much. At themoment, we don’t have the

power to disqualify a director. Under the newsystem we can levy unlimited fines as a correc-tional measure. I’m not saying that is not a pow-erful sanction, but a real deterrent would be thethreat of disqualification for a period.

Sir Ronnie, could you com-ment here? Does it workbetter – is the balance bet-

ter – in America because there isless threat to directors?

Ithink the main differencebetween America and thiscountry is that the Americans

rely more on law, which I am infavour of. We try to self-regulate and theAmericans feel more comfortable with law. TheSarbanes-Oxley Act is a prime example of thisresort to law, changing the security laws. Almosteverything America is now seen as a Securitiesmatter because the recent governance problemsare seen to arise from the issue of securities froma public limited liability companies, and there-fore that is where bad practice has to be tackled.The holder of the security, once that piece ofpaper has been issued, is the one that needs pro-tection and that protection comes to him underlaw rather than by relatively cosy arrangementsof a self-regulatory nature.

It seems to be obvious com-mon sense that you don’ttreat all shareholders alike. If

Alastair rings up Sir Ronnie andsays, “I want to talk to you aboutyour company’s remunerationpolicy,” Sir Ronnie may treatAlastair differently from the wayhe would treat me if I rang up. If

he has any sense, he would realise that he wouldhave a real problem at his annual general meet-ing from Alastair, but he won’t from me. Inaccordance with normal principles, as regardsthe direction of the company, he should treatAlastair in a very different sense from me. Now ifthere is a legal requirement that every sharehold-er is to be treated alike in all circumstances,regardless of the size of stake and inclination tobe involved, then we have a problem. There is alegal requirement that this be the case, and con-trary to what Dan Prentice suggested, it cannotbe completely changed because it is in theSecond and Thirteenth European Directives.

There is a series of different problems thatissue here. There is the problem of sensitive/con-fidential information brought up by KenRushton, and then there is the principle of equal-ity. To give an example from a German companythat I recently advised about a takeover, it has

16


JonathanRickfordBritishInstitute ofInternationalandComparativeLaw

AlastairRossGoobey


KenRushton

Dr PaulFlather

Sir RonaldGrierson

provided substantial confidential information tothe bidder. One of its shareholders, who happensto be a competitor, said “I am entitled to equalityof information; I want the same disclosure as youhave given this bidder.” The answer has to be –and it seems to be consistent with the law andwith good policy – I do not think that the policyis equality of treatment in that strict sense.

To make my point I wouldlike to share a story withyou. A few years ago, the

CEO of Deutsche Telekom wentto Frankfurt, to the main invest-ment company in Germany, andhe reported there to the reception desk and said“hello, I’m the CEO of Deutsche Telekom and Iwould like to speak to the bankers here. “ Theporter said, “sit down over there, have a cup ofcoffee, the bankers will be with you in a minute.”This shows the balance of power between invest-ment funds and CEOs – and this story happenedbefore the New Economy bubble burst. It hasbeen said that corporate governance is aboutstrengthening the weaker side, but I am not surethat that is correct.

Shareholders had incredible power before thebusting of the New Economy bubble and all thegovernance scandals, and this didn’t preventthem from losing billions of euros or dollars. Inthis case, corporate governance is not aboutstrengthening weak side but about exercising thepower differently. How do you see the situationyourselves?

Ithink, insofar as shareholdershave power, many them don’texercise it because they don’t

have the resources to do it orthey are hopelessly conflicted. If you are part of alarge investment bank, and I speak as an adviserto one, it is very difficult for the investment man-agement arm to kick up a fuss. When we startedhaving a go at those three-year running contracts,I was told by all my colleagues in the fund man-agement division: “yes, I absolutely agree withyou, but we’re not going to stand up with youbecause we have six hundred clients and fivehundred of them have got those sorts of con-tracts.” That’s one of the problems with institu-tions and it does need something like Hermes,which is owned by a pension fund, to be able todo these sorts of things.

In the United States, of course, what has hap-pened is that much of the activism has beentaken over by people with a more political moti-vation, but that’s another question for anothertime.

Ifirst wanted to back Alastairup, really, in terms of the roleof institutional shareholders.

Widely dispersed ownershipstructures can help an awful lotin mitigating (and mediating) thecomplicated relationship betweenownership and control.

Second, when looking at the problem ofagency, in a concentrated ownership structurewhere you’ve got situations where you have themajority shareholders extracting “benefits” fromthe whole, what are your views on how share-holder rights might be improved in the US?

Thank you very much indeedfor supporting what we do.As to what I would change

about shareholder rights in theStates, I think being able to vote on individualdirectors would be very helpful, which of courseis not possible under the current laws.

The ICGN (International CorporateGovernance Network), which I currently chair,had a meeting in Delaware last October, whichDavid Jackson was at – no, his colleague was at –and at that meeting I felt that we were makingsome real progress.

I think regulation in this sense is a States’rights question rather than an SEC (Securitiesand Exchange Commission) question. At ourmeeting, we were trying to see whether there is away in which we can persuade companies regis-tered in Delaware to change their bylaws to allowthese sorts of things (e.g. voting on individualdirectors), and the Delaware courts didn’t see anyproblem with this. We are having another meet-ing in July with the Delaware courts to seewhether we can make actual progress, becausethat would unlock the problem that you identi-fied.

Ibelieve there is sometimes anecessity to intervene, butobviously the question is who

controls the control. My oldfriend Igor Ansoff, founder of theStrategic Management Society, coined the term,“stakeholder theory of the firm.” This term is stillfloating around, although much misused. I ammyself is a private investor and my favouritestock is Philips, not because its doing well butbecause it goes up and down: I try to buy when itis low and sell when it is high. Philips is ratherpredictable, because historically, the cycle is asso-ciated with the tenure of the CEO.

Which leads me to the question: Is it in theinterest of the shareholders to serve the interestof the company at large? I doubt it because, as aprivate investor, I don’t care if the shares go

17


Marcus PinsSaarbrückenUniversity/IndependentConsultant

AlastairRossGoobey

KerryWaringInstitute ofCharteredAccountantsin Englandand Wales

AlastairRossGoobey

Jakob deSmitUniversity ofLeiden

down. What I care about is that they go up anddown – at any moment the price may be on theway down or on the way up, I don’t mind thatmuch. I am not sure that is not the same withinstitutional investors. After all, their incentivesregarding their clients are commission and prof-its made when you buy and sell, and you can seethat there is a lot of movement in stock markets.

In my country, the Netherlands, it is stilllegally the duty of the advisory board to serve theinterest of the company at large, and all stake-holders, and not favour one part of the group. Iam a little bit puzzled that this discussion seemsto be focused on the right of shareholders aloneto intervene, as I’m not certain that that would betheir job in the right type of solution.

So long as independent direc-tors are paid by the compa-ny, they are always “cap-

tured” and can never be trulyindependent. Has there been any thought aboutcreating some kind of external organisation, orperhaps a kind of “governance fund” that couldpay directors so they could be truly independent?

Iwould like to ask Alastair aquestion that is quite practi-cal. I am a director of a non-

governmental organisation in theUnited States and there is a ques-tion of how active we should be

in seeking information. The directors asked to beable to see the salaries of the employees in orderto understand the budget. There has been achange in staff and the new head of personnelsaid that she thought that it was quite micro-managing to ask to see this list, and it would beinvolving the directors in micromanagement

rather than in governance. I fly to Washington formy board meeting in eight days time… what do Ido?

Resign!

Is there a remuneration com-mittee in this NGO, and ifnot, why not? It has not got

the proper governance structuresotherwise. If you have an audit committee, youshould have a remuneration committee.

There is a human resourcescommittee, which I’m on.They do not want to give us

the remuneration information.

You have every right toinsist. Whether you areindeed micromanaging

depends on what you do with theinformation. You must not go to the HR depart-ment and say, “so-and-so is only doing X,Y and Z,and you should pay her $102,000, not $103,000”that is micromanagement. But you have everyright to see the structure of remuneration; it iswhat you are there to do. Make that point – youare not trying to say what everybody should get,but you should be allowed to have the informa-tion. There are people on trial in the UnitedStates now that claim they never got all thisinformation. If you are in a fiduciary position,this is information you must have, and youshould be in a position to insist on it.

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Guy LiuBrunelUniversity

MichaelPinto-DuschinskyBrunelUniversity


AlastairRossGoobey

MichaelPinto-Duschinsky

AlastairRossGoobey

Our topic, “strikingthe right balance:prescriptive versus

enabling strategies” is aninteresting one. The topicfor this session isextremely interesting andwe have very able speak-ers in George Dallas,David Jackson, and Jonathan Rickford, our dis-cussant.

Before yielding floor to them, I would like tounderline the subtitle of our conference, “TheNew European Agenda.” In discussing corporategovernance, we often have a tendency to followthe literature and discuss extensively the differ-ences between Britain and the United States.These are of some interest, but not necessarily ofmore interest than the differences betweenGermany and Britain. In reality, it is theEuropean agenda which we must think about,because regardless of how we feel about theEuropean Project, European laws and regulationswill affect us. This big economic entity needsrules. They do not necessarily need to be identi-cal, but there must be some commonalities orbusiness will not function well. And now I leaveMr Dallas to tell us how we can go about this.

Given that introduc-tion about the newEuropean agenda, I

feel rather abashed offer-ing you a very strongNorth American accent.

I was asked to talkabout the merits and limi-tations of corporate governance codes in promot-ing good corporate governance and facilitatingthe evaluation of companies. Obviously, this willbe from my own personal perspective, but thatperspective is shaped by what I do with myemployer, Standard & Poor’s. I will be speakingbriefly about what we are doing with stand-alonecorporate governance ratings; but you probablyknow us better as a credit rating agency and as afirm involved in independent equity research –where we are also active in applying corporategovernance analysis.

I would like to set the stage by dis-torting three quotations:

The first comes from the 20thCentury German theologian ReinholdNiebuhr, who wisely remarked that“man’s capacity for justice makesdemocracy possible, but man’s inclina-tion to injustice makes democracy nec-essary.”

The corporate governance twist might be tosubstitute governance for democracy: I think thepoint here is that investors cannot simply assumeor take as a given that a company is being man-aged with integrity and effectiveness. We need tohave structures for corporate governance to assistcompanies and stakeholders as they aim to buildwell-run firms.

The second quotation is from the former USSupreme Court Justice, Potter Stewart, who com-mented about a 1960s pornography case that “Iam not sure I can define pornography, but I cer-tainly know it when I see it.”

Here, we could substitute governance forpornography: if you try to break governance intobits and pieces and think about codes and regula-tions – which is our perennial temptation – wemiss the forest for the trees. Corporate gover-nance is very difficult to define, but its attributes

become clear in its absence.The third quotation comes from the

Clinton campaign slogan in 1992, whenJames Carville, his advisor, said, “It’sthe economy, stupid.” With corporategovernance, it’s all about trust, stupid.In other words, behind the hard façadeof law, economics, regulations and theindividual minutiae which comprise it,

ultimately governance is about soft (but real)issues: trust, integrity, effectiveness, tone. Evenwith traditional quantitative approaches to creditand equity analysis, if you cannot trust the man-agers – or if you cannot trust the governance sys-tem of the company – how can you trust thenumbers that you are ultimately going to use forvarious types of investment analysis?

Trust, if it is well merited, should serve thepurpose of leading to better market confidence,efficient markets, and types of growth that do suitthe interests of the new European agenda.

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Strategies and Balance

SESSION IIStriking the Right Balance: Prescriptive vs. Enabling Strategies

ProfessorJacob de SmitProfessor, LeidenUniversity Schoolof Management,and Founder,Rotterdam

School of Management

George DallasGlobal PracticeLeader,CorporateGovernance,Standard &Poor’s

A starting point for this discussion – I think itwas phrased this way in the first session – is thatcorporate governance can be considered a “riskfactor” if we frame it as such, but we need to becareful. The question you might ask is whethergood corporate governance creates value.

You might expect that, given this is what I dofor a living, I would be a strong advocate for theproposition that good corporate governance doescreate value. But I have to be honest and saythat it is not clear empirically. One has to becareful with regard to codes and prescriptive for-mulae that ostensibly produce good governance.We actually do look at academic literature as wellas other evidence, and frankly, the empirical evi-dence about corporate governance and specifictactics to promote good governance is still devel-oping.

I have heard Colin Mayer say on several occa-sions that governance is something about whichthere are many opinions, but fewer facts, and Ithink we need to keep that in mind when we arestarting to think about the individual pieces ofcode.

If you look at the recent Centre for EuropeanPolicy Studies document that came out inFebruary 2005, this point is empha-sised as well, citing a number of aca-demic studies looking at individualpieces of governance (codes of prac-tice). They reach a fairly agnosticopinion about many of the specificcomponents that comprise individualcodes. Notwithstanding the potentialto be agnostic about wholesale pre-scriptive solutions for governance, itremains important to understandthe extent to which management orgovernance issues might be strengthsor weakness influencing a company’sstrategic position or risk profile.Indeed, in the “enhanced analyticsinitiative” we see in the city ofLondon and elsewhere, the drivingobjective is to use new approaches toresearch to better understand ofqualitative “non financial” factors and how theseaffect the interest of financial stakeholders.

To return to the second point, we may notknow whether good corporate governance canincrease value, but I think we know from some ofthe cases that were cited in the first sessiontoday, bad corporate governance certainly candestroy value. This is something we need to paymore attention to. I think the challenge is howthese so-called “soft factors” relating to gover-nance and trust can be systematically, objective-ly, and meaningfully assessed and factored in toinvestment process, whether its an equityinvestor looking at the notion of an the equity

premium or perhaps how that should effect thediscount rate with which one discounts the antic-ipated future earning of cash flows. For a debtholder or credit analysts the question is how gov-ernance factors might affect a credit rating, deci-sions about credit risk spreads, or lending deci-sions in general. Another important community,of course, is the insurance world, as it deals withthe level of premiums and the terms and condi-tions that relate to the important area ofDirectors and Officers liability insurance.

This area of governance analysis is challeng-ing, and in some ways it is like trying to put acloud into a bottle, but I see it as a gauntlet thathas been thrown down to us to try to do a betterjob of looking at these factors more systematical-ly then we have done in the past. While I am nothere to talk about what S&P is doing per se, weare typical of many institutional investors andresearch groups who are trying to developstronger tools in this area. In this regard, wehave established a stand-alone corporate gover-nance rating system. We have been working withthe system for several years now, mostly in theemerging markets, in part because this is a vol-untary process. We do this working together

with the company – I will talk about the interac-tive and clinical dimensions of this and why thisnon-“tick the box” approach is absolutely essen-tial. We are doing this largely in emerging mar-kets because emerging-market companies areoften presumed guilty of bad governance byvirtue of the fact that they are operating in coun-tries with bad reputations; they are looking inmany cases for some way to differentiate them-selves from their peers and to demonstrate thattheir governance standards may be better thanothers’.

Our governance rating service, quite honestly,is less well developed in more developed mar-

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kets, but we are beginning to focus on gover-nance analytics more in our traditional creditrating process (what we call at S&P our ownEnhanced Analytics Initiative). The question hereis to what extent corporate governance shouldinfluence a credit rating positively or negatively.I would say it is more likely to be the case that ifcompanies proceed with bad corporate gover-nance, it is easier to for us to lower our creditrating. There have not been any cases to date,and it may be a while before we see this, wherewe perceive good corporate governance actuallyraising a credit rating. This is something weneed to think about..

We also have an equity research group whichfactors governance into its equity assessments.Across S&P in our traditional analytical services,the customers that we are serving – which are byand large from the institutional investment com-munity – increasingly expect that we look at gov-ernance factors rigorously and comprehensively,and that we assess the qualitative risks in a moresystematic fashion than in the past.

This takes us back to the theme here, which isthe rule of codes, legislation, and codes of bestpractice. Obviously, in the light of many of thecorporate governance problems that we haveseen in recent years, there has been a whole flur-ry of public policy responses to try to addressthis from the top down, to create codes, laws,regulations and what have you. I suppose, as welook at this thing, people may disagree with cer-tain codes or certain types of legislation, but byand large I think this trend has been a positivedevelopment. In many ways it has raised the barfor corporate governance standards and prac-tices.

