European Commission Contract No ETD 2008 IM F

European Commission – Contract No. ETD / 2008 / IM / F 2 / 126 Study on monitoring and enforcement practices in corporate governance in the Member States Presentation at the Swedish Corporate Governance Board Stockholm – 3 December 2009 Jean-Nicolas Caprasse – European Corporate Governance Head, Risk. Metrics Group Study conducted by: In consortium with: www. riskmetrics. com 1

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 2

Scope and methodology (as per EC tender) Objectives Scope & methodology Legal review: Compare national regulatory frameworks and national codes of corporate governance. Analyse monitoring and enforcement mechanisms 27 Member States Company practice: Evaluate the effectiveness of national codes of corporate governance through a screening of European companies behaviour Sample of 270 companies in 18 Member States Company perception: Examine European companies’ perception of corporate governance codes through two surveys of business associations and director institutes Survey of 42 business associations and director institutes in 25 Member States Investor perception: Assess European shareholders’ perception of companies' disclosure on a comply-or-explain basis through a survey Survey of Europeanbased investors 100 responses Conclusions and recommendations: Draw analytical conclusions based on the existing monitoring and enforcement practices and provide recommendations Based on fact findings Reference to market influencers www. riskmetrics. com Contracting party in charge 3

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 4

The comply-or-explain regime has been widely adopted by Member States Adoption of a mandatory comply-or-explain regime www. riskmetrics. com 5

Market participants broadly support the comply-or-explain approach Perception of business associations and director institutes Business associations and director institutes broadly support the comply-orexplain approach: Flexibility (more flexible than regulation) Better consideration of company-specific situations No clear tendency to try to comply with code recommendations when not suitable No significant cost impact (except for SMEs) www. riskmetrics. com 6

Market participants broadly support the comply-or-explain approach Perception of institutional investors The investor survey shows broad support for the comply-or-explain approach* Are you generally supportive of a comply-or-explain regime? % of respondents answering the question 60% 50% 40% 30% 20% 10% 0% Supportive of national Code Supportive of pan-European Code Other Don't know / no opinion *Results based on 71 respondents answering the question www. riskmetrics. com 7

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 8

The level and quality of explanations for deviations from corporate governance code provisions by companies needs to be strengthened Assessment of the quality of explanations for deviations Proportion of the total number of explanations per reference corporate governance code* § § Transitional: If companies indicated that the code provision from which they currently deviate will be applied at a later stage, these explanations were classified as “transitional” Specific: Explanations relating to a specific company situation were classified as “specific” § § Invalid: Explanations of deviations which only indicate a deviation without further explanation were classified as “invalid” § General: Explanations of a general nature in which the company mostly indicates disagreement with the code provision without identifying a company specific situation, were classified as “general” Limited: Explanations in which companies do not explain the reasons for deviating from the code, but where additional information (such as an alternative procedure) was given, were classified as “limited ” * 1, 141 explanations provided by a sample of 270 companies www. riskmetrics. com 9

According to market participants, companies could improve the quality of explanations for deviations from corporate governance code provisions Assessment of the quality of explanations for deviations by business associations and director institutes* *Results based on 31 respondents answering the question www. riskmetrics. com by investors* *Results based on 72 respondents answering the question 10

The quality of explanations for deviations from corporate governance code provisions by companies significantly differs depending on the level of information provided Quantity and quality of explanations for deviations Type of disclosure Number of companies General information Provision-per-provision information Disclosure : companies disclosing Comply-or-explain information 233 61% 39% Average number of explanations 233 2 10* Information quality: : proportion of specific and transitional information 233 53% 36% Full compliance: : companies disclosing full compliance 52 92% 8% *5 excluding Hungary www. riskmetrics. com 11

Enhance the role of market-wide monitors Granting additional monitoring and enforcement powers to market-wide monitors could improve the level of transparency required for an adequate functioning of the comply-or-explain approach Objectives Means Introduce standard corporate governance statement forms Verify the availability of information Assess the informative value of the information provided Publish analyses Issue recommendations to companies Engage with companies Impose sanctions for nondisclosure www. riskmetrics. com 12

Enhance the role of statutory auditors Mandating statutory auditors to verify certain facts contained in the corporate governance statements could enhance the level of information provided by companies within the comply-or-explain framework Objectives Means Create a standardised methodology to audit corporate governance issues Verify the availability of information Verify the veracity of the information provided (for factual information only) www. riskmetrics. com Identify areas of corporate governance statements containing “auditable facts” Mandate statutory auditors to verify corporate governance statements and certify their veracity 13

