EC launches public consultation on shareholders' rights

The European Commission has launched a public consultation on facilitating the exercise of basic shareholders’ rights in company general meetings and solving problems in the cross-border exercise of such rights, particularly voting rights. Responses will be taken into account in a forthcoming proposal for a Directive – part of the Commission Action Plan on Corporate Governance. The deadline for responses is 16 December 2004.

The Commission’s May 2003 Action Plan to modernise company law and enhance CG (see IP/03/716 and MEMO/03/112) contains a set of initiatives aimed at strengthening shareholders' rights, reinforcing protection for employees and creditors, increasing the efficiency and competitiveness of European business and boosting confidence on capital markets.

Internal Market Commissioner Frits Bolkestein said: “Shareholders need to be able to ensure that management is acting in the best interests of the company. To do so, they need access to appropriate information and to effective ways of exercising real influence. Making sure shareholders can exercise their rights will help spread cross-border investing and integrate EU capital markets. If we want the extra growth that will result from that, we need to say ‘goodbye’ to opacity and communication from the age of the carrier pigeon and ‘good morning’ to modern, electronic, transparent information systems that result in real rights being exercised. So I encourage all interested parties - companies, individual and institutional shareholders and regulators - to respond. We will listen.”

The Commission’s consultation paper gives first indications as to the possible future EU regime on shareholders’ rights in listed companies. The Commission considers that this should be based on a Directive, since the effective exercise of such rights requires solving a number of legal difficulties.

The main issues on which the Commission is seeking responses are:

• the entitlement to control the voting right - investors in shares are often not recognised as shareholders, in particular in cross-border situations, and are in practice deprived of their right to vote as they wish
• the dissemination of information before the general meeting and the possible need for minimum standards to ensure that all shareholders, irrespective of where they live, get information in time
• the criteria for participation in general meetings, and the removal of overly cumbersome criteria, such as share blocking requirements
• possible minimum standards for the rights to ask questions and table resolutions
  possible measures to enable shareholders to vote by post, electronically, or by proxy
  the dissemination of information following the general meeting and the possible need for confirmation that votes have been executed.
  
  The consultation paper is available here.
  
  Responses should be sent by 16 December 2004 to DG Internal Market - Unit G4, European Commission, B-1049 Brussels, or emailed to: Markt-COMPLAW@cec.eu.int

Do you agree with Frits Bolkenstein that "(...) modern, electronic, transparent information systems that result in real rights being exercised (...) are important for additonal economic growth?

Checkbox approach to CG doesn't work

Wharton accounting professors David Larcker, Irem Tuna and Scott Richardson say the check-box approach to CG doesn't work, because companies and their situations are too diverse. "The recipe book is big, and there's a different recipe for each company," Richardson notes. Even worse, the professors say, are consultants and ratings services that use formulas - which they typically refuse to reveal - to boil down a company's CG to a single number or grade.

Yep.

"Lots of people are coming up with G. scorecards," Larcker explains. "They're coming up with best practices and selling this stuff. As far as we can tell, there's no evidence that those scorecards map into better C. performance or better behavior by managers."

Larcker, Tuna and Richardson tried to create a magic formula of their own. But no matter how they sliced and diced G. data (consisting of more than 30 individual measures) on more than 2,100 public companies, they couldn't find one. The three professors have released their findings in a working paper titled, "Does CG Really Matter?" The title is intentionally provocative. They do think CG matters, but after puzzling over reams of company numbers, they are not confident that anyone can measure whether one firm's G. is better than another's at least, not by using typical metrics.

As they say in their paper, "Our overall conclusion is that the typical structural indicators of CG used in academic research and institutional rating services have a very limited ability to explain managerial decisions and firm valuation."

CG pays

A new study released today by GovernanceMetrics International shows corporations that are rated highest for governance practices have delivered superior investment returns.

GovernanceMetrics International said its latest data on 2,588 global companies found that 26 companies receiving the highest score of 10.0 outperformed the Standard & Poor's 500 stock index total return by 10 percent over the last five years.

Over a three-year period the companies outperformed by 8.3 percent and over one year they outperformed by 4.9 percent. The 26 companies included 20 American companies, five Canadian and one Australian.

GMI said the companies also outperformed when measured against the Morgan Stanley Capital International World Index.

"This suggests a correlation between CG practices and portfolio returns when measured across a number of variables and across a multi-year period," GMI Chief Executive Gavin Anderson said in a statement.

Anderson said that U.S. companies as a group had improved ratings over the past two years, with the average rating rising to 7.2 from 6.5. He attributed the better showing in part to the Sarbanes-Oxley Act, a U.S. law that required a series of accounting and CG reforms.

The report said that 95 percent of U.S. companies now say they have a qualified financial expert on their audit committee, compared with 65 percent in an earlier study in 2002.

Nearly three-quarters have hiring policies concerning employees or former employees of auditor firms compared with only 14 percent in 2002.

Just over half of the companies have adopted a policy on rotation of audit personnel compared with 8 percent in 2002.

A big majority of audit committees, 83 percent, now perform self-evaluations compared with 17 percent in the earlier study.

In other changes, 90 percent of companies now have board evaluation policies versus 35 percent in 2002. Director training is provided by 80 percent of companies compared with 14 percent in the earlier study. Only 11 percent of companies say they are paying auditors more for non-audit work as opposed to audit-related work, down from 48 percent in 2002.

The study found that U.S. companies have also improved in independent board leadership, but are behind the UK.

GMI said 95 percent of rated companies in the UK have separated the roles of chairman and chief executive, while only one-third of rated companies in the United States have done so. In the earlier study, 22 percent of U.S. companies had separated the chairman and chief executive roles.

Comparing nations, U.S. companies had the highest overall average rating, 7.23. Canada was second with a 7.19 score, followed by the UK with a 7.12 rating and Australia with 6.73.

Greek companies had the worst overall average rating, 2.93, followed by Japan, with 3.57.

Examples of the 26 companies with the highest rating included Eastman Kodak in the United States, Suncor Energy in Canada and Westpac Banking in Australia.

The GMI rating system uses hundreds of data points that fall into the broad categories of board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base and takeover provisions, corporate behaviour and social responsibility.

Had Sarbanes-Oxley preceded Enron they probably would have checked the boxes on that, too.

The title of this blog is a final remark in a highly intersting discussion between 3 leading FTSE-100 Financial Directora discussing the burden of CG. Taking part were Michael Queen, FD of 3i; Jonathan Symonds, CFO of AstraZeneca; and Ken Lever, FD of Tomkins.
Some other highlights of this excellent discussion are:
- I have no particular problem - being the director of a public company - that my remuneration should be disclosed for all the world to see, so that my friends and relatives can see, and so that all the shareholders can see. The issue I have a bit of a hang-up with is that we don't see disclosure of remuneration of fund managers, for instance, and we don't see the disclosure of remuneration of people in hedge funds or, indeed, private equity. Equally, we don't see the remuneration of partners of major accountancy firms and law firms. I am all for disclosure, and all for making sure people get paid a fair amount of money for a good job well done if it applies generally across everybody who is contributing to this value-creation process in our capitalist society.
- Your average punter, someone who has 500 quid in Marks & Spencer, is not going to look at the annual report and read it in great detail, but there will be people who will understand all 160 pages or 350 pages and actually make use of that information.
- Managing the performance of the organisation and delivering the value inherent within a business is more important than CG. I accept that balancing that with good governance is perfectly appropriate, but I think the scales have tilted.
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