The International Corporate Governance Network’s eighth annual conference, held in July in Milan, underlined the high profile of governance around the world in light of recent corporate scandals. Speakers came from markets as diverse as the US, Brazil, Japan, Australia, the Netherlands, the UK, Italy and Russia, including Calpers president William Crist, Italian exchange chairman Angelo Tantazzi and Gucci CEO Domenico De Sole.
The issues of most interest to the fund managers and shareholder rights advocates present were board independence, a more appropriate alignment between shareholders and management, a high level of disclosure, fair treatment for all shareholders and good corporate citizenship. Also high on the agenda were the conflict of interest in the auditing/consulting equation with many suggesting auditor rotation.
Much criticism was aimed at lax auditing standards verging on auditor complicity in misleading shareholders, particularly at Enron and WorldCom. John Biggs, CEO of TIAA-Cref, pointed to ’embedded auditor relationships’, concluding that ‘perhaps we should consider auditor rotation.’ But he stopped short of blaming auditors for all the recent scandals, explaining that ‘most of the time they were innocent; the CEO or CFO had just lied to them.’ Other speakers complained of the inadequacy of the law which does not apply suitable sanctions for corporate insiders who mislead shareholders. ‘When the incentives to misbehave outweigh the consequences, then people will misbehave,’ said Richard Koppes, partner at Jones Day Reavis & Pogue.
Guido Ferrarini, a professor at Genoa University, pointed out that non-voting shares let a controlling minority ride roughshod over other shareholders. A Brazilian delegate noted that this problem is particularly acute in some Latin American countries, where two thirds of a company’s free float may be non-voting shares, allowing a 17 percent shareholder to control the company.
Several complaints from the floor concerned the difficulty of exercising voting rights, especially across borders. One Dutch fund manager spoke of the frustration of trying to register his vote at Gucci. Gucci’s de Sole promised to look into the matter, adding tongue-in-cheek, ‘Of course we want all our Dutch shareholders to vote. Personally, I didn’t want our French shareholders to vote, but they always showed up and they always voted.’
Another popular issue was when and how shareholders should take action against poor or dishonest management, with delegates generally in favor of class actions against fraudulent company management. In the US such lawsuits are increasingly being mooted by disgruntled institutions. But in many other countries they are not an option – in Italy, for example, contingency fees for lawyers are prohibited, and there is thus no incentive to counterbalance the risk of losing the case.
The conference was not without its controversial moments. Governance expert Holly Gregory of Weil Gotshal & Manges took Calpers to task for opposing options expense accounting. No-one from Calpers took up her invitation to explain the pension fund’s stance.
Commenting on the news that the S&P 500 will drop Canadian and Dutch stocks, Sylvia van Waveren, corporate governance manager at Dutch pension fund PGGM, suggested that ‘perhaps it would have been better to eliminate companies with a record of poor transparency,’ an observation that earned the approval of the floor.
Concludes Alvise Recchi of GSC Proxitalia, Georgeson’s Italian arm, ‘Although we have not had an Enron or a WorldCom in Italy, the authorities have recognized that there is nonetheless a problem and are currently discussing how to regulate or amend the current law provisions and the corporate governance code. The ICGN conference was a huge success this year, particularly in terms of attendance by international authorities, asset management bodies and some of the most important listed companies and funds in the world.’
Leftovers worth saving
‘You [once] said that as long as the CEOs kept the profits coming in, their salary wasn’t an issue. Do you stand by that?’ – Taiji Okusu, UBS Warburg (Japan) to TIAA-Cref’s Biggs
‘We also need board members who are better trained and prepared to do their job. I mean, at some meetings they seem to think the most important question is what’s for lunch.’ – William Crist, Calpers
‘Ken Lay, Skilling, Fastow, Ebbers, Sullivan, the Rigas family – they ought to be punished… tortured!’ – Rich Koppes, Jones Day Reavis & Pogue
‘Eight months before its demise WorldCom sold $11.8 bn of investment grade bonds to pension funds. The five banks involved received $90 mn in underwriting fees… The prospectus was a work of fiction.’ – Koppes