But at the same time I think we need to bevery cautious. Regulations have their place, butthey also have their limits, and the first point I

would like to make is that we cannot simplyassume that if a company can wave a piece ofpaper that says they are compliant withSarbanes-Oxley, the Combined Code or whateverelse, this means that the company is well-gov-erned and that we should sleep better at night.We need to look at compliance as a baseline, andnot an end in itself. If we are not careful, compli-ance could be form without substance, and we allneed to be alert to the risk of window-dressingand gaming the system, because any time youestablish rules you are going to find people whowill try to make it look good on the surface whenthere is rot within. Good corporate governance isnot something that can be instituted simply byregulatory fiat.

This leads to the premise, and it is somewhatself-serving, but that is why we are devotingresources to it, that there is scope for a moremarket-based assessment. This is partly whatHermes and other institutional investors aredoing, but the point is that there is a limit to thepositive impact of codes and hence a need for themarket to assess governance risks in individualfirms. If done properly – and it is a challenge todo properly – this can compliment regulatoryinitiatives. The process of evaluating governancecan provide greater transparency for investors aswell as a positive incentive for companies toimprove governance standards. What is meas-ured tends to be managed, and this can poten-tially create a virtuous cycle.

It is really in that context that I would like toput this discussion in the framework of, perhaps,an overly simplistic model. Think of corporategovernance as a sort of combination of two basicthings: one is corporate governance architecture,the types of things that tend to be codified in reg-ulations in codes. The other part, which tendsnot to be focused upon because, frankly, it is

more difficult to do, is the peoplewho inhabitant this architecture.In many ways, I think thisdimension is missing from mostanalysis, although it is perhapsthe most crucial dimension. Ifyou imagine the “architecture”and “people” put into a simplegrid, in the best of all possibleworlds, we would have good peo-ple in a good architecture andthe opposite would be bad peo-ple in a bad architecture.

I think the more interestingquestion comes when you look atthe rest of the grid: would yourather have good architectureand bad people, or good peopleand bad architecture? I think wewould probably choose good

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people and bad architecture, and perhaps in theshort term that is the next best thing to havinggood people and having good architecture. But Ithink we need to remind ourselves of theReinhold Niebuhr quote about man’s inclinationto injustice. People themselves can change, andorganisations can change their people. If youwant to have governance that endures over time,I think there is a case for both good corporategovernance structures and principles to hold thisall together. Really, the aspiration should not beone or the other – good people or good architec-ture – but how do you pull it all together? This iswhat we are doing at S&P in our analyticalapproach to governance issues.

I am not going to elaborate in any detail, butlet me present an outline of the framework thatwe have developed over the years to assess cor-porate governance, and I would like to mention afew points. First of all, we have four major com-ponents (ownership structure and external influ-ences; stakeholder rights and relations; trans-parency, disclosure, and audit; and board struc-ture and effectiveness. And there are furthersub-categories under these broad categories. Ifyou read our criteria or book (Governance andRisk, McGraw-Hill, 2005), you will see that thiscan be broken down even further. The point isthat governance, at least from our perspective,has to be a holistic assessment of multiple fac-tors.

The discussion earlier this morning flaggedup ownership as an issue, and I think it is goingto crop up later this afternoon. Our startingpoint is ownership because it is almost like a forkin the road. The first question is who owns thecompany… it sounds like a simple question butsometimes the answer is not that simple, becauseit is not always that easy to know. But the pointis that even if you do know, the next question is

whether or not there is a controlling shareholderor a wide group of shareholders, which createsthe two different agency problems that we needto be alert to. One of the issues about corporategovernance codes is that they do not alwaysaddress the point of ownership structure. Thiscan be absolutely fundamental since the types ofgovernance risk manifest themselves differentlyin different situations, depending on whetherownership is concentrated or widely held.

I am not going to belabour any other points; Iwill talk about the stakeholder issue if there areany questions, because I think it is a more com-plicated situation, but at the end of the day itspart of the mix. Ultimately, we are focussing our

own analysis on the interest of what we callfinancial stakeholders, which are shareholdersand creditors, but you see there are issues oftransparency, disclosure, audit, board struc-ture, and effectiveness which all need to beconsidered. The point is that we are consider-ing long lists of factors, and there are otherpeople who do this sort of thing. It is not justa question of what list you have, but of howyou do this type of analysis. How do you actu-ally evaluate the company? I think methodolo-gy is key.

I believe the best way to do this is not tostart with a template, i.e. “here are the twentygovernance issues, you can answer these ques-tions right or wrong,” and expect that out ofthe right-hand side of the equation comes ameaningful measure of a company’s corporategovernance. I think that is the wrong way togo about it, but there are lots of people who

are trying to mechanically model governance,which can be fraught with peril.

Ultimately, if you are going to try to assess acompany’s corporate governance – it is morecomplicated and ultimately perhaps a bit moresubjective – we believe you need to look at com-panies on a case-by-case basis. You need to talkto people who are actually part of the governanceprocess at the firm in question, whether they aremanagers or directors, and ideally you need toget directors in rooms by themselves, speakingcandidly. It is important to avoid rigid box-tick-ing and the attitude of looking at governancesimply for the sake of governance. The key reallyhas to be how corporate governance facilitatesexecution of a company’s mission, how it mightaffect a company’s risk profile, and how it mighthelp the company build sustainable competitiveadvantage, which over time should lead togreater levels of performance and greater levelsof trust.

If you are wondering about how this works ina multicultural context, we are doing this in Asia,North America, Latin America, and Europe; indeveloped markets and developing markets; and

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in our experience working with companies’ gov-ernance structures and philosophies differ, some-times radically, from company to company.There are differences of ownership structure, andthere are companies that have different attitudestowards whether they should focus on workingwith existing shareholders or look for a broaderstakeholder mix. You have one- versus two-tierboards, and there is also that big debate, particu-larly in the United States, about whether theChair should or should not be combined with thechief executive role.

In our experience, these are legitimate differ-ences. Governance structures can be done wellin some companies and poorly in others. I thinkit is difficult to hold to the belief that there isonly one way of doing corporate governance,because you may end up with the tail waggingthe dog. You have to be wary of a rule-drivensystem. Box-ticking, as I said earlier, can begamed and can lead to false positives and falsenegatives. For those of us that try to analysecompanies from an investment perspective, obvi-ously we need to know the extent to which com-panies comply, but I think if companies explainwhy they don’t, we need to be listening with veryopen ears and possibly be willing to accept to theexplanation.

This ultimately speaks to the point that thereis room for both rules and principles, but at theend of the day you need to focus on a principle-based system, as principles will ultimately trumprules. The principles that I offer are the ones weuse in the S&P criteria, which we borrowed fromthe OECD corporate governance guidelines: com-panies should be driven by fairness, transparen-cy, accountability, and responsibility. The pointis, if you are looking at disparate structures, youneed to put these principles as the lens in frontof your eyes, so that you can interpret differentstructures through these principles. One wouldhope that these principles, even though we maydiffer about specific nuances of corporate gover-nance, would be relatively consistently valuedfrom culture to culture around the world.

To bring this home, then: the conclusion thatI would like to leave with you is that corporategovernance is a risk factor. There is a linkage ofgovernance risk to the concerns of investors andD&O insurers, and there is the need to try tounderstand these qualitative and difficult-to-understand issues more systematically andobjectively. Laws and codes can provide a posi-tive discipline, but there is more to it than simplythat. Equally, and linked to this mission, is thatgovernance is not a one-size-fits-all concept. Youneed to assess companies on a case-by-case basisand I would argue that the best way to do it isnot just to tick boxes, but to try to do this inter-actively, to connect to and provide the best expo-

sure to culture (again, principles prevailing overrules). Finally, governance is not an end untoitself. The key is to keep in mind how it helps orinhibits companies to oversee risks and buildsustainable competitive advantage; it is not a sin-gle set of rules in isolation from each other. Ithas to be linked to the enterprise as a whole, andultimately it is about trust – and trust is notsomething that can be legislated.

How do you strikethe balancebetween prescrip-

tive and enabling strate-gies? I will discuss laterwhy this is such a timelyquestion. But first, why isthe question being asked?Let’s look at governance in the UK environmentand then broaden it out into Europe.

At the time I was asked to make a small con-tribution to the discussion today, a surveyappeared on my desk co-sponsored by Allen &Overy and MORI, with the headline: “ManyEuropean senior executives are still fearful of anEnron-like meltdown”. Only half of Europeanexecutives believe corporate governance reformshave brought about a positive change in behav-iour. The costs of compliance have substantiallyincreased.” The numbers in the survey don’tquite reflect the headline, but there is an inter-esting line in the report, saying that what is sig-nificant about this response is, despite the signif-icant increase in regulation, there is still work tobe done to convince executives that regulationhas achieved what it is meant to achieve, i.e. asignificant reduction in the likelihood of corpo-rate fraud.

In the worst of all worlds, regulation merelyachieves an increase in the cost of complianceand becomes a distraction for senior manage-ment. According to the results of the survey, thejury is still out on the effectiveness of corporategovernance reforms; unless or until the majorityof those at a senior level who have to implementthese reforms, buy into them, there is only somuch that can be achieved.

One of the other issues raised in the survey isthe amount of time the spent on corporate gover-nance issues. Apparently “shareholders must askthemselves whether the 25% of the time spent bytheir directors on corporate governance issues istoo much or not enough.” The right answer willdepend on each company. It will be different fora CEO or non-executive. The wider issue iswhether we are creating a corporate culture ofcompliance and box-ticking which distractsboards from the task of moving the business for-ward. I would characterize this as the grumpybusiness approach to governance: governance

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David Jackson CompanySecretary, BP

seen in terms of regulation and compliance. There is one issue that helps open all this up

and that is the question of fraud. Where wouldwe have been if the frauds in Europe and the UShad not happened? If Enron, WorldCom andParmalat had been non-existent, in the US therewould have been no Sarbanes-Oxley, no PublicCompany Accounting Oversight Board (PCAOB),no Section 404 and the New York StockExchange would have continued in its statelyprogress towards the reform of the listing rulesto deal with their governance initiatives.

In continental Europe, the High LevelWorking Group on Company Law under JaapWinter would have finished its work, reported,and I think the Commission would have lined upsome work to follow on the Financial ServicesAction Plan.

In the UK, Derek Higgs, who had alreadystarted his work on the effectiveness of non-exec-utive directors, would have reported and we mayor may not have had changes to the CombinedCode – instead, Derek’s report was clearlyhijacked by government and put up as part astheir response of “we’re doing something aboutthis problem as well.” There was a clear ratchet-ing up of what was in the Code. Some of the coreprinciples of the code to my mind detract fromwhat I believe are the sensible recommendationsof the report. The sensible recommendations arerelated to some of the issues Sir Ronnie was talk-ing about earlier.

But we are where we are… and where are we?We have some very real problems over expecta-tions, over definitions, over cause and effect.Corporate governance is now becoming evermore linked with regulation and with compli-ance. There is a clear link between fraud (or thelikelihood of fraud) and the problems of theincreased cost of compliance and the distractionit may cause the management. But perhaps thisis not the issue. Before we consider how we canmove forward and strike the right balance, I amafraid to say we come back to the question thatrather dogged the first group, of what is meantby governance. George Dallas alluded to pornog-raphy and I think of the old description of an ele-phant: I know what it is but I cannot describe it.

In the UK, businesses see governance as syn-onymous with compliance. If you go to confer-ences like this – and I don’t want people to puttheir hands up – two questions are always asked:would all the reforms that have taken place stopanother Enron happening (and everybody saysno), then we go onto the Marconi question: wasMarconi a failure of governance or was it a fail-ure of strategy (and everybody says it was a fail-ure of strategy rather than governance). Theneverybody moves on, feeling quite comfortablethat they know where the line is drawn.

I reflect on a conversation I had with a FTSE100 chairman. It was one of those dinners thatyou get invited to where there are a fewinvestors, a few people from companies and achairman. The idea is to educate people abouthow chairmen and investors and governancecome together. And there was another companysecretary there who was bemoaning the fact thathe was trying to put together his report on corpo-rate governance for his annual report, and thelength of time it was taking, and the level of dis-closure that was required… And the FTSE 100chairman said, “there we go again. We are hereto talk about what boards do, and we havealready started talking about corporate gover-nance. Now let us spend another ten minutes onthat, kill the issue and get on with what we arereally here to discuss.”

I think that is absolutely missing the plot. Idon’t want to get philosophical about this, but ifgovernance isn’t what boards do, what on earthdo they do? The prime role of the board is togovern and the fact that you can have a chairmanof a FTSE 100 company making that sort ofstatement shows one of the real problems thatwe have had because of the way in which theagenda has been rolled out within the UK, and inother parts of the world, in reaction to problemsof corporate fraud.

I am very fortunate. I have been with BP forthree years – not that I have only been there forthree years – but I am very fortunate that I havebeen with BP for three years and have been ableto follow the example of some of the work thathas been done by some of my predecessors,because governance is something that we havethought about and we have had a set of gover-nance policies in place since about 1996. Theywere put in place for one reason: David Simonwas Chief Executive of the company and he wasgoing to move up to become Chairman, and JohnBrown was going to take over as Chief Executive.David went to my predecessor Judith Hanrattyand said, “look, I know what it’s like to be a ChiefExecutive, and you and the Board are now askingme to be a Chairman. What on earth do I haveto do?” Judith, true to her academic training andwork at the bar, went off and spent a lot of timethinking about this with a number of people andwe came up with a set of governance policies thatwe put in place at BP in 1996/7. Even with allthe changes that have gone on in regulationssince then, we have not changed one word of ourpolicies. The reason is that we did what DerekHiggs suggested in his report.

People don’t read Derek’s report; they justread the Combined Code. I would commend thewords of the report to you rather than the Code,because it led us to work out what are the differ-ent roles of the board, chairman, chief executive,

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the non-executive directors and the committees.If you can get that clarity you actually under-stand what governance is about, and really it isabout making sure the board can carry out thosetasks that are unique to the board, which onlythe board can do as the agent of the sharehold-ers. It is not a case of the board getting involvedin management. Generally speaking, governanceis about ensuring that the company’s activitiesare directed at the main purpose of the companyand that the assets and funds of the company arededicated to that purpose and to nothing else.So it is not a monitoring function, it is very mucha looking forward function. It is a governingfunction but it is not a managing function, andthe purpose of course is the creation of long-termshareholder value.

Because companies see the combined code asprescriptive regulations, they see it as an exam-ple of prescriptive strategy. But did Derek reallyintend the Combined Code in its present form tobe prescriptive? Of course he did not. Derek sawwhat he was trying to do in the combined code asan enabling strategy.

Why has that confusion come about? Firstly,I don’t think boards really want to get that torchout and look into the various relationships thatare there between the chairman, chief executiveand others. There is a cosy way in which UKboard tend to operate. We know the roles.Perhaps because boards tend to be made up ofexecutives from other companies, they are happyworking in an executive environment, and willseize on doing executive things rather thanstanding back and doing governance things. Ispoke to a non-executive director who said, “youhave actually had to write all this down, what thechairman does, what the chief executive does…Is there a problem with your company?” It israther like what Dan Prentice said about his wifeand himself in splitting up the roles: if you haveto write something down it must not be a goodidea. I believe there was even an article in aleading newspaper that raised this point shortlyafter Derek’s report came out.

So we need to be very careful. Boards do notlike the idea – or, rather some boards don’t likethe idea – of actually reflecting on what they do.I think there is also a lack of understanding as tothe role the board is playing and the features ofthe shareholder capitalism under which we areoperating. I think there is a resistance toaccountability. This is OK when the company isgoing well, but if things don’t do well, the spot-light will be that much harsher. Trust has movedaway from companies and I am not sure thatcompanies actually see now that they have role ingetting that trust back.

Why is all this important and what’s it to dowith Europe? As I mentioned at the beginning,

this is a good question at a great time. I think wehave a unique opportunity now to stand andthink about how corporate governance ought tofit into the European agenda. We know that thecomply-or-explain approach is the heart of theUK system of governance and the dialoguebetween the boards and its owners. This is thefirst year when companies are going to be puttingout their reports under the new Combined Code,which is there to try to ensure transparency, clar-ity and dialogue.

