Most activist investors are urging the U.S. Securities and Exchange Commission to proceed with its proposed proxy access rule, although some have called for revisions, such as dropping a “first-in” provision or lengthening the minimum holding period to two years.

“The proposed rule is a historically significant reform that will enable investors to hold corporate boards accountable and restore investor confidence in the capital markets,” Joseph Dear, chief investment officer at the California Public Employees’ Retirement System, the nation’s largest state pension fund, wrote in the pension system’s comment letter to the SEC.

Meanwhile, corporate advocates have asked the SEC to refrain from adopting marketwide access standards or at least delay adoption until 2011. In contrast to their position in 2007 when the agency last considered the issue, most issuer representatives now are arguing that shareholders should have the ability to file resolutions that seek company-specific access provisions.

The question of giving investors the ability to nominate directors to appear on management proxy statements has been debated by the commission since the 1940s. In May, the SEC voted 3-to-2 to propose a marketwide access rule over objections from the agency’s two Republican commissioners. The proposed Rule 14a-11 would require all public companies and registered investment companies to permit qualifying shareholder groups to offer nominees for up to 25 percent of the board.

The draft rule requires a one-year holding period and includes tiered ownership thresholds based on market capitalization (or net assets for investment firms). For issuers, the minimum holding would be 1 percent at “large accelerated” filers (those with more than $750 million in publicly traded securities; 3 percent at “accelerated” filers ($75 million to $750 million in traded securities); and 5 percent at “non-accelerated” filers (less than $75 million in traded securities). The agency rulemaking release also includes a proposal to amend Rule 14a-8(i)(8) to permit investors to file bylaw proposals that seek more permissive access provisions.

The agency received more than 450 comment letters from investors, issuers, proxy solicitors, academics, and individuals by the Aug. 17 deadline. SEC officials have said they hope to have a final rule in place before the 2010 proxy season.

The SEC also received comments from various international institutions, which observed that proxy access provisions in the United Kingdom and other markets have led to more board accountability and better communication with investors. “Our experience in markets like the Britain, Australia, and the Netherlands is that these rights are rarely used. Instead, because of greater accountability to the shareholders whom they represent, boards tend to put forward qualified candidates that are more responsive to shareholder interests,” wrote Daniel Summerfield, co-head for responsible investment at the U.K.’s Universities Superannuation Scheme.

While most public pension funds and labor investors generally support the rule, other investors raised concerns or expressed opposition. Although Barclays Global Investors said it supported the principle of allowing long-term investors to propose board nominees, the investment firm called for a “narrowly tailored” approach with a triggering requirement (such as a 50 percent withhold vote) for access rights.

The United Brotherhood of Carpenters said it opposes a federal uniform access rule and urged the SEC to amend Rule 14a-8 to enable investors to file access proposals in 2010. The union noted that other reforms, such as better disclosure rules and the widespread adoption of majority voting in director elections, have made boards more accountable.

Corporate advocates, including the National Association of Corporate Directors and the Society of Corporate Secretaries & Governance Professionals, generally opposed a marketwide rule, calling instead for the SEC to permit “private ordering” by allowing investors and companies to devise their own access rules. The proposed Rule 14a-11 “would deprive stockholders of their ability to exercise their rights under enabling state laws to implement the specific form of proxy access that they believe best fits their particular company and fellow stockholders, or alternatively to choose to forego entirely the costs and burdens of proxy access,” Cravath, Swaine & Moore and six other corporate law firms argued in a joint comment letter.

In response, CalPERS argues that forcing investors to seek proxy access on a company-by-company basis “will cost shareowners and companies significant time, and unnecessary expense.” Based on the SEC's 1997 data on the costs for shareholders to offer proposals and for companies to respond to them, the pension system estimates that it would cost $351 million to attempt to put proxy access in place at Russell 3000 companies.

In the SEC adopts a marketwide rule, the corporate law firms have asked the agency to delay the effective date until 2011 to give issuers and shareholders time to address the complex issues raised by access. The firms also noted that it would be difficult for investors to meet the proposed 120-day deadline for nominations at firms with early 2010 annual meetings. The corporate lawyers also said the commission should give investors the right to opt out of a uniform rule by either a stockholder vote or ratification of board action.

