‘If you build it, they will come’ should be the mantra for companies weighing the pros and cons of governance changes and their impact on shareholder interest. Even if management and IR are rarely asked about governance in meetings with investors, it is an increasingly important part of the decision-making process for fund managers and analysts. And with institutions under more pressure to uphold their fiduciary duty by voting and/or disclosing their proxy votes, it’s important for IR to be aware of shareholder sentiment on governance issues.
Majority voting made the most news in 2005, with several US companies voluntarily adopting it for director elections and others facing shareholder proposals on the issue. Increasing activism by hedge funds also topped the global governance agenda in 2005. Looking ahead, experts expect continuing interest from investors on issues such as executive pay, majority voting and minority shareholder rights, particularly among UK and US funds.
Vote with your hands
In Asia, with more institutions taking an active interest in voting, companies will start coming under more pressure to provide AGM information in a timely and clear manner. ‘Some fund managers are putting pressure on companies to deliver shareholder meeting notices earlier and give more detail,’ notes Jamie Allen, secretary general of the Hong Kong-based Asian Corporate Governance Association (Acga). He says investors want AGM notices and information circulars 28 days before a meeting. ‘Some companies in Hong Kong are doing this but the rules are weak in many markets,’ he adds.
As the AGM is fairly generic and routine for many issuers, a longer notification period shouldn’t prove a challenge, but it involves shaking up management’s current mindset, notes Allen.
The other issue attached to AGM notification is voting by poll as opposed to a show of hands. ‘It’s 19th century company law,’ Allen observes. ‘It’s so patently unfair to the bigger shareholders because it allows companies to stack the meeting with employee shareholders. Some companies in Korea vote by hand clap – the chairman says, If you agree, clap your hands.’
In the wake of changes in the UK and the US, there is pressure from Asian regulators for institutional proxy voting transparency. Voting is gradually increasing at Asian AGMs and investors are pouring more money into corporate governance research. In Thailand and Korea, asset managers now have to disclose their voting policy so it’s likely other market regulators will develop similar requirements.
On the warpath
The tide is turning for corporate governance in Europe. ‘Investors are moving away from a box-ticking approach to governance and using activism as a tool to force companies to change,’ explains Erik Bomans, managing partner at Brussels-based governance consulting firm Deminor.
One reason UK institutions in particular are more interested in governance is that they’re under pressure to disclose how they vote their proxies. In April Cadbury Schweppes chairman John Sunderland rallied the UK financial community toward greater institutional transparency on shareholdings and voting decisions at the annual Investor Relations Society (IRS) conference. Seven months later the UK’s Department of Trade and Industry (DTI) proposed new legislation requiring funds to disclose their votes.
Among other EU states, the focus is still on encouraging institutions to actually vote their proxies. ‘In Italy, Spain and other EU countries, voting by institutions remains the exception, but countries are trying to solve this problem,’ notes Bomans.
For now, most activist campaigns targeting European companies are being led by UK and US-based investors, particularly hedge funds, which stepped up engagement in 2005.
In March UK hedge fund TCI and Atticus Capital, a fund with operations in both the US and the UK, along with several other investors managed to block a proposal by Deutsche Börse to acquire the London Stock Exchange (LSE). They also succeeded in unseating the exchange’s CEO, Werner Seifert. In mid-August a group of US-based hedge funds orchestrated the takeover of Medidep, a French operator of retirement homes. The group found a buyer for the firm after unseating a board member at the annual meeting.
Sometimes hedge funds are simply the public face for an agenda shared by a larger group of mainstream institutions trying to instigate change. This is one reason why companies need to take their messages seriously. ‘I hope management will listen to their arguments,’ comments Bomans.
Another hot-button governance issue for companies across the EU is minority shareholder rights. In mid-October EU internal market commissioner Charlie McCreevy pushed for one share, one vote across all EU countries in an interview with the Financial Times. ‘There is a lot of work to be done on this and minority shareholders will become more active where companies are trying to protect themselves,’ says Bomans.
Currently only 65 percent of companies in the FTSE Eurofirst 300 comply with this standard, according to a study by the Association of British Insurers (ABI). Among the big names not abiding by the standard are British Airways, Carrefour and Volkswagen.
‘Investors need to be able to rely on one set of rules and exercise their rights [globally],’ notes Charles Demoulin, senior manager at Deminor. ‘But you are also facing a new form of protectionism by governments in France, Italy and Germany.’ In Germany, for instance, support is building to reward investors who vote their proxies with higher dividends.
As investors continue on the governance warpath, IR needs to be aware that limiting access to management is the worst possible tactic when dealing with activists. ‘All companies should make it a lot easier for investors to be better informed, attend the AGM and file a proposal,’ concludes Demoulin.
A tree grows in America
The two biggest governance headlines in the US for 2005 were majority voting and hedge fund activism. Nell Minow, editor of the Corporate Library and prominent governance pundit, is confident majority voting is here to stay. ‘I’d never seen a shareholder initiative gain such widespread support in such a short time – and it will continue to escalate,’ she predicts.
Majority voting, under which a director nominee needs a majority of votes cast to be elected or reappointed, is standard practice in many European countries, including France and the UK. Minow sees it as an extraordinary achievement that a number of top companies have adopted majority voting since the notion was mooted in the US: Best Buy and US Bancorp are already using it, while others including ChevronTexaco, Intel, JPMorgan Chase and Time Warner have been testing the system in a majority voting work group.
The rule is supported by Calpers, the International Corporate Governance Network (ICGN), Institutional Shareholder Services (ISS), the Council of Institutional Investors (CII), and the United Brotherhood of Carpenters and Joiners of America.
Hedge fund activism was on the rise in the US in 2005, though big changes are likely in the coming year. Minow foresees more regulation: ‘A lot of people have taken advantage of the [hedge fund] loophole a lot more than was originally intended and there is so much money at risk there. There is no reason why they should be exempt from the rules that apply to other people.’
In 2006, says Minow, North American governance will ‘continue to be all about the board. The corporate governance effectiveness of a company is as important an aspect of investment risk assessment as the bond rating or earnings per share.’
No muss, no fuss
Latin America is taking a more sanguine approach to governance. With little fuss, ADR issuers have risen to the challenge of Sarbanes-Oxley and other new US rules, not to mention strict Sox-like rules in their domestic markets.
‘Latin American companies are following the same kind of obligatory system as the US and continental Europe,’ says Jaime de Piniés, senior managing director and chief economist at the Global Consulting Group (GCG). He lists eight companies paving the way in governance in Latin America: Banco Santander-Chile, Buenaventura Corporación Geo, CTC, Petrobras, Telemig Celular, Votorantim and Walmart de Mexico.
A significant development in 2005 was the May launch of the Latin American Corporate Governance Roundtable’s Companies Circle, organized by the OECD and the International Finance Corporation (IFC). It consists of seven companies that have pledged to set an example with rigorous corporate governance standards.
In 2006 watch out for Latin America tightening the time frame for quarterly reporting, bringing it more in line with US standards. ‘As you raise the standards of corporate governance around the world, you establish higher goalposts everywhere,’ says de Piniés. ‘And it’s not just the regulatory environment. Companies are watching what their competitors are doing.’
In de Piniés’ eyes, the premium paid for companies with good governance will be an incentive for others to follow best practice. To date, Latin America has made progress in transparency in accounting. Where it has lagged is on complex corporate governance issues.