I think it is very important that both the com-panies and their owners understand the respon-sibilities that lie on them this year, because Ifirmly believe that if there are issues that are theresult of miss-communication around this time,the whole concept of comply or explain could befatally wounded – and that would not be helpfulfor the way things are taken forward in Europe.We have the company law action plan and wehave a timetable for its going forward but thereare two other important initiatives.

Firstly there was a corporate governance con-ference in The Hague which I referred to a littleearlier. For those that were there, it was clearthat across the European agenda there were twovery different approaches. I think the phrases“regulation” and “self-regulation” were beingused, describing what were seen as a “European”approach to matters and a more “Anglo-American” approach.

Certainly there are those within Europe, inthe Scandinavian countries and elsewhere, whowould see a regulatory approach as being theonly way forward: get a set of rules in, deal withit, and move on. Acknowledging the shareholdercapitalism approach is not something they wantto engage with. The idea that you can comply orexplain falls into the too-difficult box and there isa resistance to that approach. It was Alistair, Ibelieve, who mentioned the forum: there is anissue around shareholders and their position onthe forum. Comply or explain is also an issuethat the forum is looking at; there will be a reporton this in the summer so its important that thecomply-or-explain system be seen to operate.

I think the other huge opportunity before usis the appointment of Charlie McCreevy as theEU’s Internal Market Commissioner, which couldpotentially provide a step-change from FritsBolkestein’s approach. McCreevy, I think, hasnailed his colours pretty firmly to the mast. Hewants to be more pragmatic about the way inwhich regulation and legislation is broughtthrough. He wants to learn the lessons of theimplementation of the Financial Services ActionPlan. He is interested in evidence-based andcost-based regulation. Above all, he wants tofocus on competition and the workings of themarketplace. This is why it is such a good time

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to be having these discussions: I think that rightnow, as we weigh up the need for prescriptive orenabling strategies, there is a door opening,where influence and discussion can take place.

The challenges, then. I see three constituents:the companies, the owners, and governmentsand regulators as a body. Let us deal with thelast one first. I believe both legislators and regu-lators need to be clear on what they are about.Lack of clarity and consistency is threatening tofurther harm the confidence that business has inthe way in which the regulatory agenda is beingtaken forward. The challenge is clear: wherethere is a role for prescriptive regulation, the reg-ulators must ensure that all people know why theregulations are necessary and who is the target tobe protected in all of this.

“Me-too” regulation, of which we have seenquite a bit coming across the Atlantic fromSarbanes-Oxley and other influences, is not help-ful and should not be supported. I think there isa general fear in Europe that there will be a diveto the bottom with blanket regulation by theCommission reducing all to the lowest commondenominator, to the harm of the many. Thewatchwords in taking regulation forward shouldbe equivalence and a principles-based approach– so too should evidence-based regulation andcost-based regulation.

Regrettably, the UK government in its ownright is not very good at cost-based regulation,for example, the initial proposal for theOperating and Financial Review (OFR): the sug-gestion that the additional cost of complying withOFR regulation would be only £29,000 was anabsolutely hopeless way at looking at it, andfrankly threatened to undermine what was actu-ally a very sensible piece of transparency regula-tion.

There also needs to be joined-up regulation.The plethora and empowerment of new regula-

tors in the City, often through the FinancialReporting Council (FRC), has not been a particu-larly good idea. The example here is where yousee that, after a lot of discussion about the OFRregulations which firmly say that the regulationsare there to ensure that companies interact withtheir shareholders or members, the AccountingStandards Board (which is supposed to be thetouchstone of compliance) uses the word“investors” throughout. Now you may say thatthis is a legal nicety, and it’s silly to get workedup over the detail. But for companies it sets avery different standard as to what directors aresupposed to be doing. I do not believe that therehas been joined-up thinking in the past and theredefinitely needs to be in the future. PatienceWheatcroft wrote today the Times under theheadline “FSA should at least seek the City’srespect”: I think that is an important message forall regulators. They have been put in place by anAct of Parliament, but they still need to earn therespect of those on whose behalf they are operat-ing, on both sides.

The owners, as I have already said, have aclear role to play in this system. They need tounderstand their role and focus on their duties aswell as their rights. Owners should be engagingwith companies in a relationship based onrespect and their mutual roles – and not on fear.Shareholders do not have to be active justbecause Paul Myners says so or the UK govern-ment says so and is threatening regulation if theydon’t; they should be engaging properly.

Business clearly has a clear role. Trust has tobe rebuilt. There is a fine balance to be struck.Companies are owned by shareholders and notby management and that needs to be remem-bered at all times. Transparency and clarity ongovernance is a small price to pay. Let us notcompound the errors of the past but learn fromthem.

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notes. The editors apologise for any possiblemisinterpretations.

Let me go back to thetitle, bearing inmind our

Chairman’s stricture thatwe need to take account ofthe new European dimen-sion, and work my wayinto a brief discussion ofthe two extremely inter-esting and stimulating contributions we have hadduring this session. The title says “prescriptiveversus enabling strategies,” and I want to startwith an apparently silly logical point.

The classic remit which neither of our speak-ers has adopted in response to prescriptive ver-sus enabling strategies is “prescriptive bad-enabling good.” Prescriptive Sarbanes-Oxley =rules = bad (contrary to what Sir RonnieGrierson believes), and enabling = let the marketwork according to broad principles = good.

It is excellent that Mr Dallas and Mr Jacksonhave avoided this trap, as I would put it to youthat actually it is a false antithesis: if you aregoing to make enabling strategies work, you needprescription.

The first thing you need is adequate informa-tion – everybody seems to agree on that. Theclassic philosophy of company legislation in theUK since the Company Law Review (and inEurope, too, post-Jaap Winter, what I like to callthe “Spring of European Company Regulation”)is that you begin with transparency and workfrom there.

Unfortunately, enabling classic “properlyinformed markets” to operate in this field is notenough. Even if you prescribed information, thatwould not be enough because, in addition toinformation, you need to enable the people whoare going to act on the information to exercisethe influence that needs to be brought to bear,and that requires prescription.

Some of the prescriptions we have in the UKhave already been mentioned this morning:Alastair mentioned the standard UK rule thatfifty percent (and in the typical British companythat means fifty percent of the capital because wehave as a matter of practice a one-share-one-voterule), fifty percent can sack the board or any ofits members.

Whilst that nuclear option is almost neverinvoked, it casts its shadow over the whole rela-tionship between the board and shareholders.That is not true in the United States, as Alastairsaid. It is not true de facto, either, in ContinentalEurope. For an enabling strategy to work, youneed legal powers and you need to disable the

removal of those legal powers, whichresults in some highly prescriptive rules.

We also need to bear in mind that ifwe are going to look at enabling strate-gies – I will just mention this pointbriefly because it has not hitherto beenraised – we need to look at enablingstrategies at different levels. There areenabling strategies at the level of theshareholders, there are enabling strate-

gies at the level of the company (and, in particu-lar, the board), and there are enabling strategiesat the level of the member states.

If we are looking in a European context, clear-ly enabling strategies in terms of community pol-icy and community legislation can operate eitherby adopting a role of enabling member states (orat least not disabling member states), or enablingshareholders. So my first point is that enablingand prescriptive are not contrary and mutuallyexclusive terms; indeed, you need prescription toenable enabling.

My second point is about trust, which wasraised by George Dallas, and I think also byDavid Jackson. It is often said that what we real-ly need is trust, as if that excluded legislative orregulatory intervention, which, to my mind, isnot good enough.

What we need is a climate in which actions bycompany management can be trusted, and thatrequires a regulatory context. To take George’sgrid of people and architecture, I completelyagree that a bad architecture and good people ishugely better than bad people in good architec-ture.

The reason, of course, is if you have reallygood people you don’t need architecture at all. Ifyou have got an effective system of companymanagement, being operated by responsible andwell-informed business people with good judge-ment, you do not need procedures. But the pointof course is that good architecture and good peo-ple are not mutually exclusive. The object of theexercise is to produce an architecture whichencourages good behaviour in the dynamic envi-ronment of company management. In that con-text, it has been said that principles trump rulesand trust cannot be legislated.

It seems to me that the benefit – and here Ido agree with the initial thesis – the benefit of

27


JonathanRickfordDirector,Company LawCentre, BritishInstitute ofInternational andComparative Law

principles is that they can create an atmospherein which company managers recognise whattrust-engendering behaviour is. Rules cry out tobe avoided. Principles – set with a high enoughobjective – must be aspired to by the exercise ofhonest judgement by company managers.

Does it work? As George said, the evidence isinconclusive, but there does seem to be a growingbody of evidence. First of all, in the CompanyLaw Review we were told overwhelmingly thatwhilst good governance could not create goodcompanies, good governance could prevent badcompanies, which was George’s point. I havegreat difficulty in seeing how you could regardthese two propositions as not contradictions interms; I would expect that if good governancecould prevent bad companies, then such an out-come would show up in the empirical researchthat has been done. In fact there is some evi-dence for this: a growing body of empiricalresearch suggests that good governance doesmatter.

There is an initial study by Paul Gompers andothers; there is also a much more recent study byLucien Bebchuck which unpacks the Gompersstudy and shows that for America (and it may notbe true for either the United Kingdom orContinental Europe), there are key factors withinthe Gompers set that are crucial. One is theentrenchment or lack of entrenchment of boards,and the other is the openness or lack of opennessof the company to takeovers - neither of whichhas got much to do with the Combined Code, ithas to be said.

I said I would come to the European agenda.The Winter group was not influenced by Enron.Of course the Winter group looked at Enron andlooked at the Sarbanes-Oxley Act as it emerged.Butut it came to the conclusion that theSarbanes-Oxley Act was not an appropriate wayto achieve a corporate governance regime withinEurope, primarily because of the lack of flexibilityand the huge disparities of practice and culturewithin Europe. The Winter group focused onconflicts of interest, as did Cadbury, and that ledto a series of outcomes which are now embodiedin the European Action Plan.

We have two recommendations which coverthe heartland of corporate governance codes inthe traditional sense, and which adopt the UKapproach, i.e. a comply-or--explain regime forboard structure and a mandatory regime withannual general meeting approval for remunera-tion structure.

In the other direction we have an audit direc-tive, which has been heavily influenced by

Sarbanes Oxley and creates mandatory auditcommittees. In yet another direction, we have aThirteenth Directive on Takeovers which illus-trates my final point. It seems to me that there isa real question whether the mandatory compo-nent on which the enabling strategy (in theCadbury code sense) that has been adopted in theUK is likely to be replicated in Europe. If it is not,there is a big question about the European strate-gy on corporate governance.

If you look at what happened in terms ofpolitical and economic influences on theThirteenth Directive on Takeovers, what hap-pened was a combination of governments withprotectionist instincts, management with protec-tionist instincts (but, of course their own protec-tion), and trade unions with protectionistinstincts (their own protection) came together toemasculate the propositions in the ThirteenthDirective in favour of an open market and corpo-rate control.

I fear that may be illustrative of the likelyreactions of the block holders and protectionistgovernments towards the approach of openness,enabling strategies, and the empowering ofshareholders that is the underpinning forapproach in the United Kingdom. If that fear isjustified then the European strategy will notwork. Lets hope that I am wrong and that theevidence of protectionism in Europe turns out tobe ephemeral.

Additional discussion followed. Editedextracts are below.

The role of governance in emerging & developedmarkets

In developed markets, there is a danger oftreating new codes as a box-ticking exercise:

1) Companies in more developed marketsmay be presumed innocent of bad governanceuntil proving themselves guilty through fraud andscandal; and

2) Any approach which varies from the codeis likely to be presumed invalid (perhaps unfair-ly).

There is some evidence to suggest that opensystems of corporate governance do add valueand reduce the cost of capital in developed mar-kets: a recent article by Mark Rower shows thatcapital premiums are very high in continentalEurope, intermediate in the US, and lower in theUK, which seems to be a reflection of the differ-ent regulatory situations. A piece by Lewis and

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Bebchuck shows a clear correlation between vari-ous corporate governance factors and stockexchange prices.

Companies in emerging markets tend to beinterested in corporate governance (especiallyexternal assessment) because it can reduce thecost of capital and/or increase access to capital,i.e., it is a rational activity within those markets.Also:

1) It encourages investor trust (companiesin developing markets are presumed guilty of badgovernance until proven innocent); and

2) It can provide a baseline in countrieswhere national government regulation is weak,particularly if shareholder rights are not upheldor enforced in the law courts.

“There is a role for architec-ture in explaining to good peoplewhat is good. You need stan-dards in order for people toassess their own behaviour.”

Principles versus rulesRules can be avoided, while principles may be

unenforceable. How should the burden be dis-tributed?

Participants stressed that regulators must beclear about who the rules are trying to protect.

Legal sanctions, e.g. for failure to comply withfinancial reporting requirements, are effectiveand are arguably very important for maintainingthe UK’s high corporate standards.

However, the investment community andother market participants have powerful sanc-tions to enforce principles, e.g. making capitalexpensive to reward bad behaviour.

UK accounting standards are currently princi-ples-based, and the takeover panel also has aneffective sanctioning system for breaches of prin-ciple at its disposal.

Whether to use principles or rules depends onwhat you are trying to regulate, and on what kindof sanction you can effectively bring to bear.Private sanction at the annual general meetingmay be precisely the answer in some cases.

Many people see principles as a sort oflongstop for a regulator to use if all else fails.However, in the early days of the current roundof regulation, there was a great discussion overwhether regulators would resort to rules only ifthe behaviour clearly went outside the principle;or whether they would look to the principle firstand quietly forget about the rule.

The role of trust“Economic activity of

principal corporations isthe basis of the prosperityin the countries where weall live and work. It isimportant that peoplehave confidence in thatsystem, that it is not goingto be abused in any way.

The people who are in business are currentlyat the lower end of the trust scale, when theyought to be at the higher end. Trying to regainthat confidence in the whole system is why we areworking to regain trust.”

From an outside perspective, reliance on prin-ciples and self-regulation may not be sufficient torebuild this trust – hence the push to regulate.

The regulatory ratchet and the pace of changeRegulators must consider the rate of change

which the market can absorb The sheer volume ofnew regulation must be considered. TheTabaksblat Code alone mentions over 150 princi-ples and rules in its 70 pages.

“There is some expectationthat corporate governance meas-ures will prevent fraud. This is adangerous idea, because ruleswill never prevent fraud (although they mayreduce the risk of it). If we have further scandals,there will be further pressure for action. How dowe avoid a regulatory ratchet?”

As a political matter, this may be a questionfor the Department of Trade and Industry, butfrom the business standpoint, the answerrevolves around process.

“We should make the processof change more sticky and moreexpert to head off the temptationof ministers to respond to crisisby shooting from the hip, in the way Sarbanes-Oxley did.”

Communication is key in preventing differentregulators, working in different fields with differ-ent objectives, from duplicating each other’s workor creating confusing patchworks of jurisdiction.The coordination of the effort under EuropeanSingle Market Commissioner Charlie McCreevymay slow the rate of change, but further coopera-

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JonathanRickford

Sir RonaldGriersonEuropeanChairman,BlackstoneGroup, and for-mer VicePresident, GEC

JonathanRickford

KerrieWaring

tion would be desirable.Several participants believed that the rate of

change will slow down in the next two years,partly because the recent flurry of activity hasplugged several major gaps, and partly becausethe public’s attention has moved on.

The role of ownershipWhen discussing the “management and own-

ers” of a company, it is important to recall thatthe shareholders are not the owners, as the com-pany is only a legal abstraction – only the compa-ny’s assets are truly owned.

However, the concept of ownership is still auseful handle on the question:

Controlling shareholders perhaps provide a“more fertile ground for expropriation.” By con-trast, in a widely-held company there may beconfusion and risk in deciding who will take upthe mantle in overseeing management of thecompany.

It is important to understand the ownershipstructure because the point of corporate gover-nance is to penalise companies where there is amisalignment of interest between the controllingshareholder and the minorities.