The Altman Group, a proxy solicitation firm, said it would be a “serious mistake” for the SEC to adopt a marketwide access rule soon after approving the New York Stock Exchange’s ban on broker votes in uncontested board elections. Instead, Altman said the SEC needs to first address “important” issues, such as the rules on issuer-shareholder communications and other “proxy plumbing” issues.

Many commenters, including the Council of Institutional Investors (CII), CalPERS, and the AFL-CIO, urged the SEC to drop its proposal to use a “first-in” standard to determine priority if multiple groups seek to nominate board candidates who exceed the 25 percent limit. Instead, the investors called for giving preference to the investor group with the largest shareholding. “What matters most is not who is the fastest to nominate but what investor or group has the greatest stake in the director election and ultimately, the long term performance of the company,” CII stated in its comment letter.

The Calvert Group disagreed, arguing that a “first-in” approach would be fairer. “Allowing the largest shareholder group to essentially 'trump' the first smaller, but no less committed or relevant shareholder submission, is not good governance,” according to Calvert, an investment firm that offers socially responsible investment funds.

Alternatively, the Ohio Public Employees Retirement System (OPERS) called for a two-fold approach based on the length of ownership and the largest beneficial ownership. The pension fund also said a 25 percent cap on nominees was too restrictive and should be closer to 50 percent. OPERS and other investors said the limit on nominees should be based on the total number of board seats, not simply those up for election, as the later approach would reward firms with classified boards. CalPERS and many investors called for allowing at least two shareholder nominees, regardless of board size, pointing out that a single dissident director can be more easily shunned by a recalcitrant board.

There were a variety of opinions expressed by investors and issuers over the economic stake required to nominate directors. T. Rowe Price and TIAA-CREF asked the SEC to set a 5 percent ownership requirement at all companies, rather than permitting lower thresholds at larger companies. “[I]n order to use the company’s resources to nominate a director, a significant amount of capital must be represented and 5 percent is an acceptable threshold,” TIAA-CREF wrote in its comment letter.

In its letter, the Australian Council of Superannuation Investors (ASCI) said a 3 percent threshold should be sufficient to deter “frivolous or vexatious nominations.” Barclays called for a sliding scale of 5 to 15 percent based on market capitalization to “protect shareholders and the companies they own from the unnecessary distraction and expense of including director nominees for whom support is limited and whose likelihood of election is low.”

The coalition of seven corporate law firms suggested that the SEC impose a 5 percent threshold for a single investor and a higher threshold (7-to-10 percent) for investor groups. The National Association of Corporate Directors endorsed a 5 percent threshold (with no aggregation of holdings), and a 10 percent standard for micro-cap firms.

There also were disagreements over the required ownership duration to submit a nomination. The Change to Win (CtW) Investment Group, the AFL-CIO, the union-affiliated Amalgamated Bank, and TIAA-CREF all asked the SEC to increase the minimum time period for offering nominees from one year to two years. “A two-year holding period requirement would better ensure that shareholder-nominated directors are properly focused on long-term value creation for the company’s investors,” CtW wrote in its letter.

Some corporate advocates also endorsed a longer holding period. A group of corporate governance officers from Intel, Microsoft, Pfizer, and more than 20 other issuers said a “two- or three-year holding period would be more appropriate.”

However, T. Rowe Price said it did not object to a one-year holding requirement, and CII agreed that such a standard “should be sufficient to limit the access mechanism to long-term shareowners.” The Association of British Insurers and ASCI argued that there should be no minimum time period. “It is a core principle that the holders of the same capital instruments must have the same rights regardless of the period they have held them,” the British group wrote.

For a copy of RiskMetrics Group’s comment letter, please click here.

Thursday, August 13, 2009

U.K. Regulator Issues Rules on Bank Pay
Submitted by: Subodh Mishra, Governance Institute

Britain’s Financial Services Authority this week published new rules to strengthen links between pay and risk taking at U.K. banks, though opted against mandatory deferrals on bonuses as provided for under earlier draft rules.

In another departure from the draft rules, the FSA code now applies to just 27, rather than 47, institutions, exempting many smaller banks and international groups with London-based branches.

The reversal has sparked concern in some quarters, with critics charging the government with watering-down the rules and thus failing to adequately address concerns over poor pay practices. Supporters of the reversal, however, say the changes will help ensure London’s continued place as a premier financial center.

