NEWTON, Mass. -- The fight to attract global capital -- and please international investors -- has led to a sea change in corporate governance over the past year, says the author of a recent report on trends in global corporate governance.
"This has been a tidal wave year for corporate governance around the world," said Stephen Davis, author of the report and president of Davis Global Advisors.
The wave "culminated a couple of weeks ago with the G7 saying there need to be international standards of corporate governance," he said in an interview. He added corporate governance is now considered "a pillar of global economic recovery." The report, titled "Corporate Governance 1998: An International Comparison" ranks -- from best to worst -- the United Kingdom, the United States, France, Germany and Japan based on "leading corporate governance indicators." The indicators include such issues as nonexecutive directors, splitting the chairman and chief executive officer, and executive pay disclosure.
"The report is hard to do because governance is different in each country," Mr. Davis conceded. "But we're looking for common measurements and as objective a criteria as possible. We're looking to compare apples to apples."
The report ranks and critiques the world's leading economies based on events from the last quarter of 1997 through the first half of 1998.
Germany has been a long-time "laggard" in corporate governance, Mr. Davis said. But it created last spring landmark legislation to authorize share option schemes and buybacks, curbed voting rights and restrictions and takeover defenses, and allowed companies to embrace non-German accounting standards, according to the report.
In France, the government endorsed share buyback legislation and promised wide-ranging company law reform.
The U.S. Council of Institutional Investors adopted in April a code of best practice, representing the first time U.S. shareholders have reached consensus on wide-ranging corporate governance standards for the country.
Also in 1998, the United Kingdom went through a process of updating its corporate principles, forming the Combined Code in the process, he said. And the code is linked to London Stock Exchange listing rules, he said.
"Companies have to disclose whether they're complying with it or not."
Japan got its first code of best practice during the year, according to the report. But Mr. Davis added a push for corporate governance in Japan is practically "dead in the water."
And it's not just members of Mr. Davis' "Big 5" that are changing corporate governance rules. "Dutch pension funds have begun voting their shares. The Australians have new rules about executive pay. The Irish are talking more about pay disclosure. There's been a huge acceleration in corporate governance and making companies accountable to owners."
And global financial institutions are part of the push. The World Bank and International Monetary Fund have made corporate governance a "critical factor in the global economy," he said. Also on the "macro level," the Organization for Economic Cooperation and Development is preparing global standards of corporate governance.
Others agreed with Mr. Davis' findings. "I think there's a lot of exciting things going on in corporate governance" in Europe, said Richard Koppes, a Sacramento, Calif.-based consultant for the law firm Jones Day Reavis & Pogue.
Mr. Koppes said he saw a change in Europe in 1997 when he was making a speech to a group of leading French politicians and executives. Executives at major companies such as Alcatel Alsthom understand the importance of corporate governance, he said.
And the changes, in large part, come from investors' demands for greater transparency, Mr. Davis said.
Although the speed varies from country to country, he said, recent events and research that covered the final quarter of 1997 and the first half of this year show "there is clear momentum on the part of European companies to become more shareholder friendly. There's pressure from foreign investors and, on the eve of the European Monetary Union, they need capital to grow and compete.
"They have to play by the rules of the capital markets, and the rule is accountability and transparency."
Recent deals such as the merger of Germany's Daimler-Benz AG and Detroit's Chrysler Corp. have forced changes in corporate governance, he said.
"As German companies show increasing demand for equity capital, they're going to have to speed up corporate reform. The thin edge of the wedge on this is the DaimlerChrysler merger," he said.
"Under German law, large companies have supervisory boards, with half of the members elected by shareholders and the other half elected by employees. It's worked all right when it's an insular, parochial economy, and only German employees get to make appointments."
Merging with a company outside of Germany has forced a change -- albeit a slight one -- to the new DaimlerChrysler's supervisory board. He estimated thirty to forty percent of the company is Chrysler, but "those employees have no say."
So German workers have given one of their 10 seats to a representative of the United Auto Workers. It's a change, but it still does not adequately represent the U.S. shareholders' point of view, he said.
Also, it is "not required for German companies to disclose executive pay details," he said, adding companies report an aggregate pay of board members. That kind of position might be unsustainable because shareholders put a premium on disclosure.
Recent proposed legislation in France has pushed its stalled efforts at overhauling corporate governance, he said.
The French government has proposed "splitting the chairman and the CEO. This is a real radical departure from the tradition of the imperial CEO," he said, adding this person is usually very powerful because the rest of the board is customarily not active. Splitting the post will lead to a greater balance of power on boards.
Expected French legislation could lead to revealing amounts of the top two best paid executives in a company, he said.