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There is considerabledebate on this sub-ject, taking as its

background the observa-tion that there appear, atleast superficially, to besignificant differencesacross countries in termsof the structure of theircorporations and the way in which corporationsare governed. At one end of the spectrum is the“Continental European model,” which is actuallyis applicable to most countries in the world, inwhich ownership is dominated by large share-holders or blocks of shares held by particularinvestors. Graph 1 below records the holdings inexcess of fifty percent in listed companies in avariety of countries, showing the proportion oflisted companies in those countries in whichthere is a single shareholder which holds morethan fifty percent of shares in a company.

The graph records that in countries likeAustria, Belgium, Germany and Italy, in morethan fifty percent of listed companies there is asingle majority shareholder. In contrast if youlook at the UK, there is a single majority share-holder in only two percent of listed companies; inthe US its about the same.

It is even more striking on Graph 2, if youlook at the proportion of companies in whichthere is a single shareholder with a minorityblocking control in a company, with more thantwenty-five percent of shares.

In continental European countries, in morethan eighty percent or in some cases more thanninety percent of companies there is such ashareholder, whereas in the UK it is aroundabout fifteen percent, and in the US it is 5-8 per-cent depending on which market you look at.

It is not only in terms of the size of the share-holdings that there appear to be substantial dif-ferences. It is also in terms of the composition,so in many countries outsides of the UK there is adominance of holdings by families and trustsholding on behalf of families, as in the case ofGermany, as Graph 3 demonstrates below.

The other striking feature of this graph is theextent to which there are holdings by other com-panies: inter-corporate holdings, cross-share-

holdings and pyramid structures bywhich companies hold shares in othercompanies as a way of controlling thosecompanies lower down in the pyramid.

In contrast in Britain, as we know,the dominant source of shareholdingcomes from financial institutions, whichown sixty or seventy percent of theshares in companies.

Graph 4 (below) brings out another feature:the importance of insider-director holdings in thecontext of the UK.

These observations first raise the question ofto what extent are they temporary or are theylikely to be eroded over time. In fact, the differ-ences are very persistent

Since the end of the Second World War, thestructure of ownership in Canada, Germany,Japan UK and US the trends we observe todayhave existed: the dominance of families and cor-porate holdings in Germany, dominance of cor-porate holdings in Japan, and family holdings inCanada – against the widely held shareholdingsin the UK and the US. Things may be changingnow, but at least those structures have persistedfor an extended period.

The questions that we ought to raise in thissession are, first of all, what (if anything) is thesignificance of these differences? Do they matterin terms of corporate governance and the per-formance of corporations? Do we prefer one sys-tem to another? Is it the fact that these systemsare changing an indication that we are converg-ing, and is the widely-held view that we are con-verging on an Anglo-American structure orshould be converging on an Anglo-Americanstructure, the correct one? What role will differ-ent players, in particular financial institutions,play as these governance structures change?

To address these questions we have a group ofvery well qualified people to talk on this subject.Our first speaker is Antonio Borges who is a VicePresident at Goldman Sachs and a Chairman ofthe European Corporate Governance Institute,which is a body which brings together academicsand practitioners across Europe and in theUnited States from both the law and an econom-ics and finance background to address corporategovernance issues. Before that, Antonio was the

Professor ColinMayerPeter MooresProfessor ofFinance, SaïdBusiness School,University ofOxford

SESSION IIIWhich Model Works Better? Contrasting Anglo-American and European Models

31

Anglo-American and European Models

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Graph 1: The proportion of companies inwhich one individual owns inexcess of 50% of the shares

Graph 2: The proportion of companies inwhich a single shareholder hasmore than 25% of the shares.

Graph 3: The composition of ownership inthe UK

Graph 4: The composition of ownership inGermany

Dean at INSEAD and so he has experience whichcomes both from an academic perspective andfrom that of a practitioner.

It is a great pleasure to behere today and a greathonour as well to be at

such a distinguished univer-sity with such an extraordi-nary group of people and inparticular next to my col-league Colin Mayer, who isone of the pillars of theEuropean Corporate Governance Institute as youmay well know.

Unfortunately, we have very limited time andthis subject is very complex and very serious andit deserves in-depth study. I will have to briefand therefore somewhat simplistic – I hope youwill forgive me. I will try to be provocative aswell to generate some discussion and then wewill see how things develop in the debate.

First of all, I will take a relatively short-termperspective, say five to ten years as opposed to ahundred years. I hope in one hundred years wewill have all converged to the Anglo-Americanmodel, as Colin was saying, but that may take alittle bit of time so I will take a shorter view. Iwill also take a view on how things operate inpractice and the extent to which corporate differ-ences do have a significant impact on marketefficiency and also on distributive justice.

This is a summary, so I will cover governancemodels, myth and reality. This caricature thatthere is an Anglo-American model and thenthere is the rest of the world. Its not quite likethat. The practice in the US and the practice inBritain are quite different, with significant impli-cations for what we are debating here.

Europe is a different world all together, start-ing from the ownership patterns that Colin hasalready highlighted. The European model is notnecessarily inferior – in many ways it is actuallysuperior, which is why it has lasted so long andwhy people continue to rely on it – but it alsobrings considerable problems and there is a con-cern about its survival for the future because, aswe move towards what I will boldly call the neweconomy, one in which the rules of the game arenot quite the same, the governance model inEurope may not be the most appropriate.

First of all, the caricature of standard corpo-rate governance problems: the agency problem,the distance between shareholders and manage-ment, the temptation of managers to take overcompanies as if they were their own and forgetabout shareholders. How do you protect againstthat? You create these model companies, thesesingle standing companies, meaning that theyare not part of a vast conglomerate or pyramid

system with very confused systems of control.You have dispersed ownership. They should beopen to takeovers.

Boards should be independentfrom management and there shouldbe a system to protect minorities care-fully. This is the theory. This is theideal Anglo-Saxon model.

If we then go to practice we areactually very far from that and in theUS it is amazing how far we are fromthis theory. In fact, we often haveboards dominated by management,

both in the sense of the number of executiveswho are on the board relative to non-executives,but also in the sense that non-executives arefriends of the chairman, chosen by the chairmanand expected to be loyal to the chairman.

The management is usually quite powerful,with a huge degree of authority in the US tradi-tion. In particular, the role of the CEO (who isalso chairman in almost every case) is crucial andmost analysts, observers and researchers identifythe results, performance, etc of the companywith the managerial style of the chairman/CEO.If you talk to US directors, if you talk to USchairmen certainly, they will say there is no proofwhatsoever that any system is better than thisone.

This is how things are done and they workwell – “please prove to me that by separating theroles or by making the CEO more accountable tosome other power that this would improve per-formance: it does not and therefore we stick toour rules.”

This is not very close to the model we had inmind, of shareholder sovereignty representedwell at the board and the board independentfrom management and the management fullyaccountable for its decisions. How come the USsystem works well? Because above the all-pow-erful chairman/CEO and the formidable manage-ment there is the market, and the market is verystrong indeed. It is a source of constant scrutiny;market mechanisms exercise a ready sanctionover poor performance and can compel theremoval of the chairman/CEO if performance isnot satisfactory, no matter how powerful he maybe.

In fact, one could argue that in the US, chair-man/CEO tenure is too short, with an averagelength of the mandate between two and threeyears. I think we would all agree that within twoor three years there is very little you can prove,and very little you can do. If anything, we shouldperhaps claim that there is a bit of marketmyopia and that hasty sanctions can get in theway of a longer-term view.

But there is no question, in my view, that it isthrough the market mechanism that some degree

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ProfessorAntonioBorges, VicePresident,Goldman Sachs,and Chairman,

European Institute of CorporateGovernance

of accountability exists and that sanctions areexercised. The important point here is that theUS system will not work unless there is a verypowerful capital market with the resources tomobilise capital to remove a CEO, throughtakeover if necessary. This must be a sophisticat-ed market that knows how to judge performanceand act quickly.

Of course, as you can well imagine, this is arequirement that is not so widespread. Manycountries cannot rely on that kind of marketbecause it does not exist. But it also shows in myview why the corporate governance scandals inthe US were so serious and why the reaction waswhat it was: if you mislead the market, if youmanage to withdraw information or provide thewrong information such that market cannot exer-cise its scrutiny over management, then thewhole system collapses.

There is no more control. The whole prob-lem of US governance today is how do we makesure that managers cannot provide wrong infor-mation and are forced to disclose everything theyshould with the right degree of rigour.

This is what in my view explains Sarbanes-Oxley and everything that’s related to it: the sin-gle-minded focus on guaranteeing that the mar-ket has the information its needs to exercise itsscrutiny over management. According to US phi-losophy, if information is available, the marketwill do its job.

When we come to the UK, it is a very differentworld. I would argue that the UK is the countrywhere corporate governance standards are high-est and where in fact we have the most sophisti-cated and most advanced model, with a greatdegree of thought on how the board operates andhow it can perform its role well. There is a veryclear separation between governance and man-agement, which is an important pillar of goodgovernance, and a lot of effort was put in todescribing how the board should be chosen.

What is the appropriate composition of theboard? How do we guarantee its independence,and how do we guarantee its independence (notjust in name but also in practice) with the ideathat you have to provide independent directorswith the opportunity to communicate their viewsand debate among themselves? How do we guar-antee through board evaluation that the practiceis improving? How does the board have enoughresources to perform its role? All of these areextreme refinements of a model that’s beenimproving over time.

These successive improvements have takenthings to a point where there is beginning to be abit of a backlash with people saying, “aren’t wegoing too far? After all, shouldn’t the directorsbe on the side of the management most of thetime to make sure that things go well?”

I think this is a good sign. It means thatthings have been pushed as far as they could pos-sibly go, which is reassuring. But clearly this is amore institutional approach. It is an approachaccording to which you rely on the board to per-form its role because you cannot rely on the mar-ket, because the market in the UK is not as near-ly as powerful as in the US – the market some-times sanctions companies with lower stockprices and nothing happens.

Certain companies, and we can discuss partic-ular cases, are allowed to keep on destroyingvalue for a long time and nothing happens.There are no takeovers. Its takes a long time,four or five six years, before something reallyhappens. Either the board performs this role, ornobody will, which as you can see is very differ-ent from the US practice, where there is no ques-tion about speed of action. If the board does notwork, somebody else who will take care of it –there is no doubt of a swift response.

Now if we go to the European case we have avery different story indeed. European corpora-tions are dominated by these so-called referenceshareholders, these big block holders who veryoften have majority control (as Colin Mayer hasjust shown) but even if they don’t, they do exer-cise important influence over the company.

The main problem, then, is a complete confu-sion between governance and management. Thereference shareholders are on top of the manage-ment all the time. Sometimes they are the man-agement, particularly in family firms. The stan-dard problem of governance, the agency problemwhere management, independent of sharehold-ers, pursues its own interest as opposed to theshareholders’ interest, which is unthinkable incontinental Europe.

This situation just cannot happen; it doesn’tlast thirty seconds. Management and sharehold-ers are often the same and if they are not, every-body knows who is in charge.

The main problem here is of course theminorities. What about everybody else? Whatabout those who are not reference shareholders?Can we develop a proper capital market based onblock stockholders only?

This is a serious problem of incentive incapa-bility, if you will, because everybody will arguepeople should have an interest in having thereshareholders with them, and should have aninterest in generating support from shareholdersin making sure that everybody is happy andtrusts the corporation and so forth. In reality, inthe long term this would be fine, but in the shortterm there are too many incentives and opportu-nities to take personal advantage of specific deci-sions at the expense of minorities. This becomesa standard problem across Europe, probably thedominant one.

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Some people say that is how it should be.Some people say, “if these minority investor haveput their capital in our companies, they knowwhat they are coming in for. They know we arein control.” They say this very openly andfrankly – at least they are truthful about theirviews. But the reality is that you don’t build acapital market that way. You cannot create thelevel of trust and confidence that is needed, andthis is a serious handicap for many firms whichhave difficulty with access to capital.

In conjunction with this control by a limitednumber of large block holders, we have acrossEurope many instances – or even systems – oflimitation of shareholder sovereignty, be theygolden shares on the part of government, limitson voting rights, pyramid schemes, dual systemsof shares, etc. This is from northern Europe tosouthern Europe, east and west. One share, onevote is the exception rather than the rule andthat of course creates a different model and a dif-ferent approach.

So is this good or bad? This model has signif-icant advantages. These reference shareholdersperform an important role in providing stability,and in particular, commitment to a certain strat-egy that often has to go beyond short-termcycles. In certain industries in particular this hasbecome extremely beneficial. Managers knowwith whom they are working – they do not havethe same independence that they have in the US,but on the other hand they also know that theyhave the support of shareholders and if thingswork well those shareholders will very often pro-vide the commitment and the long-term viewwhich management would otherwise need tomove forward.

In fact, what we have is this concept of activeownership: I not only own these shares, but Iactually get involved in the company and I helpmy management. To a certain degree I delegatethe management of the company but I am thereto support, guide, make clear my preferences andstand by them when things become a little rough.

There is a line of argument that says this is acaricature of governance, because what happensin these corporations is that you fill up theboards with your cronies, you get friends to holdstock in your company while you hold stock intheir company and through these cross-holdingsyou actually extract yourself from market scruti-ny and therefore there is no accountability andno sanctions if things go wrong.

Actually some very interesting research thatone of our colleagues at ECGI produced showsthat the opposite is true. These so-called friendlyshareholders very often are the first to turnaround and become hostile when things gowrong. They know where their interests lie andinterestingly, for example in Germany, some-

times these so-called friendly shareholders andboard members are the first to hold hostile posi-tions and to hold them in a clandestine waywhich is nobody detects until it is too late. Theyactually become an agent of change, which isquite curious.

So what are the challenges of this model?Often, it is easy to distort the model, in particularthrough these limitations of shareholder sover-eignty, to protect control and to make sure thatwhatever happens I do not loose the control ofmy company and therefore I am not subject tomarket scrutiny through takeover.

This is supposedly beneficial in the longerterm, giving time to solve problems and putthings back on track, but in fact we know thatthis often becomes essentially a protectionist sys-tem. If you put this together with the tendencyof many governments to intervene and to worktogether with companies to supposedly helpthem become stronger, you move towards thepoliticisation of companies which is so easy todetect in particular countries like France, Spainor Italy, and which is far from market discipline.

You could also argue that there are seriousissues with board authority. Boards very oftenare pro-forma. They are window dressing. Wego there, we sit we listen. Management makeswonderful reports. We ask some questions, theyrespond, but we know the real decisions are nottaken at the board, they are taken in meetingsbetween the management and the dominantshareholders somewhere else – that, again, is notin the interest of minority investors. There areserious concerns about compensation, and finallyit is worrying that there is no openness to usingmarket mechanisms as the ultimate source ofreward or sanction.

If I take this a step further and become even alittle more radical, let me talk for a bit about theNew Economy: a growth model based on innova-tion, entrepreneurship and risk-taking, whichdemands very rapid reallocation of resources.The most important features must be a strongability to get rid of inefficient uses of resourcesand to channel resources to whatever new oppor-tunities may exist, some of them quite randomreally, with some prospect of gain but with veryhigh risk associated with them.

This approach, which of course lies behindthe extraordinary performance in the US econo-my that we are now observing, is clearly based onruthless market discipline. If you don’t keep upwith market expectations, after a few quartersyou are out. If this kind of performance contin-ues, your company will be taken over and theresources are diverted elsewhere. The knowledgethat the takeovers, real or potential, can happenquickly generates a permanent sense of fear andanxiety, where people know they have to be on

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their toes. Together with this, there is anappetite for bold strategies, which otherwise youdo not find. Shareholders are prepared to gam-ble on very risky strategies that management willpropose to them because it is what delivers thehighest returns. There is a capital market tohedge your bets and to make sure that you dealwell with risks.

Finally, if the capital markets operate well,those gambles pay off and they pay quicklybecause you have quick capitalisation. You bringto the present this future stream of income, andthat provides a very, very strong incentive to risktaking.

The classic criticism is the US market ismyopic. It sanctions management too easily andgets rid of CEOs too early – but on the otherhand, it also forces very rapid reaction and veryquick (you might say too quick but that is theprice you pay) reallocation and readiness tomake all these gambles. That’s why the US gov-ernance model is doing so well for the US econo-my.