According to the FSA, the code, released Aug. 12, is designed to force boards to focus more closely on ensuring that pay is consistent with good risk management and sustainability, and that individual compensation practices provide the right incentives.

“The FSA is determined that banks’ remuneration policies should be consistent with, and promote, effective risk management,” FSA head Hector Sants said in an Aug. 12 statement. “The new rules and code of practice … are aimed at achieving this.”

The code will take effect Jan. 1, 2010, and represents the first set of major market rules to reform pay in the wake of the global financial crisis. The code may also help U.S. lawmakers and others address ways and means to reform and measure links between compensation and risk at companies receiving aid under the Troubled Asset Relief Program.

Eight principles, including one to address deferrals on bonus pay, were added to the FSA code to provide institutions with a better understanding of the yardstick the agency will use when measuring compliance.

The principles include: remuneration committees should have a majority of non-executives; risk managers and compliance officers should be involved in setting bankers’ pay; bonuses available to risk managers and compliance officers should be proportionally lower than for bankers; the calculation of bonus pools should be based principally on profits; when performance related pay accounts for a large share of overall remuneration, there should be a bias towards longer-term performance; non-financial criteria should be part of bonus calculations; long-term bonuses should take account of future risks; and at least two-thirds of bonuses should be deferred for at least three years and they should reflect group-wide and divisional, as well as personal, performance.

According to the FSA, affected financial services companies will be expected to provide a remuneration policy statement by the end of October. The statement must be sanctioned by the remuneration committee and will be used by the FSA to check compliance with the code. Non-compliance could mean enforcement action or a mandate to hold additional capital, should, agency officials warn, companies pursue risky processes.

Meanwhile, the Swiss Financial Market Supervisory Authority’s deadline for feedback on its own proposed new compensation guidelines for financial services companies is Aug. 14. Like the FSA’s code, the draft guidelines aim to align pay policies better with long-term profitability and take into account risks, according to Bloomberg News. Final guidelines are expected next month.

Also this week, Swiss lawmakers on Aug. 11 rejected proposed caps on executive pay at banking giant UBS. The Swiss government owns just under 10 percent of the company.

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Thursday, April 9, 2009

RBS Pay Report Receives 90% Dissent
Submitted by: Ted Allen, Publications, and Karoline Herms, U.K. Research

In a symbolic protest, the British government joined many other investors in voting against the Royal Bank of Scotland’s past remuneration practices on April 3.

The company’s remuneration report received 90.4 percent opposition from the votes cast—the most ever during an advisory vote on executive compensation. Most of the opposition came from the government, which obtained a 57.9 percent voting stake after rescuing the failed banking firm in October. The company recently posted the largest quarterly loss in British history, and the government now has a 70 percent interest after investors approved a rights offer/preference share redemption on April 3.

Before the RBS shareholder meeting in Edinburgh, most of the news coverage and investor outrage focused on the pension package received by the former CEO, Sir Fred Goodwin. He is to get an annual pension of 700,000 pounds ($1.02 million); Goodwin received an initial payment of 2.8 million pounds and the company paid his taxes. RBS has acknowledged that the payments were not “standard practice” but told the Treasury that they were “considered appropriate arrangements for [the company] to make in discharge of his contractual obligations.”

The government’s vote against the remuneration report can be seen as a public relations move, since the company has already worked with Treasury to bring its pay policies closer to best practices. For instance, RBS agreed to pay no 2008 bonuses for executive directors; provide no increases in basic salaries in 2009; defer 2009 annual incentives for three years (with a “claw back” provision); make no payments under a profit-sharing plan; and reduce long-term incentive awards below 2008 levels. In addition, 12 directors, including the remuneration committee chair, have stepped down since October.

U.K. Financial Investments (UKFI), which manages the government’s stake, said it voted against the retrospective pay report because it objected to the board’s decision to allow Goodwin and Johnny Cameron, the former head of the investment banking unit, to retire early and thus take undiscounted pensions. In a press release, UKFI chief executive John Kingman said the government “fully supports the approach the present RBS board is taking to remuneration matters, including in relation to the remuneration arrangements for the present chairman and chief executive.”

