The US has proven itself an outstanding exporter. Cars and TVs were popular for a time, until overseas companies followed with similar, and often better, products. Today – though it’s hard to quantify – a major US export is undoubtedly its proxy voting power. Moreover, the techniques and mind set of Anglo-Saxon corporate activism are catching on worldwide.
‘Money has become a conveyor belt carrying activism and governance principles across frontiers,’ proclaims Stephen Davis, a Newton, Massachusetts-based global corporate governance consultant. ‘The consequences for corporations, in terms of communications among shareholders, managers and the board, are enormous.’
Indeed, the globalization of portfolios is gathering brisk momentum. The worldwide trend is reflected in overseas investment by US pension funds, expected to jump from $117 bn in 1992 to $700 bn by 1999. Institutional investors believe activism pays and exported proxy power is on the rise. In 1991, US pension funds voted less than 25 percent of foreign holdings. Last year, they voted nearly 75 percent. ‘In some markets, US investors, who may own a small percentage of stock, actually outvote local investors,’ comments Davis.
Still, while international investors thirst for accountability and credibility, overseas company management shouldn’t brace for a deluge of ‘cowboy’ activists. ‘For now, caution is the word,’ notes Davis. ‘Few institutions foment rebellion outside their home market.’ For example, Davis reckons that California Public Employees Retirement System (Calpers) backs management 90 percent of the time outside the US, but only 75 percent of the time at home. Still, institutions are on a learning curve.
Catalytic Converters
Regulators in the US and abroad have been among the major catalysts for change. Department of Labor guidelines require many US pension funds to carefully vote their international proxies. Though flexible, the guidelines have sparked corporate governance scrutiny of overseas holdings. At the same time, while companies with ADRs listed in the US face accounting requirements, US investors complain that voting rights aren’t addressed. The SEC is slated to release guidelines in September on voting procedures for companies with ADRs.
‘If people actually go to the SEC and complain about voting problems, they obviously take the matter seriously,’ says Stanley Dubeil, director of global research at Bethesda, Maryland-based Institutional Shareholder Services (ISS). Governance firms, such as ISS and the Investor Responsibility Research Center (IRRC) in Washington, have helped grease the skids of US proxy power abroad. ISS has opened its first overseas office, in London, to stay in closer touch with European developments.
Dubeil wryly recounts his experience with Sweden as recently as two years ago. ‘It was by far the worst corporate governance market,’ he declares. ‘Companies would send notification of a meeting and that was pretty well it. So I would call them up asking for a numbered agenda.’ According to Dubeil, faxing the material was out of the question but a company might be coaxed to mail it. ‘If I suggested mailing might take too long, they would invite me to see the document on display at the company.’
Dubeil, along with local shareholder groups, pressed for reform and last season Swedish companies published numbered agendas. ‘US institutions played a large role in the change,’ he remarks.
Amidst this globalization of proxy power, IROs have been in the trenches, laying the foundation for change. ‘The spread of IR professionals has helped make the proxy process in other parts of the world similar to our own,’ says John Wilcox, chairman of New York proxy and IR firm Georgeson & Co. Wilcox also notes another powerful – though often underestimated – catalyst of US-style activism: publicity. ‘Overseas shareholder advocates read about the success of US activism and use those techniques in their own markets,’ comments Wilcox.
Rules of the Game
As investors look to maximize value in the corporate governance arena, companies are trying to figure out which rules to follow to best compete for international capital.
Chalking out the playing field and establishing those rules are Anglo/US investors. While companies everywhere are beginning to respond, the French are among the most compliant. A Davis Global Advisors survey of corporate governance practices in major markets shows France, where foreigners own some 40 percent of stock, with the best improvement, reflecting the impact of the Vienot committee.
As local governance standards converge into a rough resemblance of the Anglo/US model, companies everywhere can expect shareholders to be following more sophisticated guidelines. With some $20 bn invested in overseas equities, Calpers has led the US activism charge abroad, first entering international markets in 1988. Two years later, it began exercising its voting rights.