If you go to Europe, you have a very differentapproach because in Europe we are far from apowerful and strong capital market that wouldexercise this type of scrutiny, rewarding out-standing performance and supporting a bolderapproach to strategy.

We are far from that model partly because weare very far from an integrated capital market inEurope, in particular because governance barri-ers are crucial (but slow-moving) in market inte-gration. Investors do not invest cross-bordereasily because they don’t understand the gover-nance systems of other countries and they arehighly reluctant to put their money in a placewhere they do not feel confident.

Furthermore, you have these instances of col-lusion between governments and companiesattempting to develop national champi-ons. This, of course, requires the coop-eration of those reference shareholdersthat I mentioned before. They will workwith the government if they are givenproper compensation, and again, this isfar from a market mechanism that willgenerate the results I was talking aboutbefore.

Capital markets remain very fragmented andthere is a sort of vicious circle where, becausegovernance does not improve, capital marketsremain fragmented, and because when capitalmarkets are fragmented people don’t trust themarket as a system of control. If you go to aFrench or German industrialist or politician andtalk to them about opening up, allowing cross-border takeovers, letting investors elsewhere inEurope decide who can best manage a German ora French company, they would say it’s “out of the

question. We don’t trust the market; we don’tbelieve it will lead to the right decisions.” Thatargument is not completely wrong, but the longerwe maintain these barriers, the longer the mar-ket will be prevented from get to where it shouldbe.

Then you have some additional problems.Not necessarily of the same nature, but the cul-tural differences across Europe are amazing inthe way they have a bearing on governance.Boards, especially those with people from differ-ent nationalities, find themselves in completeparalysis because people from different countrieshave such different attitudes about what shouldbe done.

I am not sure we should discuss specific caseshere, but if you remember the Vivendi case,which was such an extraordinary example ofvalue destruction year after year – there wereessentially two groups of directors, some fromFrance and some from Canada and the USA, andthey lived in different worlds and were perpetu-ally blocking each other.

What one chairman thought was exactly right,the other thought was exactly wrong, for reasonswhich had nothing to do with each other. Theyfundamentally had different perspectives on theproblem and continued blocking each other untilthe company went down. This dimension, whiledifficult to quantify, makes life difficult.

Finally, my key point: as we try to put bettermodels in place for Europe, I think our first pri-ority and our best goal would be to eliminatethose differences that create significant barriersto a European capital market and discourageinvestors from one country to invest in another.Having a proper market the size of this continentwould allow us to rely on the market, goingbeyond a simple theoretical model and seeing itactually work in practice.

Today I would like toshare with you myviews as a practi-

tioner working in invest-ment, working betweencompanies and fund man-agers to try and get the

best returns for our clients.I want to pause for a moment and look at the

question: “Which works better? ContrastingAnglo-American and European models.”

There are two words that I want to focus on:“model” and “Anglo-American.” I suggest thatwe spend too much time talking about modelsand too little time talking about chains of corpo-rate governance.

In dealing with models, the first question iswhether the Anglo-American model exists. JohnPlender in the Financial Times has already high-

36


Guy JubbHead ofCorporateGovernance,Standard LifeInsurance

lighted some of the important differencesbetween the approach in America (also noted byAntonio) and the approach taken in Britain. Iwill come back to that in a moment. Second,does the European model exist? We have talkedabout some of the differences with referenceshareholders in certain markets, and there arealso differences to do with voting and infrastruc-ture. I propose that there is actually no suchthing as the “European model.”

Institutional investors are important playersin this – of course I would say that, but nonethe-less – they are the people who are involved alongthe length of the governance chain, providing theglue between the investors, the shareholders,ultimately the men in the street, and the compa-nies in which we invest. And investors them-selves are not homogeneous: in particular, hedgefunds are very diverse. Where do they fit intocorporate governance?

Lastly, in sharing my views with you, I wantto touch a little bit on the question of engage-ment, which is an important catalyst in makingsure corporate governance actually works.Particularly between institutions and companies,but it perhaps goes further down the chain aswell.

In terms of the myths of models, it seems tome, having been in this so-called business for anumber of years now, that corporate governanceis more about chains, and the chains can beextremely complex – like playing three-dimen-sional chess at times.

At the very basic level, you have at one endthe investor, who gives his money to StandardLife Investments, who then invests it in the com-pany. The company pays the dividend, whichcomes back to Standard Life Investments, and isthen put into our client’s pension or other invest-ment vehicle.

When we come back to the complex gover-nance chain, this relationship takes on newdimensions. Our clients come in different shapesand sizes. Sometimes we have pension funds,sometimes we have charities; sometimes the pen-sion funds are large, with demographicallymature members, and sometimes they are young.Each has different preferences and different lia-bilities.

There are NGOs that impact on the gover-nance chain, which themselves represent differ-ent subsections of men in the street (the ultimatebeneficiaries of all this). There are representa-tive bodies, governments, legislators… and downat the company end you have different compa-nies in different jurisdictions, with their atten-dant reference shareholders and disparate goals.

Within the chain, you have a lot of complexi-ty, and the chain is only as strong as its weakestlink. There are different chains in different juris-

dictions, and even different chains in the samejurisdiction. There is evidence of this in the UKwhen, after privatisation, a number of companieshad special shares (“golden shares”), which car-ried different rights to the others.

But chains have the same beginning and thesame end. We talk a lot about the chain goingfrom the institution down to the company, butthe chain is ultimately my client’s money goingfrom us to the company, and back as a dividend.My clients are the beginning and the end of thatchain, but when you speak to our clients walkingaround Oxford, they are almost entirely unawareof corporate governance.

In my ten, eleven years at Standard Life deal-ing with this responsibility towards 2.5 millionpolicyholders, I have probably received twenty orthirty letters about corporate responsibility andhow we perceive our responsibilities about cor-porate governance. From a macro policy level,we have a big issue relating to the education ofinvestors on investment practices, and corporategovernance is an important subset of this educa-tion.

In terms of dealing with chains, each compa-ny has a unique corporate governance DNA. Notwo companies are the same: they have differentshareholders and different regulations. That isthe great interest for me in corporate governance– no two companies or situations are ever quitethe same. I get to match the style of the investorto the different styles and DNAs of the compa-nies. The DNA will determine the cultural styleof the company, and as ever, the DNA chain isonly as strong as the weakest link.

Moving along to institutional investors, Ibelieve they can control the governance chain.Whether they do control the chain is anotherquestion altogether, but institutional investorsare involved both in policy engagement and incorporate engagement. They lobby on policy,largely through representative bodies but alsoindividually. They use the media as a mecha-nism for lobbying views on particular policy.

In terms of engagement, institutions areinvolved in both proactive corporate engage-ment, and in reactive engagement where institu-tions have to roll up their sleeves and getinvolved. Cable and Wireless is an example ofthis; Marconi is another.

Reactive engagement has been much in thenews lately, but proactive engagement is just asimportant: it is where we pick up the phone tocompanies, and say “can we come round andhave a cup of coffee?” There may not be a partic-ular issue to talk about, but it is an importantpart of the dialogue between institutions and cor-porations, keeping the chain together.

Comparing between the different jurisdictionsin the US, the chain tends to be litigious and con-

37


frontational. This is not the case in Europe andthe UK. In the UK, we have tended however tohave influential pressure points.

The situation at GSK on remuneration wasone such: it was a watershed in the UK that toldcompanies that investors were prepared to beassertive. It also had the encouraging dividendof far better company awareness of the need tokeep shareholders informed of what they aredoing and to listen to shareholder views. InEurope, as Antonio was saying, we have “friendsof the family” who can sometimes be the repre-sentative shareholders or, in certain parts ofEurope, institutions: for example, Telecom Italia,where the banks may be actually pulling thestrings or making sure they are associated withwhat is going on.

Going global does bring challenges to institu-tional investors when it comes to corporate gov-ernance. Although our influence is diluted in theUK, I can by and large gain access to boardroomswhen I want to. That is more challenging when Igo to Europe or the US.

Coordination becomes difficult when dealingwith institutional investors, although institution-al investors are increasingly bonding together indifferent networks – Hermes was instrumental inbuilding up GIGN, the Global Investors’Governance Network, and there is also the ICGN,which Alastair chairs and which is coming upwith some very useful recommendations.

But cost is an issue for institutions. I was lis-tening to Alastair earlier this week in Edinburgh,highlighting that institutions have to face up andbe prepared to pay for what they are doing oncorporate governance.

There is a cost (whether I am an overhead ora profit centre is a question for debate) but it isvery much an issue which does require an invest-ment by institutions; there are issues of econom-ic scale that come into play. When going global,you do have challenges in trying to blend togeth-er the different views of US, European and UKshareholders, who all come to the table with adifferent agenda.

Comply or explain: In the UK this is nowbecoming the generally accepted approach, but Iwould suggest that this is still not proven interms of whether or not it will work. I acknowl-edge its general acceptance, but I believe thereare still some rough edges to address as we goforward. In Europe this is gaining some momen-tum, although time will tell as to how well it willwork – it is more explaining than complying. Inthe US, law and regulation are still the drivers.

Good communication down the DNA chaindoes align the players. In the UK, I suggest thesecommunications are now channelled. YesterdayI was speaking to a chairman of a company we

invest in, and the day before another companychair came up to Edinburgh to see me. Each daythis is happening. Ten years ago, it did not. Tenyears ago, chairmen were asking (and I still havea few letters on file), “by what right does MrJubb ask these questions?” I think this has nowchanged in the UK.

In the US, we have regulation FD (FairDisclosure, which is fair but arguably neitherhelpful nor constructive). FD is used on onehand to try to keep a level playing field, while onthe other hand many institutions in the US use itas an excuse not to actually talk about things likecorporate governance, which are not necessarilyprice-sensitive. In Europe, we are starting tobreak the ice. In my experience, there areenlightened companies and there are unenlight-ened ones -- middle ground is not so well under-stood.

Representative bodies: in terms of the key tothe codes in the US, we have the Council ofInstitutional Investors, which is quite good atpolitical lobbying and is getting better at coordi-nating its members to deal with individual corpo-rate situations, but by and large it is not as effec-tive as the ABI (Association of British Insurers)and the NAPF (National Association of PensionFunds) in dealing with situations in the UK. Inthe UK, the ABI and the NAPF are rather like therepresentative shareholders.

They can bring a degree of discipline to bearwhen discipline is needed -- two or threeinvestors gathered together can actually havetheir prayers answered more effectively. InEurope, the lobbying focus is clearly on Brussels:the industry bodies are of course there.Interestingly, in Europe I find private investorbodies, which are more prevalent in Sweden andGermany for example, are being listened to in away that they are not in the UK.

In terms of engagement, it takes two to tango;attitudes need to be in tune. I see that it is hap-pening in the UK and I think it is going to hap-pen in Europe, but policymakers should paymore attention to communicating objectives oncorporate governance. It is they who can wraptheir legislation and regulations with encourage-ment to engage and talk constructively. If theyare at the top, they can (in part) set the tonecoming down.

Governance, from my perspective, is focusingon governance chains. I have to speak to compa-nies, I have to be accountable and speak to myclients. The governance models themselves are,if not a myth, then something that needs to bedisentangled.

Investors (and perhaps we mean shareholdersin some respects, coming back to the point Davidwas making, but I generally mean investors

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here), not companies, should control the chains.However, to do that, investors have to be proper-ly resourced, they have to understand what theyare doing, and they have to do it in a way that isconsistent with their clients’ interests. The spot-light is undoubtedly moving on the chain and

investors are feeling the heat more than theyhave in the past.

Policymakers must be the communicationcatalysts, particularly in Europe and the US, tohelp unlock some of the benefits of the chain.

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transcript. The editors apologise for any possi-ble misinterpretations.

Again coming back to myexamination analogy,faced with the question

“which model works best?” wehave two responses which are almost diametri-cally opposed.

We have Antonio’s view, which is that thereare essentially three contrasting models of gover-nance (the UK, the US and Continental Europe),with the US market-driven, the UK institutional-ly-driven and Europe large-shareholder-driven.There may be some advantages in a traditionalsense for the Continental European model interms of stability, but perhaps not in the contextof the new economy.

Then we have Guy saying that it is actually abit of a myth: there are not really such pro-nounced differences; we should think of gover-nance as chains with investors at the one endand companies on the other, and what reallymatters is communications. By this rationale,institutions play a critical role as the linkbetween companies and investors.

To help sort out these issues, we have as ourdiscussant Chris Pierce, CEO of GlobalGovernance Services, ltd., and a former directorof Professional Standards at the Institute ofDirectors, as well as an editor of a handbook oninternational corporate governance; he is verywell placed to adjudicate on this debate.

The job of discussant,as I see it, is to sim-plify things.

Perhaps to exaggeratethings slightly, perhaps tomisrepresent the previousspeakers for effect, and to

create general discussion(and perhaps general confusion). Let’s see if Isucceed in that objective.

The first point that I think came out thisafternoon was that all of the speakers that wehave here are seeming to say that pan-nationalmodels do not exist. There is no such thing as anAnglo-US model or a European model. What weseem to be going down to is a national level: “thisis how it works in Germany”; “this is how itworks in the UK.” In the research community Ihear that that people’s application of these mod-els seems to be breaking down because there aremore differences than similarities between the

US and the UK.I am aware of the work that the chartered

accountants are doing at the moment – KerrieWaring, who is here, and Tim Bush and othersfrom the ICAEW – identifying at least 30 factorswhich are different for corporate reportingbetween the US and the UK. The similarities arebreaking down; the people that are looking at itin significant detail are finding more differencesthan there are similarities.

I look at it from a European perspective.Germany compared to UK compared to Swedencompared to Slovakia, Greece, Turkey, Poland…they all seem to have different company law sys-tems, different codes, different governance struc-tures, board structures, enforcement systems,levels of sophistication on enforcement and soon. I feel that there is more diversity there thanthere is homogeneity. The idea of these pan-national models being useful for analysing corpo-rate governance for comparative purposes hasbroken down completely.

The second point that has been looked at :how do we actually know the effectiveness of cor-porate governance practices? I was rather sur-prised not to hear any mention, either this after-noon or this morning, of the role of the WorldBank and the OECD. The OECD-World Bankhave been looking and evaluating corporate gov-ernance practices around the world: they arecalled ROSCS, Reports on the Observance ofStandards and Codes. The corporate governancepractices in over 30 countries have been exploredin this way, and I think it is a very interestingway to evaluate practices against principles. Ialso heard this morning (from George Dallas) ofother criteria to evaluate performance – we sawthe Standard & Poor’s criteria being used againstmuch more grounded criteria which are moreeasily identifiable (as opposed to the principles ofthe OECD). I have also seen quite a bit ofresearch activity on the impact of corporate gov-ernance on the practices themselves; a lot of peo-ple in this room have been researching the struc-tures by which companies are actually complyingwith the split CEOs, the number of independentand non-executive directors on boards, etc.

I have great concerns that the structure (ifthat is what George Dallas meant by “architec-ture”) of boards seems unlikely to be proven tohave any impact on performance. I see quite abit of research taking place on corporate gover-nance processes and practices actually beinglinked to performance in the UK, US, Germany,Korea, Thailand, etc., with a number of interest-ing research outputs, but I am not seeing cleardemonstrations of the link between corporategovernance structure and performance.

The other thing that we have not mentionedtoday is the financial impact of corporate gover-

40


Chris PierceCEO, GlobalGovernanceServices Ltd.

ProfessorColin Mayer

nance and I would like to point out a recentKorn/Ferry survey where the top 100 companiesin the US say that it costs more than $5 millionto comply with 404 (the internal controls sectionof Sarbanes-Oxley). These are significant finan-cial costs and the company community is sayingthat these costs should be considered if there isto be further regulation.

The question as to whether or not all this cor-porate governance is working: again, I have mydoubts. When you look at what happened withHollinger in Canada, where $1.7 billion and 97%of revenues can’t be explained, and you wonderwhat is going on. Today, I was looking at theFinancial Times: there is a Japanese directorwho has just been indicted, one of the best-known industrialists of the last 15 years, for mal-reporting and misreporting his companyaccounts – not for the last year or two, but forthe last 40. I am wondering: where is theenforcement taking place to actually implementthe practices we think are desirable.