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Wednesday, March 4, 2009

Three Canadian Banks Agree to Hold Pay Votes
Submitted by: Ted Allen, Publications, and Michelle Tan, Canada Research

The Canadian Imperial Bank of Commerce (CIBC), the Royal Bank of Canada (RBC), and the National Bank of Canada (NBC) all have agreed to hold an annual advisory vote on executive pay in 2010, becoming the first Canadian companies to do so.

CIBC and RBC announced the policy changes after shareholder proposals on the subject received majority support from investors--which rarely happens in Canada--at their annual meetings on Feb. 26. Bill Etherington, chairman at CIBC, said the bank would work with the proponents--MEDAC (Mouvement d’éducation et de défense des actionnaires) and Meritas Financial--as well as “other governance” organizations, and any other interested banks, in determining how a management pay-vote proposal would be drafted. At RBC, chairman David O'Brien said the board “will now be considering how best to give shareholders a vote on this important issue, and we commend those who brought the 'say on pay' proposals forward,” according to The Globe and Mail newspaper. NBC agreed to provide a compensation vote in 2010, one day before its Feb. 27 meeting, where investors were to vote on the MEDAC request for an advisory vote. “In so doing, the bank is acknowledging the developments of the past few weeks relating to this matter and fulfilling a wish expressed by many of its shareholders,” the Montreal-based bank said in a statement.

The moves by three of Canada's largest banks come as bank executives face investor criticism over bonuses. The banks, which hold their annual meetings early in the Canadian proxy season, traditionally have had a significant influence on the corporate governance practices at other firms.

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Tuesday, March 3, 2009

Malaysian Exchange Extends Comment Period
Submitted by: David Smith, Co-Head, Asia-Pacific Corporate Governance Research

As we noted on Feb. 24, Bursa Malaysia last month released a consultation paper inviting comments on proposed amendments to several Listing Requirements. Following “numerous requests by industry participants,” the original deadline for comments of Feb. 27 has been extended to March 15.

Notably, Proposal 7.3, if adopted, would increase the permitted size of general mandates that could be requested by companies for the issuance of new shares on a non-pro rata basis from the current 10 percent of issued share capital to: 20 percent of issued share capital for an issue of shares on a non-pro rata basis to shareholders; or 50 percent of issued share capital for an issue of shares on a pro rata basis to shareholders.

This particular proposal follows similar changes in others part of Asia, including neighboring Singapore, which recently amended rules on share issuances to allow companies to issue up to 100 percent of issued share capital via a pro-rata rights issue, up from the 50 percent limit previously in place.

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Friday, February 27, 2009

Improved Compliance in Hong Kong, Survey Shows
Submitted by: David Smith, Co-Head, Asia-Pacific Corporate Governance Research

The Stock Exchange of Hong Kong recently released its third annual survey of compliance with the Code on Corporate Governance. The results show some improvement in levels of compliance with Code provisions:

1. Compliance improved across most provisions - around 98 percent of issuers complied with at least 41 of the 45 code provisions (up from the 96 percent that complied with 41 out of 44 code provisions in the second review).

2. However, only 43 percent of issuers had established a nomination committee (2006: 40.9 percent).

3. Moreover, only 10.8 percent of issuers reported on a quarterly basis (2006: 15.6 percent).

The review looked at disclosures of corporate governance practices made by 1,213 publicly traded issuers (listed as of Dec. 31, 2007) in their 2007 annual reports. The universe is a slight increase over last year when the second review looked at disclosures made by 1,114 listed issuers in their 2006 annual reports.

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Tuesday, February 24, 2009

Malaysian Exchange Seeks Comment on Proposed Governance Changes
Submitted by: David Smith, Co-Head, Asia-Pacific Corporate Governance Research

The Malaysian stock exchange, Bursa Malaysia, released earlier this month a consultation paper inviting comments on proposed amendments to several Listing Requirements. Included in these proposals are changes to the minimum public shareholding spread and the removal of the minimum number of public shareholders required (both at listing and as an ongoing requirement), and proposals for a higher general mandate for the issuance of new securities. Respondents should note that the closing date for comments is Feb. 27, 2009. Comments can be e-mailed to Bursa Malaysia using the appendices provided.