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 14

Business associations and director institutes view the impact of corporate governance codes on (supervisory) boards as positive Have national corporate governance codes had a significant effect on the (supervisory) board? Has this effect been positive or negative? Significance of effect: 5 = very significant, 4 = significant, 3 = neutral, 2 = insignificant, 1 = very insignificant Positiveness/negativeness of effect: 5 = very positive, 4 = positive, 3 = neutral, 2 = negative, 1 = very negative www. riskmetrics. com 15

Business associations and director institutes view the impact of corporate governance codes on management as positive Have national corporate governance codes had a significant effect on the management? Has this effect been positive or negative? Significance of effect: 5 = very significant, 4 = significant, 3 = neutral, 2 = insignificant, 1 = very insignificant Positiveness/negativeness of effect: 5 = very positive, 4 = positive, 3 = neutral, 2 = negative, 1 = very negative www. riskmetrics. com 16

Business associations and director institutes view the adequacy and clarity of corporate governance codes positively but see some room for improvement Assessment of content of codes Positive assessment Board composition Functioning of the board Board evaluation Role of the chairman Role of independent directors Role of executive management Relationship between the board and management Shareholder’s meeting Shareholder’s rights Communication with shareholders Relationship between shareholders and the board Conflicts of interest Internal audit External audit Remuneration of executive directors Internal governance Board transparency Committee’s transparency Disclosure on conflicts of interest Transparency on remuneration www. riskmetrics. com Room for improvement RM perspective internal control RM strategic scenarios/product development Transparency on financial & non-financial risk profile Stakeholder interest 17

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 18

Institutional investors were polled on their perception of corporate governance codes and their practices in monitoring corporate governance Overview of respondents per country of origin and country of investment Country of origin Country of investment – top 5 9% Germany 7% 48% UK 6% 47% 43% France 7% 40% Netherlands 16% 8% Spain 9% 16% UK (+ Ireland Jersey) France Nordic Non-European (US, Japan) Benelux Germanic Other Continental Europe Over 2, 000 investors were polled 100 respondents www. riskmetrics. com 19

Polled institutional investors vote at the majority of companies held in portfolio Percentage of equities voted as a percentage of companies held in 2008 56% www. riskmetrics. com 20

Polled institutional investors vote the majority of their assets under management Percentage of equities voted as a percentage of assets under management in 2008 53% %of Respondents Answering the Question 35% 30% 23% 25% 20% 17% 13% 15% 11% 9% 10% 5% 9% 9% 4% 4% 2% 0% =0% www. riskmetrics. com >0% - <10% >10% <25% >25% <33. 3% >33. 3% <50% >50% <66. 6% >66. 6% <75% >75% <90% >90% <100% =100% 21

According to institutional investors, shareholder rights could be enhanced in two areas Need to enhance shareholder rights on remuneration and on corporate governance statements Should shareholders’ rights to vote on a remuneration statement be enhanced? * Should shareholders’ rights to vote on a corporate governance statement be enhanced? * 5% 27% 73% 95% no yes *Out of 65 respondents www. riskmetrics. com 22

A large number of shareholders appear to choose not to exercise their monitoring and enforcement responsibilities. This free-rider issue represents a significant market failure The market failure caused by the « absentee landlords » "Engaged shareholders" Dia logu e Vot e ? -ride Free "Absentee landlords" www. riskmetrics. com 23

Raising the fiduciary responsibilities of investors can address the free-rider issue regarding monitoring of company practice Enhance shareholder responsibilities Why? Market failure needs systemic remedy Pursue the 2003 Action Plan medium-term objectives of the European Commission 60% of investors polled are in favour of mandatory disclosure requirements for all investors How? No need to implement mandatory voting Increase transparency: disclosure of investment and voting policies disclosure on the exercise of shareholder responsibilities (dialogue and voting) Create reference codes of best practice: “principles of stewardship” on a comply-or-explain basis www. riskmetrics. com 24

Agenda Scope and methodology Introduction and legal review Company practice Company and director perception of CG codes Investor perception of CG codes Conclusion www. riskmetrics. com 25

Conclusion Broad market acceptance of the comply-or-explain regime Two types of deficiencies should be adressed: Unsatisfactory level and quality of information on deviations by companies Low level of shareholder monitoring The comply-or-explain approach should not be abandoned. It should be strengthened www. riskmetrics. com 26

Questions & answers The study can be found at: http: //ec. europa. eu/internal_market/company/ecgforum/studies_en. htm For addition enquiries: Jean-Nicolas Caprasse jean-nicolas. caprasse@riskmetrics. com Stockholm, 3 December 2009 www. riskmetrics. com 27