To finish, an overview from the OECD lastyear suggested that corporate governance prac-tices were improving. There is still a long way togo, however. The OECD suggest improved trans-parency and disclosure (because sunlight is anextremely important factor in improving corpo-rate governance) and also suggest that compli-ance must be monitored far more. There seemsto be very little going on around the world interms of actually evaluating compliance, particu-larly in the areas where we have comply-or-explain. I take on board Antonio’s commentthat, in Europe particularly, we have barriers tocapital transfers which must be seriously lookedat if European governance is to expand into acredible alternative to corporate governancepractices in the US.

Just for a bit of fun, I did notrefer to the World Bank andtheir people because, as you

may know, some of them havebeen recently fired for fraud! As regards thenational versus international governance models,it is true that they are still very national, butbusiness leaders and other authorities realisethat things are changing. This is an importantpoint because, to a large extent because of theeuro, there is more cross-border investment inEurope than before. There are stock marketsthat are losing market share while others aregaining due to the higher standards of gover-nance in certain areas. Competition is beginningto emerge, which is precisely what is generatingthe protectionist response.

Governments and certain business leaders arenow demanding protection and new barrierswhich did not exist before: they are more con-

cerned with competition within Europe. So thereis a trend in the right (i.e. pan-national) direc-tion, but it is, unsurprisingly, being resisted.

On the interesting and important issue of gov-ernance and performance, I do not have anyresearch that I can quote off the top of my head,but there are two important points: First, in theEuropean model of large block-holders with avery strong influence on the company, it is gen-erally easy to prove that this leads to better deci-sion-making. Many managers at difficultmoments in their careers and the lives of theircompanies will perform better if they can go tosomeone who is on their side, and is supportiveand helpful. It is of course subjective, but Ibelieve it introduces an element of stability –emotional stability, if you like – which deliversbetter performance. Second, in my view, in theUS you have the very opposite of this. You haveboards which demand constant performance.Never mind what the stock market is doing – “wesupported you a couple of years ago and nowwe’ll fire you.” No hesitation, no counter-pres-sure. On the other hand, if someone comes inwith a bold approach or gamble – “let’s go, weare with you. We are certain our shareholdersknow how to deal with that.”

This is, in my view, very much behind thedrive for performance and the appetite for risk-taking which characterise the US economy today.These are just two instances of links between thegovernance model and the performance of thecompanies under those models.

You mentioned the OECDand the World Bank. Froma practical standpoint,

those actually do not come into our analysis toany significant degree. We are aware of them inthe background – perhaps we should pay moreattention to what they are doing – but as thingsstand at the moment the OECD and the WorldBank, whilst very important bodies that havedone a lot for the furthering of corporate gover-nance, are not given much attention. We aredealing much more with local and specific issues.

Antonio’s argument that thereason the US governancemodel is currently the

leader – its effectiveness – is dueto market scrutiny and the market’s capacity forimmediate censure. I would argue that in the UKwe actually have much closer and more effectivescrutiny via our regulators, but at any rate in theUK I think the existing model is still not provenand depends on the effectiveness of institutionalinvestors.

My worry is: how long will the regulators orlegislators wait for investors to gear up to play in

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AntonioBorges

Guy Jubb

Unknownquestioner

the new economy? What is the sanction thatwould make the institutions get into action?

Iwould like to correct a possi-ble misperception. I wouldnot like to say that the US

model is the best in the world forevery purpose. I think we have to understandsome of its disadvantages, but I would stand bythe importance of market scrutiny and howmuch more powerful it is in the US than inEurope. I am not discounting the quality of thework that has been done, particularly in Britain,on analysis and research of corporations. I amsimply saying that the market pays less attentionto it.

In the US, if a company’s stock price startsgoing down, action follows quickly – managersget swept away, or if that does not happen, some-body will take over the company. You mightargue that it is knee-jerk, too fast, but it is muchmore powerful in the sense that managers aremore afraid there than anywhere else in theworld. In Britain, managers are afraid of theinstitutional investors, and rightly so; they arenot as afraid of the market because it is less pow-erful.

Indeed, this is a very important differencebetween the US and Britain. The role of theinstitutional investors is crucial here, but muchless important in the US. In fact, US boardmembers are not supposed to talk to investors,or if we do, we must talk to all of them at thesame time. That is the point of fair disclosure.The US market operates on this premise: you arenot supposed to give privileged information toanybody. We are not supposed to speak to influ-ential investors in the US, be they institutions orblock-holders. They are kept at arm’s length.

In terms of investment byinstitutions, I would observetwo things. In the short

term, when markets are bullish, investors canperhaps lean back and say “everything is goingfine” – the problem is when markets start to gobad again, which is what separates the goatsfrom the sheep. It puts real issues at the institu-tions’ doorstep and, from a political point ofview, I suggest institutions are quite easy prey aspoliticians start to ask “where were the investorsall this time?”

Over the last year, the roleof institutions in the USmodel has significantly

changed, due to things like the Disney fiasco andthe problems with Warren Buffett. There arereal political issues concerning the American

institutions – in my last few visits there, the freerider issue is becoming more important and hasbeen played by TIA and others. I am concernedthat investors should, at an international level,play the principal part in companies’ operations.I go along to a great extent with what Alastairsaid on this topic earlier.

To what extent do we com-bine in European CG bothstrong institutional

investors as well as family shareholdings? Howbest to incorporate an American-style investmentstructure onto the traditional family approachwhich has worked well so far in Europe (not tomention the Far East)?

When is a family not afamily? We have seenthat what starts off as a

family company (e.g. Morrison’s in the UK) tendsto start off with Mr Morrison as the entrepre-neur; through trust arrangements it gets into thechildren’s hands and over the years the trustsbecome more diverse and the ownershipbecomes more diverse. In trying to combinewhat is essentially private equity (i.e. familyequity) with public equity, there is always a sig-nificant degree of tension: the public equity isalways looking to see when the private equity isgoing to hand over its shares (whether that’s agood thing or a bad thing, the other shareholdersare continually waiting around for this to hap-pen).

The boards of companies, in that situation,can be rather comic. Simultaneously, they knowthat the family has an interest and the boardneeds to look after it, and the boards can play thefamily off the other investors. Because the inter-ests get so diversified over time – Sainsbury’s isan interesting case in the UK – the accountabilityto the family is perhaps a critical issue. This iswhat I mean by “when is a family not a family.”

In substance, the problem of getting fromfamily-owned to public companies, there is noeasy solution.

Iagree that the private busi-ness (private equity) is differ-ent from public equity and in

a public company there are certain duties andresponsibilities that the company owes the share-holders. If you don’t like those responsibilities,you should stay within the private arena. I dosee that many organisations want access to morefinance – but if they want access to this financethey will have to be more transparent and mayhave to give up the controls.

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Guy Jubb

Chris Pierce

Guy Liu

Guy Jubb

Chris Pierce

AntonioBorges

Even though family firmsmay not always remain100% within the family,

families will continue to be sig-nificant block-holders in many corporations forthe foreseeable future. The key here is how tosolve the time-consistency problem. It is in theirinterests to deal with investors, and the marketas a whole, in a fair manner. They all stand togain. The problem is, in the short term, there areall kinds of incentives to do otherwise.

How can we adapt the model to make it morecompatible with long-term objectives? 1) Let usnot allow families or block-holders to leveragetheir position beyond their legitimate influence.This is of course a very difficult point in Europebecause people have built positions of controlthrough all kinds of schemes which cost a for-tune, and they are not ready to give these posi-tions up without a fight.

Anything that improves shareholder sover-eignty, one-share-one-vote, should be welcomed.In the same way, a reduction of governmentintervention, golden shares and so forth shouldbe welcomed.

In my view, the way to make the two modelscompatible with each other is to accept, defend,even recommend block-holders, on conditionthat they remain a minority, and/or if things gowrong, a takeover is possible and they can beremoved. Experience shows, and there is plentyof research about this, that family firms usuallydo very well but they have one major problem:they have no regeneration mechanism if thingsgo wrong. There is no natural way of removingor changing what does not work. If families arebetter at long-term strategies and long-termmanagement of a firm, translating to higher per-formance, the other investors should be happywith that, so long as they still have a say. Block-holders with 30-40% should be an interestingmodel.

There are good and bad fea-tures in the three modelsmentioned by Antonio.

Can you see any convergence, and if so, wherewould you like to see more?

There is no doubt that peo-ple in Europe see what ishappening; they see the

competition across financialmarkets and the first steps of cross-borderinvestment, like the Santander-Abbey Nationalstory. This brings up an important issue: are theUK investors ready to trust Spanish corporategovernance? Apparently they did.

People are still afraid of this, and want moreprotection, but at the same time we are all awarewhat direction things are going. To quote ColinMayer’s research on 19th Century Britain, when15 or 16 different stock markets actually becameconsolidated in London, investors that typicallyonly invested in their own region learned how totrust firms that were further away and less well-known. This all happened without governmentregulation and without a great deal of interven-tion, but it also happened because it was a suc-cessful process – if there had been a lot of scan-dals along the way, perhaps things would nothave evolved the same way. The path to integra-tion is always dependent upon a great many vari-ables, that may or may not lead to successfulconvergence in the creation of a European capitalmarket.

In terms of EU convergence, Iwould certainly like to seeimprovement of corporate

reporting. There are quite considerable diver-gences between Sarbanes-Oxley, IAS, GAAP andother areas of national corporate reporting, andif that area was tidied up I think the world wouldbe a better place.

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Paul Flather

Chris Pierce

AntonioBorges

AntonioBorges

SESSION IVRound Table Discussions

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Round Table Discussions

GROUP A: Do some regulatory codes perform better than others?In general, principle-based code will work better than mandatory rules; one of the reasons is that

in the latter case there is a danger that Board may comply with them without any reflection on theirperformance. Principle-based codes allow for some diversification, resulting in a healthy competitionbetween companies and systems. This already illustrates that a well-developed market may be a pre-requisite for principle-based code to work. In earlier stages of development, formal rules might bemore important. The value of rules may also depend on particular cultures, traditions, the variouspositions of employees, trade unions, shareholders etc. In some societies, people are more likely torespond to written rules than in others.

Combined codes, in varying proportions, may be the best answer, but they should never be over-prescriptive. It may be safely assumed that company boards generally will treat codes as writtenrules if they are forced to explain why they do not comply with those codes. Formal rules have thedrawback that they may be difficult to change, e.g. because of lack of time in Government andParliament.

What are the right overall policies for Europe?The answer to this question is partly in the above. Policy, however, should allow for a consider-

able diversity of regimes, consistent with the principle of equivalence, to stimulate competition. Theregulatory impact should be assessed, and appropriate cost-benefit analyses should be made.

Should Sarbanes-Oxley apply to European businesses?Yes, in principle, but …” USA culture is very regulatory and lawyer-driven, and Americans tend

to believe that rules and complying with rules is crucial. Therefore, US models are not directly appli-cable to other continents and countries. Furthermore, the USA has a strongly developed market sys-tem, where the rules of the New York Stock Exchange are at least as important as government regu-lations. The situation elsewhere is usually not exactly the same, and indeed often very different.Sarbanes-Oxley deals with some problems, although it is not a complete governance model, but isover-prescriptive and does not allow for a larger variety of circumstances than exist in the US.

A strong point of Sarbanes-Oxley is that management never has the excuse that it didn’t knowwhat was going on. It should be clear who is ultimately responsible. In Europe, it is often easier tomanipulate information, even within the rules, to present reality in a more positive way. A weakpoint of Sarbanes-Oxley may be that it is over-prescriptive, and does not easily accommodate vari-ous circumstances. Sarbanes-Oxley strengthens internal information and control, which should beconsidered a positive effect.

GROUP B: Should institutions be more active in governing firms?Yes, to avoid regulation. However, an argument can be made that taking ownership rights is suf-

ficient.

Are still-tougher rules required?Generally speaking, regulations are sufficient. However, they need to be better-enforced and

stronger disclosure rules would be desirable.

What are the costs of regulation?If regulation were sensible, the costs would probably have been incurred without the regulation.

So, are the costs too high? The emergence of the private equity market suggests yes. The companiesfrom emerging markets that want to be listed in London, Frankfurt or New York suggest no.


45


GROUP C: Has regulation after perceived failures been justified?Regulation was inevitable; historically, it has been the natural reaction to crashes, as society and

investors demand something be done to prevent repetition of mistakes. Current regulation hashelped restore trust among larger funds, but has not necessarily had an impact on small privateinvestors.

Historically, reform has a strong element of periodicity: fraud is discovered, new codes and regu-lations are created, contraventions become more sophisticated, and public interest in the topic falls.

Are these reforms appropriate?The answer to this question depends on how the codes are judged. Essentially, they will be con-

sidered to have “worked” if they prevent another Enron and improve shareholder value over the longterm – it is too soon to say whether this is the case.

It seems that the reaction has been broadly appropriate, as minimum standards of disclosure,etc., are prerequisites for allowing shareholders to monitor their companies (particularly if the gov-ernance will rely on codes rather than direct regulation). However, Sarbanes-Oxley may prove tohave been a bit too ambitious.

How much bureaucratic interference comes from codes?If a code is addressing a market failure, it must be of some benefit. Properly designed codes are

worth the extra bureaucratic effort. Problems arise when separate board committees are created todeal with regulation, as they must learn to work together.

GROUP D: Is active institutional involvement always a good thing?Yes, when stock is underperforming, or institutional shareholders cannot sell. They must inter-

vene where there is a high risk of underperformance or fraud. However, factors that promote effec-tive institutions vary depending on context (political culture, sector, etc.). From management’s pointof view, some underperformance is normal. Shareholders should be notified (and should be entitledto act) regarding election/re-election, major transactions, audits, and remuneration.

How to regulate global companies?Product market competition is preferable to regulation via corporate governance, with notable

exceptions: antitrust legislation, international accounting standards, timing of AGMS (spaced toavoid overload), Ratings information should be effectively comparable.

What is the balance between internal and external regulation?Half and half. Internal regulation should be the first resort, with external regulations dealing pri-

marily with market failures. Additionally, transparency should be enforced for the sake of investorsand annual reports should include disclosure of CG activities and expenditure.

OTHER THEMESCan there be a European regulatory frame-

work, given the obvious variances between codesof conduct, market culture, etc. between theEuropean countries/regions, namely pro-nounced in the underlying differences betweenUK and the mainland philosophies of business?

The question of whether regulation under-mines performance is a matter of balance.Regulation is not an undermining factor per se,but should not simply be applied “straight out ofthe box.”

In terms of “good” and “bad,” the latter cate-gory applies when regulation gets too politicizedand/or too loosely structured. Transparency andcompatibility are ideals worth striving for.

Business has not made its voice heard due tobad organization. The corporate lobby is not aswell organized as the new governance industry.

There are numerous ways of regulating; mar-ket regulation, i.e., through consumer behaviour,might be a way forward.

46

Concluding Remarks

Thank you for all thoseenlightening report backsfrom the roundtable ses-

sions which have produced someinteresting insights.

Now, I think I have really had my own say atthe beginning of the session IV, and as our dis-cussions have eaten a little into our time, I amgoing to hand over at once to Paul Flather whohas been busy trying to draw out some generalthreads from our deliberations.

The discussions overthe day have thrownup many interesting

points, and producedsome lively clashes andcontroversy. As a non-expert I have beenintrigued by the manyarguments made. But I

would like to pick up on five issues that have par-ticularly struck me and seem to me to offer possi-bilities for future research and analysis. Theymay perhaps even form the basis of further workto be undertaken by the Europaeum group ofuniversities, as we are currently in discussionswith a leading corporate to create and develop arelevant international European research projecton new Corporate Governance reforms.

1. Independent DirectorsQuestions were raised about how could inde-

pendent directors now have a crucial role to playin the future better governance of our corpora-tions. How will they stand up against the so-called Non-Independent directors, the execu-tives? What will be their specific role? Whatpowers will they have? How much company sup-port should they receive and be able to call on?There are also questions of their appropriateremuneration levels, whether there should bepublic funding involved. Above all, there aredeeper questions of how they can be part of theteam, while remaining able to exercise scrutinyindependently.