Calpers president William Crist says globalization is coming to every country; it just came to the US first. ‘We have sometimes been misinterpreted as trying to export culture or cause corporate cultural change,’ he says. ‘That’s inaccurate. As business becomes more global, there are common understandings – standards – beneficial to all.’ There’s nothing sacred about the US or the SEC, ‘But the practices we are accustomed to lend themselves to a large global system.’
With its international portfolio largely indexed, Calpers cannot readily trade its holdings but corporate governance does offer a way to boost performance. Building on what it calls ‘fundamental’ fair market concepts, the $110 bn fund is pushing global principles aimed at enhancing long-term share value. These include board accountability, transparent markets, equitable treatment for shareholders, local codes of best practices, and efficient voting methods.
But different governance structures are appropriate for different markets and earlier this year Calpers introduced country-specific governance principles for the UK and France. A vanguard of things to come, it marks the first time an institutional investor has set out a corporate governance vision beyond its home market. In both countries, where Calpers invests a total of almost $6 bn, the fund wants no retreat from current governance standards.
In the UK, Calpers is urging shareholders to exercise their voting rights. In France, the fund wants an end to cross shareholding and a ‘one-share-one-vote’ capital structure. Calpers will also instruct its voting agents to routinely ask for formal proxy vote counts at meetings.
Local governance principles are also in the pipeline for Germany and Japan by year-end. ‘Our communication with Japan has increased considerably,’ notes Crist. ‘France has made tremendous strides. Germany too will move toward the center. Globalization is inexorable. No-one could stop it even if they wanted to.’
Global Code
As an advocate of US corporate governance traditions, Calpers may take the highest profile, but it is far from alone. A new pole of power is quickly developing global ambitions. Representing some $1 trillion in global fund investment, the nascent International Corporate Governance Network (ICGN) agreed in July to actively advocate good corporate governance guidelines worldwide. Next summer the ICGN, whose members include stock exchanges and industry associations, plans to unveil a prescription for best practices in international corporate governance and a list of ways to ease cross-border share voting.
The principles or voting reforms the ICGN will ultimately come up with remain uncertain, but for the first time ever, a multinational investor group has agreed to advocate global standards. ‘We are trying to encourage change in areas of the world with less than ideal levels of corporate governance,’ says Keith Douglas, ICGN co-chairman. ‘Some standardization is necessary so everybody understands the rules and investors can invest with confidence.’
Institutional investors such as Calpers act like owners, trying to add value from the bottom up. For its part, the ICGN plans to target financial regulators and other authorities but it is not looking to see companies forced into submission. Rather, it may export another western ‘tradition’: regulation based on disclosure.
‘Pressure should be placed on corporations by encouraging them to disclose corporate governance practices,’ says Douglas. A similar tactic was successfully used by the Toronto Stock Exchange in its governance guidelines. Other countries such as South Africa are looking at similar strategies.
Local Uprisings
Corporate governance is a global phenomenon with localized debates raging over appropriate solutions. Typically, market scandals have led to public pressure, and a rash of national corporate governance committees has sprung up worldwide.
‘There are different ways to deal with the issue of corporate governance and rules must be adapted to particular circumstances,’ cautions Peter Grant, deputy chairman of London Merchant Securities and keynote speaker at a recent conference looking at best governance practices for the next century. ‘Governance is a word that is easy to run away with you.’
Local traditions are, however, under siege. With some $60 bn in pension assets, the Teamsters union, which has successfully used the proxy process at home in the US, sponsored its first overseas resolutions last spring. It chose supermarket heavyweight Ahold, one of the few Netherlands companies with bylaws allowing shareholder resolutions. If Ahold management allowed the proposals, it would mark the first time an investor-sponsored voting resolution actually made it to a Dutch ballot.
The Teamsters worked with local shareholder groups to call for an end to the Dutch custom of giving supervisory boards the power to reappoint themselves without periodic shareholder votes. Having launched a successful PR campaign, and with some 40 percent of Ahold shares held outside the Netherlands, the dissidents were counting on firm shareholder support.
