Corporate Governance Trends

in OECD Countries

OECD/World Bank Asian Roundtable on

Corporate Governance
Hong Kong, China 31 May-2 June 2000

Stephen Davis

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Context of Change
 Epic transition in OECD area as the state
withdraws from economies

 Who replaces the state? To whom are corporations

or funds accountable? How can companies be best
shaped to succeed?

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Catalysts
 Foreign Money: Transmission belt sending
corporate governance values across borders

 Failures & Scandals: Corporate collapses and

misdeeds expose need for owner oversight

 Stagnation: Unemployment, crony capitalism,

under-performance turn focus to shareholder value

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 Lowered Trade Barriers: To survive, firms need
low-cost capital, forcing appeal to investors

 Privatization: Sales of state-owned enterprises

have handed institutional investors new powers

 Pension Bomb: Demographic pressure on equity-

driven pension funds to boost returns

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Key Trends in OECD
Corporate Governance

 Benchmarks
 Convergence
 Disclosure
 Shareowner Intervention
 Fund Governance

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Benchmarks: International
 G7—Richest nations name corporate governance
newest pillar of global economic architecture
 OECD developed first global standards, but non-
compliance by members is found common
 World Bank/IMF/Financial Stability Forum—
Good corporate governance part of emerging
market recovery
 Asia-Pacific Economic Cooperation Forum,
PECC, Asian Corporate Governance Assoc.

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 IOSCO
 IFAC
 International Corporate Governance Network
 Commonwealth Assoc for Corporate Gov.
 EBRD
 EASD
 Euroshareholders Guidelines
 Private sector: S&P, Déminor, ISS Australia,
GovernanceMetrics, State Street

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Benchmarks: National
Australia IFSA Blue Book Canada PIAC
Bosch TSE (Dey)

Belgium Cardon, CBF Finland Confed of Finnish

VBO-FEB Industry

Botswana IoD France Vienot, Levy-

Lang, Esambert,
Marini, AFG
Brazil Inst. of CG Germany DSW, Strenger

Bulgaria CG Initiative Ghana IoD

Recs.

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Greece Capital Markets Italy Preda
Commission

Hong Kong HKSA, HKSE Japan CGFJ, Kosei

Nenkin Rengokai

India CII, SEBI/Birla, Kenya Private Sector CG

IIM Trust

Indonesia Jakarta Initiative Korea CG Reform Com

Ireland IAIM Kyrgyz Civil Code

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Malaysia Finance Russia Shareholder Rights
Committee Code Decree

Mexico Banking & Sec. Singapore Stock Exchange

Com Code

Netherlands Peters, VEB South King Committee

Africa
New IoD Spain CNMV
Zealand
Portugal CMVM Code Sweden Academy of
Directors

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Thailand Stock Exchange

U.K. Combined Code,

Turnbull

U.S. CII, NACD,

NYSE/NASD,
Business
Roundtable, GM

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Convergence:
Shareowners & Stakeholders
 OECD found common ground
 UK: DTI rule forces funds to address social
investing; Turnbull forces firms to weigh and
disclose social risks; law reform will re-write
directors’ duties
 Germany, Japan, Korea: recognition of
shareowner value
 Future Solution: Accounting will measure
human capital for better valuation of firms

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Disclosure
Race to overhaul company law, listing rules

 Accounting Standards (Germany, Japan)

 Audit Oversight/Integrity (US, Canada, Japan,
Italy, Korea)
 Executive Pay (UK, Ireland, Australia, France)
 Corporate Governance Statements

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Shareholder Intervention

 Consensus among investors: Activism pays

 Emerging view among governments and

corporate boards: More rights bring more
capital, better performance

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Recent Evidence
 ANZ study: Poor governance cost NZ 7%
 Kang: Activist institutions associated with
positive corporate performance
 Stiglitz/World Bank: Privatization only works in
combination with good corporate governance
 Millstein/MacAvoy: Good boards=premium
 McKinsey: 11% premium on governance
 Wilshire: CalPERS reaped $609m for $2.5m

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Trends in Activism
 Focus Funds: Target under-performing, under-
governed companies or tilt toward well-governed
(AV, Hermes Lens, Relational Investors, ABF Euro VA, Russia fund )
 Routine Voting: More monitoring, less expense
 Benchmarks: Pressure on indexers and analysts
 International Alliances—CalPERS/Hermes, ICGN,
World Bank/OECD GCGF Investor Taskforce, ACGA
 Cross-Pollination of Tactics, Ideas—Web
 Stakeholder Issues, Unions—ICFTU, Rio Tinto

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Expanding Rights

 Company law reform: Expanding shareowner

communication
 Greater ballot powers—Canada, UK (though
Japan is debating limits)
 Electronic voting near: UK steps (NAPF panel, e-
commerce bill, commercial ventures); laws in Australia, the
Netherlands, France, Germany; pressure on EU

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Fund Governance
 How many fund managers would pass standards?
 Few fund governance rules: PIAC, U.S. CII, IFSA
 UK: Financial equivalent of a nutrition label.
Theory: Accountable owners will be activist
 Kirby Canadian Senate report on accountability
 AFL-CIO tactics are a taste of the future

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What Shareowners Expect of
Public Policy
 Local benchmarks reflecting global standards
 Disclosure rules to allow application of
benchmarks and promote integrity
 Law & regulation empowering shareowners—easier
voting and communication, protection of minorities
 Tax and statutes to spur shareowner value—share
options, end to cross-holdings, fair takeover rules

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What Shareowners Expect of
Company Practice
 Prepare a corporate governance balance sheet.
 Put R&D into governance. Incorporate the best new
ideas and emerging standards.
 Overhaul voting agenda as a critical link to
investors. Utilize the Internet.
 Collect information as much as disseminate it .
Early intelligence of worldwide shareholder concerns allows management to
anticipate criticism and best compete for international equity capital.

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Conclusion

 Assume there are no borders in corporate

governance. Institutional investors from any part of the globe
are monitoring markets and companies everywhere and basing
decisions, in part, on how they rank with global competitors on
governance criteria..

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