2. Corporate Governance and EconomicPerformance

A key criticism of corporate governancereform and the raft of proposals that have beenset in place following the crisis of companycrashes is that they seriously restrict corporateeconomic performance and success. But thereappears to be little research measuring the corre-lations between the application of compliancewith Corporate Governance measures and eco-nomic performance. Equally, it can be arguedthat there is little conclusive proof that good gov-ernance produces greater economic benefit tocompanies. It seems to be me that there is muchopinion on such relations and relatively littlehard research and fact. This would surely be afruitful area for further, focussed research.

3. Shareholders, Sovereignty and CapitalShareholders clearly must continue to have

influence on their companies. However, it hasnever been easy for them to accumulate orexpress their views, even on simple measuressuch as voting on the membership of the board,or an election of the chairman. This has led to arise in so-called ‘shareholder activism’, and therehave been some significant examples whenorganised shareholders have turned over compa-ny policy, modified plans and strategies, andbeen seen to have key executives replaced.However, such interventions remains relativelyhaphazard and debates around such activismoften collapse into an all-or-nothing debate, inthe form of “do this or else” or “take it or leaveit”.

More work should be done on defining moreprecisely the role of shareholders, the balance ofsovereignty, who the ultimate controllers of acompany are, how more refined discussion couldtake place, and the means by which poorly coor-dinated bodies of shareholders can be consulted,better and perhaps more regularly, and involved.This would ameliorate a culture in which con-frontational or reckless gestures by either partystand in the way of good governance, as suggest-ed by one contributor to our discussion.

Concluding Remarks


ProfessorColin Mayer

47

Concluding Remarks

Perhaps we should be asking whether internettechnology could be used to allow shareholdersto be in closer connection with each other thanthey are at present, so as to allow them to betteridentify issues, demonstrate support, and, if nec-essary, take action.

4. Sunlight and TransparencyThe new corporate governance agenda has

much to do with transparency and throwing ‘sun-light’ over any murky dealings within companies.But what should be revealed, how often and towhom? Questions of sunlight remain crucial, notleast because information is often privileged andcompanies are very wary of revealing anythingthat might lose them competitive and commer-cial advantage. How can such conundrums besolved satisfactorily for both sides?

5. A New European Agenda We have discussed the nature of corporate

governance in America, in Britain and in Europe.We have noted that the corporate structures inEurope and America are different and we havenoted significant differences between keyEuropean players too. We have also examined apossible convergence between the US and theUK, in particular. What we have not been able toresolve, not surprisingly,, is whether we should

simply accept that, within a broad framework ofCG compliancy and reform, there are be differentapproaches appropriate to each different nation-ality and to local democratic and economic goals.

Alternatively, should we be exploring a widerEuropean model and framework, both in con-tradistinction to specifically American approach-es and strategies, taking note of the multination-al and international nature of most corporates -particularly their penchant for playing off differ-ent approaches, even choosing to set up theirheadquarters in those countries where compli-ance regimes most ‘suit’ them, perhaps wherethey can best avoid restrictions.

Should we be searching for a new, moreEuropean agenda from Brussels, or accept thatthere will be distinct British, French and Germanapproaches? Should it be a more rigid or looserframework? Should it seek convergence or dif-ference with the USA?

These strike me as five significant themeswhich have emerged from our deliberations overthe day. I hope you will agree that they leave usplenty of further food for thought. Indeed, I sup-pose that there are large questions to face – whatprecisely, for instance, is ‘good governance’? Ouruse of the term can inevitably be loaded with ourassumptions about what we want from corpora-tions in European society. This raises questionsof efficacy; but of our values, and ends, as well..

PAUL ASKEW, Director, Whetstone Group LtdJOOST VAN ASTEN, Director of International Relations,

University of LeidenJANA BAMBIC, Doctoral Student, European LawDEVIKA BANERJEE, Strategy and Communications

ConsultantKIM BELLO-OSAGIE, CEO, Cerberus, Inc.DR GEORGE BLUMBERG, Oxford Centre for InnovationPROF ANTONIO BORGES, Vice President, Goldman SachsROBERT BRYAN, Head of Employment Team, Darbys

SolicitorsALAN CALDER, CEO, IT Governance LtdDR ROBERT COELEN, Vice President International, Leiden

International OfficeTIM CULLEN, Senior Associate Member, St Antony's College,

University of OxfordGEORGE DALLAS, Managing Director and Global Practice

Leader, Standard & Poor's Governance Services UnitDENIS H DOBLE, Director, FCO AssociationWILLEM AJ VAN DUIN, Member Executive Board, Eureko

BVTIM FEYERABEND, Referent Corporate and Affiliates

Governance, T-Systems International GmbHJUDITH FINCH, Diversity and Equal Opportunities Officer,

University of OxfordDR PAUL FLATHER, Secretary-General, EuropaeumKATHERINE FLETCHER, Programme Officer, EuropaeumSANDIIP GOEL, Consultant, Cghru & Partners, MoscowPROF HOWARD GOSPEL, Professor, Saïd Business School,

University of OxfordDR PAUL GOWER, Economic Adviser, Department of Trade

and IndustryANDREW GRAHAM, Master, Balliol College, OxfordSIR RONALD GRIERSON, European Chairman, Blackstone

Group, Ltd., and Former Vice President, GECBURCU HACIBEDEL, DPhil candidate in Finance, Saïd

Business School, University of OxfordHEATHER HROUSALAS, DPhil candidate, Saïd Business

School, University of OxfordDAVID JACKSON, Company Secretary, BP GUY JUBB, Head of Corporate Governance, Standard Life

InvestmentsDR STUART KEWLEY, Managing Director, eurasia-ipsAW KIST, President, University of LeidenCHRIS KOENIG, Business Correespondent, Oxford TimesGUY LIU, Lecturer in Economics, Brunel University and

Sichuan UniversityAJINT MAHAJAN, MBA Student, Saïd Business School,

University of OxfordPROF COLIN MAYER, Peter Moores Professor of Finance,

Saïd Business School, University of OxfordPROF TERENCE MCNULTY, Professor of Management and

Governance, University of Leeds Business SchoolPROF JOHN MELLOR, Visiting Professor, Corporate

Governance, Bristol Business School; Chairman,Foundation for Independent Directors; and Policy Advisor,All Party Parliamentary Corporate Governance Group

PROF KEES MOUWEN, Vice President and Professor ofStrategy, Tilburg University

DR WILSON NG, Roberts Fellow in Corporate Governance, Leeds University Business School

HENRIETTE NOTTEN, Deputy Head Economic Section,Embassy of the Kingdom of the Netherlands

KEN OKAMURA, DPhil candidate in Finance, Saïd BusinessSchool, University of Oxford

CHRIS PIERCE, CEO, Global Governance Services Ltd.,Former Director of Professional Standards, Institute ofDirectors

MARKUS PINS, Management ConsultantDR MICHAEL PINTO-DUSCHINSKY, Senior Research

Fellow, Brunel UniversityPROF DAN PRENTICE, Allen & Overy Profesor of Corporate

Law and Fellow of Pembroke College, University of OxfordPIER ANDREA RANDONE, PhD Student, Saïd Business

School, University of OxfordJONATHAN RICKFORD, Director, Company Law Centre,

British Institute of International and Comparative LawMAURITS VAN ROOIJEN, Vice President for Institutional

Advancement, University of WestminsterALASTAIR ROSS GOOBEY, Senior Advisor, Morgan Stanley,

and Chairman, International Corporate GovernanceNetwork

EDWARD ROWE, Assurance Professional, Grant ThorntonUK LLP

KEN RUSHTON, Corporate Governance ConsultantPROF JACOB DE SMIT, Professor, Leiden University School

of ManagementMARTIN SMITH, Maging Director, West Bridge ConsultingPROF LAURA SPIRA, Professor of Corporate Governance,

Oxford Brookes University Business SchoolMURRAY STEELE, Senior Lecturer, Cranfield School of

ManagementRON STRIKKER, Minister Plenipotentiary, Embassy of the

Kingdom of the NetherlandsSIMON TANG, Law student, Wadham College, University of

Oxford CHRISTIAN TOENNESEN, Doctoral Student in Management

Research, James Martin Institute, Saïd Business SchoolALEXANDER VON UNGERN-STERNBERG, Executive

Director, Euro-IB LtdCOLIN WALL, Copley Wall & AssociatesKERRIE WARING, Corporate Governance Manager, Institute

of Chartered Accountsnts in England and WalesEDWARD WELLS, Principal Policy Adviser, London Stock

ExchangeANNE WILLCOCKS, Director of Company Law Reform,

Department of Trade and Industry and Former Secretary,Higgs Review of the Role and Effectiveness of Non-Executive Directors

PROF STEPHEN WOOLGAR, Professor, Saïd BusinessSchool, University of Oxford

TADASHI YOSHIDA, Director, Japan ManagementAssociation

LIANG YU, MSc candidate in Management Research, SaïdBusiness School University of Oxford

DEMING ZHU, China Business Solution, Ltd. and MBAStudent, Saïd Business School, University of Oxford

48

Appendix A

APPENDIX AList of Participants

ANTONIO BORGES is Managing Director& Vice Chairman at Goldman Sachs andChairman of the European Corporate

Governance Institute. Prior to his work with GS,he was Dean of INSEAD between 1993 and2000. He has also taught at the University ofLisbon, Portuguese Catholic University, andStanford University. Between 1990 and 1993Antonio Borges was Vice Governor of Banco dePortugal, where he took a leading role in the lib-eralisation of Portugal's financial system. He alsoworked at European level on the project ofEconomic and Monetary Union. He is a memberof the European Corporate Governance Forum,set up by the European Commission to examinebest practices in Member States with a view toenhancing the convergence of national corporategovernance codes and providing advice to theCommission. He

GEORGE S. DALLAS is ManagingDirector and Global Practice Leader ofStandard & Poor's Governance Services

unit, based in London. Prior to this assignmentMr. Dallas was head of Global Emerging Marketsfor Standard & Poor's, encompassing emergingmarkets activities of both Standard & Poor'sCredit Market Services and Information Services.He has served as regional head for Standard &Poor's Ratings Services in Eastern Europe, theMiddle East and Africa, and as regional head forStandard & Poor's European credit rating opera-tions. Mr. Dallas is editor of the bookGovernance and Risk (McGraw Hill, 2004), andhas written numerous articles and several bookchapters on themes relating to corporate gover-nance and international finance. He is a memberof the European Corporate Governance Instituteand a member of the steering committee of theEuropean Corporate Governance TrainingNetwork.

DR PAUL FLATHER is Secretary–General of the Europaeum, an associationof leading European Universities, and

Fellow of Mansfield College, Oxford. He was thefounding Secretary-General of the CentralEuropean University (1990-1994) originally setup in Budapest, Prague, and Warsaw by George

Soros, and director of international and externalaffairs for Oxford University (1994-1999).Formerly, he worked at the BBC, TimesNewspapers, and served as Deputy Editor of theNew Statesman. He has worked with dissidentmovements in Central Europe in the 1980s, andwith race equality groups in the UK. He was anelected member of the London Council in the1980s (chairing its committee on post-schooleducation 1986-1990), and is currently directingthe Europaeum’s research project on the futureof European universities.

ANDREW GRAHAM is the Master ofBalliol College, Oxford, a non-ExecutiveDirector of Channel 4 Television,

Chairman of the Advisory Board of the OxfordInternet Institute (which he largely created) anda Trustee of the Esmee Fairbairn Foundation. Headvised the Prime Minister, 1967-69 and 1974-76; and, from 1988-94, the Leader of the LabourParty, John Smith. He wrote (with Gavyn Davies)“Broadcasting, Society and Policy in theMultimedia Age,” now part of the standarddefence of public service broadcasting. OxfordUniversity has made him an Honorary Doctor ofCivil Law. His partner, Peggotty, is Dean ofSocial Sciences at the Open University. He is apassionate windsurfer.

SIR RONALD GRIERSON is a banker andindustrialist and has on several occasionsheld full-time appointments in government.

His principal business posts were ManagingDirector of S.G. Warburg (1948-1985) and Vice-Chairman of The General Electric Company(1968-1996). His main government appoint-ments were Deputy Chairman and ManagingDirector of the UK Industrial ReorganisationCorporation and Director-General for Industryand Technology of the European Commission inBrussels. At various times he also served on theboards of Chrysler Corporation, R.J. ReynoldsNabisco, W.R. Grace & Co., British AircraftCorporation (now BAE Systems) andInternational Computers Ltd. He continues to beon boards and advisory boards in Europe and theUSA (among others as European Chairman ofthe Blackstone Group and Chairman of the advi-

49

Appendix B

APPENDIX BBiographies of Speakers

sory board of Bain & Co.) and is chairman of sev-eral international philanthropic bodies in thefields of medicine, education and music.

GUY JUBB is Head of CorporateGovernance at Standard Life Investments,a leading investment manager with 128

billion Euros in assets under management. Guyis responsible for the management of all ofStandard Life Investments’ corporate governanceactivities. He has been involved in developingbest practice approaches to corporate governancesince 1993 and has extensive experience ofEuropean governance issues.

COLIN MAYER is Peter Moores Professorof Management Studies at the SaïdBusiness School and Director of the Oxford

Financial Research Centre. Professor Mayer haswritten widely on corporate finance, taxation andgovernance and on the regulation of financialmarkets. He has directed the European ScienceFoundation Network in Financial Markets andthe Financial Economics Programme of theCentre for Economic Policy Research. In additionto having held visiting fellowships at Stanford,MIT and Brussels University (ULB), where hewas the first Leo Goldschmidt Visiting Professorof Corporate Governance, he is a Delegate ofOUP and Chairman of Oxford EconomicResearch Associates (OXERA) and serves on theboards of several leading academic journals.

CHRIS PIERCE is the Managing Directorof Global Governance Services Ltd. Hiswork involves developing directors and

boards in Europe, Africa, the Middle East, theUS, South America and South East Asia. Prior tobecoming MD, he was the Director ofProfessional Standards and ProfessionalDevelopment at the Institute of Directors (IoD).He has also held senior management positions inthe Overseas Development Administration,British Airways and Leeds Business School.Chris has written extensively on director andboard development issues. His key publicationsinclude: The Effective Director: an essentialguide to director and board development (KoganPage, 2001) and The Handbook of InternationalCorporate Governance (IoD, 2004) [co-editedwith Kerrie Waring]. He is currently writing aToolkit on Developing, Crafting and ReviewingCorporate Governance Codes for the Global

Corporate Governance Forum (part of the WorldBank) to be published in Summer 2005.

DAN PRENTICE is a Professor in theFaculty of Law at the University ofOxford. He teaches Company Law,

Corporate Insolvency and Corporate Finance,combining teaching with a mainly advisory prac-tice at Erskine Chambers. He is a member ofboth the Law Society's Committee on CompanyLaw and the Law Society's Committee onInsolvency Law.

ALASTAIR ROSS GOOBEY CBE is cur-rently Chairman of Hermes Focus andJohn Wainwright and Co.Ltd. He is also

Deputy Chairman of GWR Group plc, a Governorof the Wellcome Trust (the UK's largest medicalresearch charity), and a Senior Advisor to and amember of the European Advisory Board ofMorgan Stanley. Between January 1993 andDecember 2001 he was Chief Executive ofHermes Pensions Management Ltd., the execu-tive arm of the BT Pension Scheme, the UK'slargest. His career prior to that included periodsas manager of the Courtaulds Ltd. pension fund,and as Chief Investment Strategist at JamesCapel. He is Chairman of the InternationalCorporate Governance Network, a member of theEuropean Commission's 15-member CorporateGovernance Forum, an honorary Fellow of theInstitute of Actuaries, and an honorary charteredSurveyor.

