As of Monday, October 17, 2005     

The Global Agenda

Wherever investors go, demands for better governance follow
October 17, 2005; Page R7

As big investors scour the globe for better returns, they're also pushing for, and winning, changes in corporate-governance practices.

From Asia to Europe to Latin America, institutional investors are pressing to protect the independence of auditors and board directors, simplify shareholder voting rights and shed more light on executive-compensation packages.

"More and more investing is global," says Christian Strenger, chairman of the International Corporate Governance Network, an investor-advocacy group based in London. "There's hardly a capital market today that doesn't have at least 25% nondomestic ownership, so the need for improvement in corporate standards is certainly global."

One complicating factor is the larger role that governments and founding families play in the ownership of companies outside the U.S. That means that some of the corporate-governance changes that have been most prominent domestically don't necessarily translate overseas, such as the 2002 Sarbanes-Oxley law that imposed new accounting and disclosure requirements in response to high-profile scandals at Enron Corp., the former WorldCom Inc. and other public companies.

"Much of Sarbanes-Oxley is about keeping managers from blowing things up," says Mike Lubrano, a senior official with the International Finance Corp., an arm of the World Bank. "But that's not likely to be the problem in much of the rest of the world, because [many foreign] companies are controlled by a majority shareholder that controls the shots. The principal problem we see for listed companies in emerging markets is how to build confidence that minority shareholders and other financial stakeholders are going to be fairly treated." Mr. Lubrano is head of the investor and corporate practice unit in the corporate-governance department of the Washington-based International Finance Corp., which analyzes and advises on governance practices at the 1,500 companies in emerging markets in which it invests. It also pushes for governance changes through its representatives, who sit on 200 corporate boards throughout the developing world.

Problematic Giant

Yet despite a sense of progress elsewhere, one of the largest markets in the world, China, remains problematic for investors. Institutional investors who are active there are nevertheless cautious about what they see as serious problems with transparency, insider trading and the quality of management of Chinese companies, according to a report of Institutional Shareholder Services Inc., a proxy-advisory firm based in Rockville, Md. Often, top managers and board directors have ties to the government, which is the majority owner in many listed Chinese companies, corporate-governance experts say.

Foreign investors also face various restrictions such as a policy -- now under review -- that prevents non-Chinese investors from owning more than 25% of any Chinese bank. The Chinese government also restricts foreign investment in areas considered critical to national interests, including telecommunications, advertising and e-commerce, according to Marc Goldstein, an analyst with ISS.

Notable developments in corporate governance around the globe
 Companies required to expense stock options starting next year
 New German law forces disclosure of executive pay
 E.U. preparing "action plan" to bolster shareholder rights
 Accounting firms face ban on lucrative side jobs with companies they audit
 China considers ending ban on foreigners' owning more than 25% of banks
 Singapore tightens stock-market rules after speculative trading by Chinese-owned jet-fuel company creates scandal
 New law in Colombia requires one-quarter of public-company board members to be independent
 Chile working on capital-market reforms to encourage investment
 Peruvian securities regulator seeks greater disclosure around initial public offerings to reduce fraud
Source: Institutional Shareholder Services Inc.

"China has a governance code, but the government is still extremely involved," says Mr. Strenger, who is also a board member of Germany's largest mutual-fund company, DWS Investment GmbH. "That's where we'd very much like to make some concerted efforts" at reform, he says. One of the things Mr. Strenger's governance group is doing in China, in cooperation with the International Finance Corp. and the Paris-based Organization for Economic Cooperation and Development, is to bring in international investors for discussions on the benefits of governance changes.

Better in Brazil

A similar approach among international investors was taken a few years ago in Brazil, a country which Mr. Strenger and others now point to as a corporate-governance success story. In 2000, with the stock market in Latin America's biggest economy suffering from a lack of new listings, TIAA-CREF, the California Public Employees' Retirement System and other institutional investors held meetings with Brazilian government officials to explain how corporate-governance changes could help turn things around by inspiring confidence among investors.

"We told them that what developing countries need is real money coming in to back real companies to create real jobs," says Anne Simpson, executive director of the International Corporate Governance Network. Ms. Simpson was head of the World Bank's corporate-governance program when she helped lead the delegation to Brazil.