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Wednesday, January 21, 2009

Shareholders Rebuff Bellway’s Discretionary Bonuses
Submitted by: Tom White and Karla Silva, RiskMetrics' London

At its Jan. 16 annual meeting Bellway plc announced it would review future remuneration policy in conjunction with shareholders after an overwhelming 59% vote against the remuneration report. The revolt by shareholders was in response to the bonuses of 55% of basic salary recently paid to Bellway’s three top executives for their performance during a year when sales, profits and share price fell considerably.

Bellway plc is a UK housebuilding company that builds homes throughout England, Scotland and Wales. UK company meetings offer shareholders an advisory vote to approve the Company’s remuneration report for the year under review. The arrangements at Bellway created a revolt among shareholders after it did not base its bonus payments of more than GBP 630,000 (US $945,000), or 55% of their basic salaries, to its three Executive Directors on pre-set targets, but rather used discretion to make an assessment at year end. The payments, just below half of the ‘normal’ maximum available, were made despite a sharp fall in Bellway’s financial performance compared to the previous year.

The company’s financials deteriorated markedly from fiscal 2007 to 2008, according to its annual report, and the annual report did not clearly explain the rationale for the awards; neither did the company in extensive discussions with RiskMetrics.

In these discussions, the company maintained that external events were changing so rapidly it was not “sensible” to preset targets, although the 2007 remuneration report had stated that targets would be set for the 2007/08 financial year (as part of a general exercise in tightening up the key terms of the bonus). The Remuneration Committee instead decided to take a broader view of performance over the year as it did not want management to strive for arbitrary targets at the expense of taking the necessary actions required to deal with the rapidly developing crisis in the mortgage and housing markets.

In making its assessment at the year end, the Committee said it considered a number of factors, most notably the performance of management in positioning the company to focus on debt control, cash conservation, and the performance of management against that of other housebuilders struggling under enormous debt burdens and having to re-negotiate their bank facilities and associated covenants. The company is proposing to pay a final dividend to shareholders, resulting in a total dividend of 56% of the previous year’s level.

The Committee decided to pay bonuses to the three executive directors because it considered that they had performed well during the year in “hostile” circumstances and the Committee saw a direct link between their bonus and their performance.

The opacity of the Remuneration Committee’s discretionary process for assessing a bonus, however, raised concerns as to whether the Committee’s judgement reflected a proportionate response to: (i) the company’s significant deterioration in financial performance for 2007/08; (ii) the significant exceptional charge arising from the writedown of land and property assets; and (iii) the future outlook for the housebuilding sector given the difficulties that have continued to hamper lending by the major mortgage providers and for the recessionary outlook for the global economy as a whole.

Various shareholder representatives’ unease over the payment were reported in the media. The Financial Times reported that the Association of British Insurers (ABI), for example, had expressed concern that provisions of best practice have been violated and this matter should be taken into consideration by shareholders as they vote at the AGM. Peter Montagnon, the ABI’s Director of Investment Affairs, said, “Management had targets and abandoned them when it became clear they were not going to meet them. They decided to pay bonuses anyway.” Accordingly, the ABI issued a rare “red top” alert, signifying concern of the highest level for the pay-outs.

The Regulatory News Service revealed that, at the AGM, Chairman Howard Dawe told shareholders that the Board has noted shareholders' views on the Report of the Board on Directors' Remuneration and believes it was wrong in not consulting with major shareholders earlier. It therefore proposes to review future policy on this matter, in consultation with them, in the coming months.

Shareholders expressed their opposition to the bonus payments by registering a 59% vote against the remuneration resolution, which RiskMetrics had recommended its clients oppose.
This revolt shows that remuneration matters are under the intense scrutiny of shareholders in the current downturn. The response to the use of discretion by Bellway may be seen as an example of what is yet to come for the 2009 voting season.

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Tuesday, December 9, 2008

RiskMetrics Group Research: Brazilian Corporate Governance Trends
Submitted by: Sarah Cohn, Communications

RiskMetrics Group has just published a new piece of research this week titled, Brazilian Corporate Governance Trends. The report findings found that corporate governance practices in Brazil have improved significantly in recent years, but great strides must still be made to bring the country in line with international best practices. To access the research piece, please visit here.

