Shareowners in Global Corporate Governance OECDWorld Bank South

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Shareowners in Global Corporate Governance OECD/World Bank South East Europe Corporate Governance Roundtable Bucharest,

Shareowners in Global Corporate Governance OECD/World Bank South East Europe Corporate Governance Roundtable Bucharest, Romania September 2001 Stephen Davis, Ph. D.

Why Corporate Governance? n Emerging investor consensus : Activism pays n Emerging company response:

Why Corporate Governance? n Emerging investor consensus : Activism pays n Emerging company response: investor rights and protections are perceived to lower risk, bringing more capital at lower cost n Better performance

Activism Findings: Mc. Kinsey n n n Investors would pay an 18 -28% premium

Activism Findings: Mc. Kinsey n n n Investors would pay an 18 -28% premium for superior board and disclosure practices Board quality is often more important than financial issues in stock selection The less investors trust shareholder protections, the more they value governance. Companies with poor governance face a steep barrier in gaining access to capital.

UK Switzerland Sweden U. S. 17. 9 18. 0 18. 2 18. 3 Chile

UK Switzerland Sweden U. S. 17. 9 18. 0 18. 2 18. 3 Chile Argentina Mexico Italy 20. 8 21. 2 21. 5 22. 0 Netherlands Spain Belgium France Germany Japan Taiwan 18. 5 19. 2 19. 6 19. 8 20. 2 Brazil Korea Malaysia Thailand Indonesia Columbia Venezuela 22. 9 24. 2 24. 9 25. 7 27. 1 27. 2 27. 6

Other Recent Evidence… n n Stanford U: Strong link between governance and value in

Other Recent Evidence… n n Stanford U: Strong link between governance and value in Russia (Bernard Black) CLSA: Best governance yields double value in emerging markets Univ. of Vienna: shareowner monitoring critical where blockholders wield control (Klaus Gugler) Wilshire 2001: ‘Cal. PERS Effect’ activism made companies jump from 96% under to 14% over market

And still more n n ANZ study: Poor governance cost NZ 7% Stiglitz/World Bank:

And still more n n ANZ study: Poor governance cost NZ 7% Stiglitz/World Bank: Privatization only works in combination with good corporate governance Millstein/Mac. Avoy: Good boards=premium Harvard Business School: Activist institutions associated with positive corporate performance

Shareowner Trends n n n Routine Voting: More monitoring, less expense Benchmarks: Codes, pressure

Shareowner Trends n n n Routine Voting: More monitoring, less expense Benchmarks: Codes, pressure on indexers and analysts, ratings International Alliances: Cal. PERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce, , GIGN, ACGA n n Cross-Pollination of Tactics, Ideas: Web Disclosure Rules: Policy statements required UK, Australia, Germany, Stakeholder Issues, Unions: ICFTU, Rio Tinto, climate change Focus Funds: Target under-performing, under-governed companies or tilt toward well-governed

Case Studies: Costly Errors n Petro. China u n Poor governance profile damaged IPO

Case Studies: Costly Errors n Petro. China u n Poor governance profile damaged IPO Tomkins u Imperial CEO suppressed value, triggering rebellion

Case Studies: Success Stories n Daewoo Securities and Grupo Elektra u n Shell u

Case Studies: Success Stories n Daewoo Securities and Grupo Elektra u n Shell u n Investor rebellion spurs IR overhaul Pfizer u n Open governance reform dialogue with foreign investor Focus on governance wins merger backing Vivendi u Governance initiative gains investor support for merger

What Shareowners Want Companies to Do n Create a Corporate Governance Balance Sheet u

What Shareowners Want Companies to Do n Create a Corporate Governance Balance Sheet u u n Overhaul Investor Relations u u u n n Identify CG assets and liabilities Consider a CG rating Add research & development—find best new ideas Re-position road shows to reach right investors Gather intelligence on investor priorities Modernize the proxy/AGM notice—use web Introduce a code, IAS, governance disclosure

What Shareowners Want Policymakers to Do n n Mc. Kinsey 2001: improve law, regulation

What Shareowners Want Policymakers to Do n n Mc. Kinsey 2001: improve law, regulation and attack corruption 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 n Tax and statutes to spur shareowner value—incentive pay, end to cross-holdings, fair takeover rules

Conclusion n Assume there are no borders in corporate governance. Institutional investors from any

Conclusion n 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.

Davis Global Advisors, Inc. 57 Hancock Street Newton MA 02466 -2308 USA T +1

Davis Global Advisors, Inc. 57 Hancock Street Newton MA 02466 -2308 USA T +1 617 630 8792 F +1 617 630 0398 E [email protected] com www. davisglobal. com