In the end however, Ahold management kept its finger in the dike, blocking the dissidents’ resolutions from the voting agenda. A senior Ahold spokesman, quoted in Global Proxy Watch, dismissed the board accountability resolution as not ‘something shareholders want to vote on.’
For their part, UK fund managers haven’t been timid at taking their concerns abroad. Mercury Asset Management (MAM) has been demanding that South African gold miners provide more transparency in the valuation process of mergers. Closer to home, Hermes, the large institution responsible for managing the Royal Mail and British Telecom pension funds, is espousing the US practice of paying directors with shares. In Britain, non-executive directors are usually paid in cash.
In many respects, the UK and US systems are similar, however; whereas the German and Japanese approaches differ markedly from the Anglo-Saxon model. With cross-shareholdings clouding the picture, and boards resembling managers more than owner representatives, neither country can truly claim an equity market based solely on investment logic. Yet, as closed systems relying on internal capital, Germany and Japan both successfully competed on the global stage. But when the Japanese stock market bubble burst and West Germany merged with its eastern neighbor, each country had to search farther afield for capital.
Steel Bid
In Germany’s insular financial system, banks play a key corporate governance role, serving as both owners and suppliers of capital. Meanwhile, employee representatives – by law – make up half a German company’s supervisory board, limiting the power of shareholders. What influence fund managers have is displayed behind closed doors. Minority shareholders are expected to stay outside the door as the big players hash things out.
But this March, unions and shareholders teamed up against the banks to thwart an unprecedented hostile takeover bid. Having rallied major domestic banks, German steelmaker Krupp made a hostile $8 bn bid for rival Thyssen – a move almost unheard of in Germany. Krupp’s cash bid was some 25 percent over market value and Thyssen argued Krupp would be leveraged up to its I-beams, putting Thyssen shareholder interests at risk. Thyssen swiftly organized a group of minority shareholders who together own 25 percent of Thyssen’s stock, while public and union concern about job losses and the resistance of minority shareholders quickly scuttled the bid.
The Krupp-Thyssen tussle highlights the encroachment of western-style tactics on the continent, with many Germans decrying the role played by US investment bank Goldman Sachs in plotting the Krupp plan. Similarly, when Credit Suisse Group’s $9.5 bn acquisition of Winterthur Insurance was announced in August, it was hailed as a triumph of US-style shareholder activism as wielded by Martin Ebner. It was also viewed as a sign of things to come as Europeans increasingly turn their orientation towards equities and investors use their clout to enhance returns.
Meanwhile, in Japan, US-style governance standards are filtering through. Most large Japanese companies have up to 40 board members. Recently, Sony promised to cut 28 members from its board while opening the door to more outside directors, including foreigners.
Of course, Japan’s most notorious proxy practice is holding almost all annual meetings the same day in June with hardly a blink between the release of proxy statements and the vote. That helps keep the colorful local racketeers known as sokaiya at bay, but the pace makes voting decisions notoriously tough for overseas investors.
It is perhaps ironic that making those decisions just got a little tougher. Long a western practice, executive stock options have made their appearance in Japan with Toyota Motor leading the way. Many US investors backed the move, arguing it focuses directors on the bottom line. Other observers say it will only motivate short-term strategic thinking. In any event, it certainly adds another unwelcome wrinkle to the hectic proxy process.
There’s no doubt a certain cross-pollination of corporate governance ideas takes place. For example, separating the roles of chairman and CEO was never an issue in the US until the UK’s Cadbury report came along. Indeed, as institutions grow more powerful, the secretive ‘old-boy’ style is not uncommon. ‘Large institutional investors frequently hold private discussions with corporate managers and directors,’ concludes Georgeson’s Wilcox. ‘Often, these discussions are accompanied by the threat of a shareholder proposal. But such threats only open the door to more discussions. It is all done outside the proxy process and not viewed as traditional activism.’