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Tuesday, November 4, 2008

Japanese Investors Step Up Opposition to Pills
Submitted by: John Taylor, Japan Research Group

Corporate Japan may have a tougher time deploying “poison pills” as opposition to the use of such defenses mounts. In the latest signal that financial market participants have grown wary of the use of pills, shareholders of the Japanese payroll management company Works Applications were able to halt management efforts to install the defense. In September, the company became the first known to RiskMetrics Group to drop a poison pill takeover defense plan from its annual meeting agenda, acknowledging that votes posted in advance of the meeting had “fallen well short of anticipated support” for the measure.

Notably, the company sports just 15 percent foreign ownership, underscoring that domestic institutions are joining their foreign counterparts in opposing takeover defenses.

Works Applications’ recent retreat received scant media attention in Japan beyond a brief article in the Sept. 23 on-line edition of business daily Nihon Keizai Shimbun. According to the article, management told shareholders at the company’s Sept. 24 annual meeting that it had decided not to seek renewal of the plan in view of the paucity of shareholder support. According to a company statement released on the eve of the meeting, the company had “concluded that more careful study of the proposal content [was] required, and that it was resolved to delete these items from [the] annual meeting agenda.”

The move may be the latest manifestation of growing pushback to the growing prevalence of pills at Japanese companies. According to RiskMetrics data, more than 500 Japanese firms have adopted the defense since 2005 when legal experts deemed the defense to be legitimate under Japanese corporate law.

But by August 2007, Japan’s influential Ministry of Economy, Trade, and Industry began to publicly voice concerns over the use of pills. In its annual white paper on economic and finance issues, the agency singled out managements using pills as a means to entrench their positions, noting “hostile takeovers can boost productivity and corporate value by removing inefficient executives and improving management (the efficiency effect on management).”

METI’s pronouncement, coupled with increasing skepticism of pill usage from Japan’s business press, officials at the Tokyo Stock Exchange, and others, has decidedly altered views on defenses and helped dampen a feared explosion of poison pill adoptions during Japan’s 2008 annual meeting season. Although shareholder approval is increasingly treated as a prerequisite, if not legal requirement, for pill deployments, the incident at Works Applications would suggest that pill adoptions will decline heading into 2009, and firms may be increasingly reluctant to seek plan renewals.

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Friday, October 24, 2008

Sweden Proposes Bank Rescue Plan
Submitted by: Martin Wennerström, Research Team Lead (Nordic Region)

The Swedish government is fast-tracking a bailout package that could impact the executive and non-executive director compensation plans of the country’s banks and financial institutions.

Under the proposal, participating banks would have to “restrict salary increases, bonuses, board fee increases, and executive severance payouts.” While the restrictions would nominally expire at the end of the guarantee period on Dec. 31, 2009, it is as yet unclear whether the restrictions would in practice persist beyond this date.

The government plans to guarantee up to 1.5 trillion Swedish kronor ($205 billion) in borrowing by the banks. Sweden joins the United Kingdom, Germany, the Netherlands, and other European nations in taking action to shore up financial institutions. Also this week, France said it would spend 10.5 billion euros ($13.9 billion) to buy subordinated-debt securities from six major banks.

The guiding principle of the Swedish legislation would be for the brunt of any losses to be born by the financial institutions themselves and their shareholders, rather than taxpayers. Participation would be on an ostensibly voluntary basis, and participating institutions would be assessed a risk-based guarantee fee in the form of either cash or super-voting shares.

The proposed legislation, which has just cleared a comment period without major comment from Sweden’s financial authorities, states that executive compensation restrictions are needed to mitigate the moral hazard inherent in the bailout package. The government asserts that variable compensation could namely exacerbate risk-seeking behavior arising from guaranteed investments. Indeed, the principle that banks not profit from any risks born by the Swedish taxpayer is a central component of the proposed legislation.

The reaction to the bailout package among the major Swedish banks has been mixed. While Swedbank welcomes the plan, Svenska Handelsbanken (SHB) believes itself stable enough to remain outside the framework. Financial Markets Minister Mats Odell has nevertheless stated that he expects all banks to participate eventually, and attributes all statements to the contrary to private individuals rather than the institutions themselves.

The political and media response to SHB’s decision has been similarly mixed. Prime Minister Fredrik Reinfeldt has stated that participation should be purely voluntary, while both Finance Minister Anders Borg and Shadow Finance Minister Thomas Östros stress that all major banks should participate. Given that the program would lower the risk of the Swedish financial sector in general, Borg argues that anything less than full participation would allow some banks a free ride at the expense of others.

