Corporate governance is advancing around the globe, but countries often are not marching in step.
While U.S. institutional investors long have led efforts to reform practices harmful to shareholders, global investors are just starting to address corporate practices that disenfranchise shareholders and protect management.
The upshot is, what is cutting-edge practice in France or Holland may be viewed as yesterday's news by a U.S. institutional investor.
Still, foreign investment by major institutions - often U.S.-led - is driving changes from the Netherlands to Japan. Dominance of foreign capital is apparent in many markets. For example, in Holland, 41% of shares are owned by foreign investors, while the proportion is about one-third in France.
While cross-border investment flows are becoming more barrier-free, the same is not true for corporate governance practices. Explained Albert Morillo, head of European equities for Scottish Widows Investment Management Ltd., Edinburgh, "Let's get one thing straight: There is no single market in corporate governance."
Still, reforms are advancing around the globe. Among the major developments:
A special corporate governance committee set up by the Amsterdam Stock Exchange has issued a 40-point code of best practice. Similarly, the Confederation of Indian Industry recently issued its own code - a giant step for an emerging market.
Also, the Brussels Stock Exchange has established a commission to draft a code of conduct for listed Belgian companies, following in the footsteps of the London, Amsterdam and Paris stock markets.
An association of Dutch corporate pension funds is planning to set up a research arm to study Dutch companies' ability to provide shareholder value.
Other groups might go beyond purely economic issues: Heerlen-based Stichting Pensioenfonds ABP, the mammoth Dutch civil servants' fund, plans to examine social aspects of corporate policies, including labor and environmental issues (see related story at right).
Germany's two-tiered board structure is under pressure to change, as shareholder groups are advocating legal changes to improve the workings of the supervisory board, the body that oversees the management board.
Among other things, the Deutsche Shutzvereinigung fur Wertpapierbesitz, Dusseldorf, advocates reducing the maximum number of board members; limiting the number of board chairmanships an individual can hold to five; and restricting voting power of German banks where they both own a stock and vote the shares on behalf of clients. It remains to be seen how many proposals are embraced in a draft bill the government might introduce this fall.
Even in Japan, considered one of the most recalcitrant markets, corporate governance reform is taking its first steps. Sony Corp. recently reduced the number of board members from 38 insiders to 10 members, including three outside members.
In the United Kingdom, however, some observers are worried that a draft report by the Hampel Committee on corporate governance signals backtracking on certain issues.
In particular, observers are wary of the report's recommendations that separation of the chairman and chief executive's jobs is preferred but not required - an easing from earlier guidelines - and lack of a clear definition of who qualifies as an independent non-executive director. Both issues have been hotly debated by U.S. investors.
While the report strongly maintains disclosure requirements laid out by the predecessor Cadbury and Greenbury committees, some experts worry the latest effort overly relies on development of broad principles at the expense of clear and understandable guidelines.
Sarah Wilson, joint managing director at Manifest Voting Agency Inc., Witham, England, said some institutional investors already are being pressed by companies to change their stances. The Hampel Committee report "could make it easier to apply pressure," she said. At this time, "fund managers could need more support" in the form of tougher guidelines, Ms. Wilson added.
U.S. influence cited
To a significant extent, this growing awareness of enhancing shareholder value stems from the influence of U.S. pension funds, which are required by law to vote their shares, at home and abroad.
In contrast, even European institutional shareholders who vote all of their domestic holdings rarely cast ballots for their international shares, according to a recent study by Stephen Davis, president of Davis Global Advisors Inc., Boston, and Karel Lannoo, a senior fellow at the Centre for European Policy Studies, Brussels.
Of 16 European institutions with $102 billion in equity holdings, none voted more than 10% of their overseas shares, their study found. In contrast, a recent survey by U.S. data processing firm Automatic Data Processing Inc. in
Roseland, N.J., found U.S. institutional investors voted more than half of all proxies they received from 36 major markets in the first quarter of 1997.
"With ADP and custodian banks competing to supply U.S. institutions with global proxy voting services, it is now usually easier and cheaper for U.S. shareholders to vote in Europe, Latin American, Asia and Africa than it is for investors based in those regions to do so," Mr. Davis recently told the annual meeting of the International Corporate Governance Network, a loosely knit forum for institutional investors and investor organizations.
