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Corporate Governance Trends in OECD Countries

Corporate Governance Trends in OECD Countries

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Corporate Governance Trends in OECD Countries

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

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

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

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

  5. Key Trends in OECD Corporate Governance • Benchmarks • Convergence • Disclosure • Shareowner Intervention • Fund Governance

  6. Benchmarks: International • G7—Richest nations name corporate governance newest pillar of global economic architecture • OECD developed first global standards, but non-compliance by members is found common • World Bank/IMF/Financial Stability Forum—Good corporate governance part of emerging market recovery • Asia-Pacific Economic Cooperation Forum,PECC, Asian Corporate Governance Assoc.

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

  8. Benchmarks: National

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

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

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

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

  13. Trends in Activism • Focus Funds: Target under-performing, under-governed companies or tilt toward well-governed (AV, Hermes Lens, Relational Investors, ABF Euro VA, Russia fund) • Routine Voting: More monitoring, less expense • Benchmarks: Pressure on indexers and analysts • International Alliances—CalPERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce, ACGA • Cross-Pollination of Tactics, Ideas—Web • Stakeholder Issues, Unions—ICFTU, Rio Tinto

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

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

  16. What Shareowners Expect of Public Policy • Local benchmarks reflecting global standards • Disclosure rules to allow application of benchmarks and promote integrity • Law & regulation empowering shareowners—easier voting and communication, protection of minorities • Tax and statutes to spur shareowner value—share options, end to cross-holdings, fair takeover rules

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

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

  19. Davis Global Advisors, Inc. 57 Hancock Street Newton MA 02466-2308 USA T+1 617 630 8792F +1 617 630 0398E