Beyond SHB, many banks have been lukewarm to the proposal, owing to the vagueness of the legislative text. The financial terms of the guarantee and credit fees, as well as the executive compensation restrictions, are as yet undefined and will be determined by the Swedish National Debt Office, which will administer the plan. The lack of interest has been reflected in the fact that the interbank loan rate reportedly fell less than expected following news of the bailout package.

Conversely, the government would formally have leeway to drop the executive pay restrictions entirely when negotiating with banks. Depending on the terms offered as well as the bargaining positions of the banks, executive pay considerations may be taken off the negotiating table. Time will tell, as negotiations will presumably begin immediately after the new legislation comes into force on Oct. 28. Top Swedish banking talent have in the past jumped ship as a result of pay cuts, meaning that the terms of the bailout package, as well as the final roster of participating institutions, could potentially impact the banks’ leadership structures.

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Wednesday, September 17, 2008

Proxy Season Preview: Australia
Submitted by: Martin Lawrence, Head of Research, Australia and New Zealand

The 2008 Australian proxy season, which gets underway at the end of September, promises to be dramatic. As has happened in a number of global capital markets over the past year, the credit crisis has exposed shortcomings in the risk management practices and business plans of Australian companies, while a slowdown in the world economy also has focused investor attention on links between executive pay and company performance.

Three key issues look set to dominate the proxy season: Director quality, executive pay, and the fate of listed, externally managed vehicles trading at significant discounts to director valuations.

The 2008 season is likely to be the first in several years where executive pay will not be the primary focus; Australia has since 2005 had a mandatory annual non-binding vote on company remuneration reports, and the 2007 season saw two major companies, AGL Energy and Telstra, have their remuneration reports defeated by large margins.

Director quality, however, is likely to trump pay as the key issue for 2008 after the credit crisis caught many Australian companies seemingly unprepared. Many of these companies will face annual meetings between September and November and some of their directors may be at risk of losing their seat in the face of shareholder anger. Notably, Australia mandates a majority vote standard for director elections.

A prime casualty of the credit crisis and key focus of investors will be Centro Properties Group and its listed subsidiary, Centro Retail. The twin entities’ inability to refinance their debt has left them at the mercy of bankers for nearly a year, and directors of both entities will be facing a host of questions from investors over what they perceive to be inadequate disclosure and poor risk management.

Also facing scrutiny will be directors of Allco Finance Group, the investment and finance firm that has since early 2008 relied on bankers to stay afloat when a collapse in its market value triggered debt covenants. Directors of Allco who approved the disastrous December 2007 purchase of property manager Rubicon, a business in which Allco’s former executive chairperson and another Allco director had major shareholdings, are also likely to face scrutiny, not only at Allco but at other companies at which they are directors.

Incumbent directors of ABC Learning Centre, the child-care operator that has been forced to delay the publication of its 2008 results as its new auditor reviews its accounting practices, are also likely to be under the microscope. The company announced significant changes to its board earlier this year in a bid to address investor concerns after a loss of market confidence around disclosure issues following its interim 2008 results. Still, the firm’s inability to finalize its 2008 accounts suggests investors will still have questions for the remaining directors.

Aside from these high-profile victims of the credit crisis, directors of companies such as IAG, Foster’s, Transurban, Challenger, and Mirvac are likely to face stormy meetings as investors question them over failed acquisitions, substantial payouts to departed executives, and faltering performance.

The decline in the Australian equity market over the past 12 months is also likely to lead to renewed interest in executive pay. As noted above, large payouts to departing CEOs are likely to again be a focus, and signs are emerging that some boards will be seeking to “compensate” executives for the impact of external economic factors on company performance. This is unlikely to be received well by investors, given many company executives have enjoyed windfall gains stemming from increased bonus payments over the past five years as the Australian economy boomed.

Part of the fallout from the credit crisis is the steep decline in the value of externally managed listed entities investing in infrastructure or similar assets. These funds, many of which will face investors at meetings over the next three months, have generally carried high levels of debt, leading to investor anxiety as debt has become more expensive and harder to find. Such worries were heightened when one entity, Babcock & Brown Power, announced a shortfall as it attempted to refinance debt following acquisitions in late 2007.