Brazilian officials responded to the meetings with a novel proposal: They would create an entirely new stock market, called the Novo Mercado, where local companies would have to meet certain corporate-governance standards in order to be listed. Among the most important changes that were eventually implemented: abolition of murky voting-rights schemes in favor of a transparent one-vote, one-share system.

To date, 14 companies with a market capitalization totaling around $2 billion have listed on the Novo Mercado. Foreign investment in the 394 companies listed on both the Novo Mercado and its parent exchange, the Bovespa stock market, grew to 27.3% in 2004 from 24.1% in 2003, says Bovespa spokesman Gustavo Ferreira.

Progress in the EU

In the European Union, meanwhile, attempts by politicians to introduce new corporate-governance standards have met with mixed success. A rule set to go into effect next year requires companies throughout the EU's 25 member nations to record employee stock options as expenses in their financial books -- a move widely sought by shareholders who maintain it forces management to provide a more accurate accounting of costs. The European Parliament is also expected to endorse rules that will restrict companies based in the EU from paying their audit firms for nonaudit work. Shareholder activists have complained that it's a conflict of interest for auditing firms to earn consulting contracts from companies whose books they are paid to audit.

In a political trade-off to achieve that reform, however, the EU last month retreated from a Sarbanes-Oxley-type plan that would have required public companies to submit their financial results to special board audit committees beyond regular internal auditing. The idea was shelved after an outcry from business leaders and investors about the wisdom of designing a one-size-fits-all system for diverse corporate structures. Currently, companies in the EU use international financial-reporting standards, and individual EU member governments retain the power to decide whether their locally based companies must submit to additional oversight by special auditors.

A lot of the concerns critics have about corporate governance in Europe stem from a structural peculiarity seen in many company boards -- a category of board members designated as "shareholder representatives." Despite the democratic-sounding title, these board members are selected by the majority shareholders. Often they are put in place as part of a strategic alliance, says Jean-Nicolas Caprasse, managing director of the European branch of ISS, which provides proxy-vote recommendations to more than 1,200 institutional and corporate clients. "The question is whether these shareholders are representing all the company or just one bloc," Mr. Caprasse says.

Seeing fertile ground, U.S. trial lawyers are touring Europe these days trying to recruit European institutional investors to stand as plaintiffs in class-action securities lawsuits in the U.S., arguing that their participation in such suits will promote good corporate governance in Europe. In a parallel development, Sweden, the Netherlands, Italy, Germany and France have all either enacted or are considering allowing limited forms of class-action lawsuits, largely in response to pressure from consumer groups.

At present, no European country is considering contingency fees for plaintiffs' lawyers or other kinds of U.S.-style innovations that have turned torts into a lucrative business for the trial bar in the U.S. But the collapse two years ago in Germany of the Neuer Markt, a technology-heavy stock market similar to Nasdaq, burned many small investors, which helped provide the political momentum for a law enacted there this year that makes it easier to mount group actions in the courts. Likewise, a similar push for legal changes is occurring now in Italy, prompted in part by the 2003 collapse of Italian dairy giant Parmalat SpA in a massive accounting fraud.

Executive Pay

Another issue gaining momentum in Europe is the push to link executive pay and performance more closely. In France earlier this year, departing Carrefour SA Chief Executive Daniel Bernard was awarded a severance package valued at up to €38 million ($46 million) when he stepped down from the retail group after failing to achieve revenue targets. The award prompted French Finance Minister Thierry Breton to pledge that he would introduce legislation giving shareholders the final say over such golden parachutes.

In Germany, meanwhile, the push for more shareholder control over executive pay is part of a broader campaign seeking more U.S.-style corporate disclosure rules to make German businesses more transparent. Late last year, a number of German companies, including Siemens AG, Allianz AG, and Volkswagen AG, whose largest shareholder is the German state of Lower Saxony -- home state of Chancellor Gerhard Schroeder -- announced they would begin disclosing the pay of top executives. But most other German companies fiercely resisted. In response, lawmakers passed a law this summer requiring listed German companies to disclose annual earnings of top executives. The legislation takes effect next year.

"People think this is a private affair," says Mr. Strenger of the international governance group. "Obviously it is not. We told them it was shareholders' money that is being paid out."

--Ms. Jacoby is a staff reporter in The Wall Street Journal's Brussels bureau.

Write to Mary Jacoby at

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