European investors might start catching up soon. Recent French pension legislation would require pension funds there to vote their stock, Mr. Lannoo noted.
Dutch guidelines released
Voluntary codes of best practice offer some of the most tangible evidence of corporate governance's progress.
The Netherlands' corporate governance commission, chaired by Jaap Peters, a former chairman of AEGON N.V., recently made 40 recommendations dealing with conflicts of interests on the supervisory board to recommending creation of nomination, audit and compensation committees.
The report also called for: permitting only one former executive to serve on a company's supervisory board; no automatic re-election of directors; publication of executive shareholdings and option schemes; allowing shareholders to help set the annual meeting agenda; and proxy voting reform.
The report also recommended companies survey the influence of investors, and whether and how this should be increased.
Still, observers believe the report was flawed. Peter Paul de Vries, chairman of the stockholders association Vereniging van Effectenbezitters, 's-Gravenhage, said legislation might be necessary if voluntary compliance is not provided.
"In the last few years, we've seen directors staying on when they no longer had the trust and confidence of the shareholders. And companies with certificated shares (non-voting shares used as anti-takeover protections) sometimes do what the shareholders are opposed to," he said.
Codes not all equal
What's more, some codes of best practice are tougher than others. The U.K.'s Cadbury Committee, the Dutch Peters Committee and the French Vienot committees all addressed issues concerning board structure, the need for qualified independent directors, reporting and controls, and implementation issues, Mr. Lannoo wrote in a paper.
But the Dutch and French committees had major omissions: "The discussion of the role of shareholders and the annual general meeting was rather disappointing," he added.
What's more, "both countries employ a system of multiple, respectively capped voting rights which was not questioned."
In fact, the touchstone democratic issue of "one-share, one-vote" is not viewed as nearly as important as it is by U.S. and U.K. shareholders. Mr. Peters told the International Corporate Governance Network there is a "worldwide demand for transparency and accountability" which is "more important than the push for one-share, one-vote."
And all Dutch protectionist anti-takeover measures are not being swept away. Shareholder proposals to abolish non-voting stock certificates and blank check preferred stock failed to persuade the Peters Committee.
As a result of these varying codes, ICGN attendees agreed to develop minimal global corporate governance standards and find ways to remove barriers to cross-border voting by the group's meeting next year.
Overzealous tactics criticized
While corporate governance activists push for further reforms, corporate concerns about overzealous tactics are being voiced.
David Wilson, group company secretary for B.A.T. Industries PLC, in prepared remarks for the corporate governance conference, warned: "The Cadbury and Greenbury initiatives have spawned an industry of corporate governance gurus," each of whom produces a separate set of corporate governance guidelines to which U.K. companies are pressured to comply.
Richard Regan, co-chair of the ICGN and head of investment affairs at the Association of British Insurers, London, echoed this remark: "This is a danger .*.*. that corporate governance could generate a whole new industry monitoring the compliance by companies and boards of directors with codes of practice and guidelines."
In addition, Mr. Wilson bemoaned a "box-ticking" mentality being applied to corporate governance. "Any company found wanting in any particular regard is being sacrificed on the altar of negative media publicity without proper regard - or indeed any regard - being paid to the explanations and justifications preferred by its board of directors."
Latest U.K. recommendations
Both of these issues were reflected in the Hampel Committee's report calling for greater reliance on broad principles and flexible interpretations of guidelines.
Sir Ronald Hampel, who chairs the committee and is chairman of Imperial Chemicals Industries, said "there is no single formula for success" in creating board structures.
In an Aug. 5 draft report that might lead to consolidation of the earlier Cadbury and Greenbury guidelines, the committee said:
Separation of the chairman and CEO's jobs is preferred but not mandatory.
A lead independent board director should be named to whom shareholders could express their views.
The board's responsibility is to shareholders; making them accountable to stakeholders would make the board less effective.
Voting by shareholders should be encouraged but not required.
Small companies should not be exempt from the guidelines but flexibility should be used so they are not overburdened by costly requirements.
The draft document is open to comment. A final report should be issued by year-end.