JONATHAN RICKFORD CBE is a solicitorand consultant on regulation and Europeanlaw and policy, Director of the Company

Law Centre at the British Institute ofInternational and Comparative Law, and visitingprofessor in Comparative Company Law at theLondon School of Economics. In 2002 he was amember of the EU High Level Group ("WinterGroup") on Corporate Law, and VisitingProfessor at the University of Leiden in theNetherlands. He was the Project Director of theGovernment's independent Review of CompanyLaw from 1998 to 2001. Mr Rickford was a legaladviser to the DTI from 1972 to 1987 and theirchief legal adviser from 1984 -1987. He was chieflegal adviser, director of regulation and directorof corporate strategy with British Telecom plcbetween 1987 and 1996. He is a member of theCity of London Corporation Advisory Panel.

50

Appendix B

The University of OxfordOxford is the oldest university in

the English-speaking world andlays claim to nine centuries of con-tinuous existence. Oxford attractsstudents and scholars from acrossthe globe, with almost a quarter of our studentsfrom overseas. More than 130 nationalities arerepresented among a student population of over18,000.

Oxford is a collegiate university, with 39 self-governing colleges related to the University in afederal system. There are also seven PermanentPrivate Halls, founded by different Christiandenominations. Thirty colleges and all hallsadmit students for both undergraduate and grad-uate degrees. Seven other colleges are for gradu-ates only; one has Fellows only, and one special-izes in part-time and continuing education.

During the 20th century, Oxford has added toits humanistic core with a major new researchcapacity in the natural and applied sciences,including medicine. In so doing it has enhancedand strengthened its traditional role as an inter-national focus for learning and a forum for intel-lectual debate.

The University of Paris I: Panthéon-SorbonneThis leading French university

was founded in 1970 after the stu-dent revolution of May 1968, theSorbonne traces its historic rootsback to 1257. It aims to bringtogether the Humanities, Law and Economics,subjects previously taught in highly distinct andhierarchal Faculties.

Some 40,000 are enrolled in 14 teaching andresearch departments and five Institutes, whichoffer top level degree courses in law, political sci-ence, economics, management and the humani-ties. The campus is spread across Paris, notablyoccupying part of the Sorbonne and other presti-gious French university buildings.

Paris I is also at the centre of a rich networkof international relations stretching across the

five continents and continues to play a major rolein the training of researchers, academics, judges,lawyers, senior managers and top French civilservants. It is at the forefront of research andteaching in the fields of European Studies,International Relations, Management andCommunications.

Leiden UniversityLeiden is the oldest university in

the Netherlands. It was founded inFebruary 1575, as a gift fromWilliam of Orange to the citizens ofLeiden after a long siege by theSpaniards. It was the first university in theNetherlands to practice freedom of belief andreligion, allowing philosophers like Spinoza andDescartes to develop their ideas. The universityhas three guiding principles: an international ori-entation; intensive research; and a high qualityof education and research.

The university has approximately 17,000 stu-dents and 4,000 staff members and has nine fac-ulties, a School of Management and a School ofEducation. The faculties offer a varied range ofbachelor’s, master’s and PhD programmes. Inaddition, three other units offer post-academictraining: the Institute for EnvironmentalSciences (CML), the School of Education(ICLON) and Campus The Hague.

In coming years, the University intends tomake major contributions to society in the areasof prosperity, well-being and culture. To this end,the University is committed to both recruitingand developing talent. This will involve second-ary school pupils, university students, and youngresearchers and academics.

The University of BonnBonn has a tradition going back

almost 200 years, a student bodynumbering 30,000 and an excellentreputation at home and abroad. Itis of the leading universities in

51

Appendix C

APPENDIX CParticipating Universities

52

Appendix C

Germany. The University is shaped by the peoplewho teach, learn and research here, all of whombenefit from a working in a research universitythat operates internationally while remainingconscious of its traditions; cooperates withnumerous universities and research establish-ments all over the world; and has developedteaching and research methods that enjoy world-wide recognition.

Living up to its long tradition as a classicUniversity with a full range of courses, Bonnoffers nearly a 100 different first degree pro-grammes. Students can choose from a wide andmodern range of subjects that allow a multiplici-ty of combinations. The university providesnumerous continuing education courses formature students, which enjoy great popularity.Alongside the classic subjects, the University ofBonn also developed novel concepts for interdis-ciplinary and international study. In addition, itmaintains partnerships with universities inEurope, America, Asia and Australia, and almosta sixth of the student body is made up of interna-tional students.

The Graduate Institute of International Studies(HEI)

The HEI was created in 1927, asan institution providing students ofall nations the means of undertak-ing and pursuing internationalstudies, through multi- and trans-disciplinary approaches, developed since its cre-ation.

It was setup alongside the other development,international and intergovernmental institutionsestablished in Geneva. For a long time it was oneof the only academic institutions in the world todeal solely with the study of international relations.

It represents a special interface between thetheory and practice of international relations andresponds to the growing importance of interna-tional relations in the world today. TheInstitute's research activities benefit both stu-dents, the international community in Geneva, aswell as international relations professionals fromthe diplomatic and private sectors.

53

Appendix D

Goldman SachsGoldman Sachs are leading global investment

banking, securities and investment managementfirm, provides a wide range of services worldwideto a substantial and diversified client base thatincludes corporations, financial institutions, gov-ernments and high net-worth individuals.Founded in 1869, it is one of the oldest andlargest investment banking firms. The headquar-ters are in New York, and the firm maintainsoffices in London, Frankfurt, Tokyo, Hong Kong,and other major financial centres worldwide. Thefirm is committed to placing client interests firstand emphasise integrity, commitment to excel-lence, innovation and teamwork. In 2005, thenet revenue was a recorded $24 Billion, with an$8 Billion increase since 2003.

The Blackstone Group The Group opened its first small office in

1985, four staff and a balance sheet of $400,000.Today it comprises diverse companies such asAllied Waste, Celanese, CineWorld, GrahamPackaging, Houghton Mifflin, Nalco, SouthernCross/NHP, Spirit Group, TRW Automotive,Texas Genco, and Universal Orlando. The totalenterprise value of all transactions to June 30,2006, was over $158 billion.

The founders hold certain core beliefs fromthe outset. They believe that in a world of giantorganisations there is room for a small firm withthe highest levels of professionalism and integri-ty, and senior-level attention to clients and rela-tionships. They remain committed to investingonly in strictly friendly situations, and support-ing strong management teams. They invite gift-ed, entrepreneurial professionals from largefirms to join Blackstone in creating affiliatedbusinesses in their areas of expertise. The firmalways put significant amounts of its own moneyinto investments and provides entirely objectiveadvice with no pressure from alternative agen-das. Its success in pursuing its goals and beliefsis reflected today in the firm's outstanding repu-tation and its acknowledged role as a major glob-al player.

British PetroleumBP is one of Britain's largest companies and

one of the world's largest oil and petrochemicalsgroups. It is an international company, withoperations in more than 70 countries. Its rev-enues rose 23 percent to $285.1 billion, and itsprofits soared 50 percent last year. Its keystrengths are in oil and gas exploration and pro-duction; the refining, marketing and supply ofpetroleum products; and the manufacturing andmarketing of chemicals. It supports all its busi-nesses with high quality research and technology.BP runs its business on the principles of strongcorporate governance, a clear system of delegat-ing accountability and a set of values and policiesthat guide our behaviour

Standard Life Investments Standard Life has been looking after its cus-

tomers for over 180 years and currently have aclient base of over seven million people. They arean investment company focused on deliveringconsistently leading investment results by work-ing as an integrated global team using an invest-ment style that focuses on change and processesthat are both robust and repeatable. Its globalinvestment network, enhanced by our presenceon the ground in key markets, gives us a clearunderstanding of worldwide investment issues.They have operations in Edinburgh, London,Montreal, Boston, Hong Kong and Dublin andrepresentative offices in Beijing and Seoul. Grosssales increased from £125m to £463m last year,representing a 270% increase

Allen and Overy Allen and Overy is an international legal prac-

tice, with some 452 partners working in 25 majorcentres worldwide. Its London office was estab-lished in 1930 and has over 2,100 staff. The firmputs clients are at the heart of their vision byfocusing on developing expert knowledge; under-standing the uniqueness of clients; managingrisk and developing opportunity; integratingacross practices; and professionalism

APPENDIX DProfiles of Companies Represented

Global Governance Services Ltd This firm advises governments, non-govern-

mental organizations and business leaders ongovernance development around the world, andwork with global directors to achieve good prac-tice standards and support them to embodyresponsibility, fairness, accountability, and trans-parency.

British Institute of International and ComparativeLaw

The institute was founded in 1895 and contin-ues its mission of advancing the understandingof international and comparative law; promotingthe rule of law in international affairs; and theirapplication through research, publications anddiscussion. As an independent legal researchinstitute, unaffiliated to any university, it is theonly body of its sort in the UK. The Institute cre-ates a diverse community of scholars and practi-tioners and serves as an unrivalled focal point forits substantial membership base.

The European Corporate Governance NetworkThis is an unincorporated, not-for-profit asso-

ciation under the laws of England and Wales. Itprovides an investor-led network for theexchange of views and information about corpo-rate governance issues internationally; examinescorporate governance principles and practices;develops and encourages adherence to corporategovernance standards and guidelines; and gener-ally promotes good corporate governance.

Morgan Stanley Morgan Stanley has combined the comple-

mentary skills and resources of two powerfulorganizations: Morgan Stanley, established inNew York in 1935, and Dean Witter, establishedin 1924 in San Francisco since 1997. Their distin-guished pedigrees encompass a record of historicfirsts: in national and international expansion, inthe use of technology, and in the development ofnew financial tools and techniques that haveredefined the meaning of financial services forindividual, institutional and investment bankingclients.

Reed ElsevierReed Elsevier is a leading provider of global

information driven services and solutions,employing 36,000 people in over 200 locationsworldwide. In February 2006, it reported rev-enues for 2005 of just over £5bn (?7bn).

It serves Customers in the science, medical,legal, educations and business communities. In

2005, it published more than 15,000 differentjournals, books and reference works, as well asmore than 500 online information services andorganised more than 430 trade exhibitions.

British TelecomBT is one of the world's leading providers of

communications solutions serving customers inEurope, the Americas and Asia Pacific. Its princi-pal activities include networked IT services, local,national and international telecommunicationsservices, and higher-value broadband and inter-net products and services.

In the UK, BT serves more than 20 millionbusiness and residential customers with morethan 30 million exchange lines, as well as provid-ing network services to other licensed operators.

Standard & PoorsA division of The McGraw-Hill Companies

(NYSE:MHP), Standard and Poors is the world'sforemost provider of financial market intelli-gence, including independent credit ratings,indices, risk evaluation, investment research anddata. With approximately 7,500 employees,including wholly owned affiliates, located in 21countries, Standard & Poor's is an essential partof the world's financial infrastructure and hasplayed a leading role for more than 140 years inproviding investors with the independent bench-marks they need to feel more confident abouttheir investment and financial decisions.

The McGraw-Hill Corporation McGraw-Hill have more than 290 offices in

38 countries. Sales in 2005 were $6 billion.

Hermes Focus Asset Management and HermesFocus Asset Management Europe

Established in 1983 HFAME take a uniqueapproach to investment management. They Bothinvested in over 250 companies that are funda-mentally sound but whose shares are discountedby the market as a result of strategic, governanceor financial structuring weaknesses and whereshareholder involvement can be the catalyst forchange and result in improved performance.

The approach is based on the fundamentalbelief, shared throughout Hermes, that compa-nies with concerned and involved shareholdersare more likely to achieve superior long-termreturns than those without. The funds managedby HFAM and HFAME are the logical extensionof the corporate governance, voting and share-holder engagement activities of Hermes. It has£62.7bn under management with 311 employees.

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Appendix D

As the pace of European integration acceler-ates, decision-makers, opinion-formers,politicians and citizens in European coun-

tries increasingly need to 'think European', totranscend national perspectives and empathisewith a European mix of national and internation-al cultures.

To meet that challenge, 10 leading Europeanuniversity institutions – Oxford, Leiden,Bologna, Bonn, Paris I, Geneva (GraduateInstitute of International Studies), Prague(Charles), Madrid (Complutense), Helsinki andKrakow (Jagiellonian) – have jointly set up anassociation designed to serve as an 'internationaluniversity without walls', in which future schol-ars and leaders of our new Europe will have anopportunity to share common learning and con-front common concerns together, from a forma-tive age and throughout their active lives.

The Europaeum exists to foster collaborativeresearch and teaching, to provide opportunitiesfor scholars, leaders, academics and graduates, tostage conferences, summer schools and collo-quia, and to enable leading figures from theworlds of business, politics and culture to takepart in transnational and interdisciplinary dia-logue with the world of scholarship.

Recent themed programmes have been on

The Future of the European University; ATransAtlantic Dialogue; Culture, Humanities andNew Technology, and Islam-in-Europe.

The association operates flexibly, responsiblyand simply – with a minimum of bureaucracyand complexity. Small internal grants promotethe mission of the association.

All events aim to include professors fromthree or more partner institutions, while remain-ing open and ready to work alongside any otherbodies or experts. The Europaeum now encom-passes all those in Social Sciences and theHumanities, and more recently, experts inScience History and Science Policy.

Longer-terms aims encompass jointly-offeredteaching programmes, developing capacity forpolicy-related work, an internet-based knowledgecentre promoting international academic collab-oration, as well as new linked scholarship andvisiting professorship schemes.

Above all the Europaeum aims to add to thesum knowledge about – and for – the newEurope, to help prepare the future citizens andleaders of – and for – Europe, ensure that allpartner universities are fully engaged in bothexplaining and making Europe's future, and toleave all those involved in the Europaeum withan enlarged ‘sense of Europe’.

The Europaeum Vision

View further details about the Europaeum online at www.europaeum.org

To receive regular updates on the activities of the Europaeum, please subscribe free to the associa-tion’s monthly e-bulletin, by visiting the website or contacting [email protected]

The Europaeum99 Banbury Road

Oxford OX2 6JX

United Kingdom

Tel: +44 (0) 1865 284482 Fax: +44 (0) 1865 284481

“If we’re not careful, compliancecould be form without substance,and we all need to be alert to therisk of window-dressing and gamingthe system, because any time youestablish rules you are going to findpeople who will try to make it lookgood on the surface when there isrot within. Good corporate gover-nance is not something that can beinstituted simply by regulatory fiat.”– George Dallas, Global PracticeLeader, Corporate Governance,Standard & Poor’s

“Training non-executive directors in order to makethem “fit for the job” seems to be very ill-con-ceived because I cannot actually see a non-execu-tive director of a large company, for instance GECin the old days, mastering the intricacies of everysingle part of the business. Why should heattempt to do something which is patently impos-sible? He should be what the law calls a “reason-able man” and he should have reasonableinstincts, and that is about as far as one could goon the subject of who is and who is not suitablebe a non-executive director”– Sir Ronald Grierson, European Chairman,Blackstone Group, and former Vice President, GEC

“When it comes to it, most people put theirhands up and say: “If the shareholders areagainst this sufficiently, we will go quietlyrather than make a fuss.” Institutionalinvestors can be a catalyst for change and acatalyst for improved performance in com-panies, as the board themselves can be tooblinkered to see that change is necessary.” – Alastair Ross Goobey, Chairman,International Corporate GovernanceNetwork, and Senior Advisor, MorganStanley

“I think there is a resistance toaccountability. This is OK when thecompany is going well, but if thingsdon’t do well, the spotlight will bethat much harsher. Trust has movedaway from companies and I am notsure that companies actually seenow that they have role in gettingthat trust back.”– David Jackson, CompanySecretary, BP

“Corporate governance is more aboutchains, and the chains can be extreme-ly complex – like playing threedimen-sional chess at times. Investors, notcompanies, should control the chains.However, to do that, investors have tobe properly resourced, they have tounderstand what they are doing, andthey have to do it in a way that is consistent with their clients’ interests.”– Guy Jubb, Head of CorporateGovernance, Standard Life

“As we try to put better models in placefor Europe, I think our first priority, andour best goal, would be to eliminatethose differences that create significantbarriers to a European capital marketand discourage investors from one coun-try to invest in another. Having a propermarket the size of this Continent wouldallow us to rely on the market, goingbeyond a simple theoretical model andseeing it actually work in practice.”– Professor Antonio Borges, VicePresident, Goldman Sachs

restructuring corporate governance

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