Governance features of these entities, especially the fees paid to external managers and the level of power they enjoy, have also come under scrutiny as security prices decline. Several entities managed by Babcock & Brown are seeking to renegotiate management agreements with that firm, while investors in some other funds have called for the entities to be wound up. The market’s corporate regulator, the Australian Securities & Investments Commission, has already signaled that these entities, and in particular their attempts to reduce the discount between director valuations and security prices, are likely to be a major area of focus as the watchdog deals with the post-credit crisis market environment.

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Friday, July 11, 2008

2008 Proxy Review: France
Submitted by: Guillaume Tassin, French Market Analyst

With the majority of annual shareholder meetings past, the French proxy season this year was notable for a greater focus on executive pay, and more pressure from activist investors.

The Law for the Promotion of Employment, Labor, and Buying Power (TEPA), which went into effect this year, reflects the growing shareholder discontent with executive severance pay. The law was adopted partly in response to the 2006-2007 insider trading scandal at European Aeronautic Defence and Space. TEPA requires that all executive pay at listed companies--except that related to supplemental retirement benefits or non-competition agreements--must be performance-based. Performance targets must also be verified by the board of directors, according to the law, which specifically targets retirement and severance benefits.

The law expands on a 2005 measure that stipulated that the terms of any new employment agreements with company presidents, CEOs, managing directors, and deputy managing directors be subject to approval by the board and by shareholders, according to a release by Soulier, a Paris-based law firm.

According to RiskMetrics Group data, 11 of 17 companies in the CAC 40--a major French stock index--that have submitted employment agreements to a shareholder vote this year have limited total severance benefits to two times an executive’s last total pay package. Though no pay measures failed to win majority shareholder support this year, a significant number of investors opposed severance packages with a salary multiple greater than two. For instance, 20 percent of shareholders voted against an employment agreement at Alcatel-Lucent’s May 30 meeting that would provide CEO Pat Russo with a €6 million ($9.5 million) severance package. Shareholders may have disapproved of the performance targets, which allow the severance payout if the company achieves 90 percent of its target revenue and/or 75 percent of target operating profit if Russo retires in 2009. Despite this high-profile instance, such agreements are rare in France.

Despite the passage of TEPA, companies can still choose a broad range of performance criteria--ranging from easily measurable shareholder returns to such benchmarks as internal business unit performance or client satisfaction. As the law still exempts payments in the case of a change in control or provided by a non-compete agreement, French executives and directors may still walk away with large severance packages.

Continue reading "2008 Proxy Review: France
Submitted by: Guillaume Tassin, French Market Analyst" »

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Tuesday, June 3, 2008

Proxy Season Preview: Japan
Submitted by: Marc Goldstein, Director of Governance Research-Japan

“Poison pills” and other takeover defenses will once again dominate the agenda at Japan’s corporate meetings this year.

The vast majority of Japanese companies hold their shareholder meetings over a two-week period in late June. This year, the largest number of annual meetings will take place on June 27--when companies such as beauty products firm Kao, electronic manufacturer TDK, and Mitsubishi UFJ Financial Group will hold meetings--although many will be held on June 18-20, and June 24-26. A few meetings, such as those at electronics firm Idec and construction toolmaker Trusco Nakayama, will be held as early as the week of June 9.

The most controversial issue this year will again be the introduction and renewal of various types of anti-takeover measures. In the wake of takeover attempts at Hokuetsu Paper, Bull-Dog Sauce, and Sapporo Holdings, and the belated legalization in May 2007 of stock-swap acquisitions by foreign firms (called “triangular mergers”), many Japanese firms are in a state of near-panic over the possibility of being acquired.

Their fears may be overblown, however. Triangular mergers are used overwhelmingly for friendly acquisitions, not hostile takeovers; and the difficulties of successfully managing a company after a hostile acquisition will help to ensure that the number of such cases will be limited. Also, some of the firms implementing pills are not especially vulnerable, because founding families, business partners, or other insiders own more than a third of outstanding shares. This is enough to veto any special resolution, such as an article amendment or a merger, severely limiting what a hostile bidder could hope to accomplish.

Nevertheless, several hundred companies will introduce or renew pills this year. One in seven Japanese companies likely will have a pill in place by the end of June. Since 2006, the vast majority of poison pills have been so-called “advance warning-type” plans. With these pills, the board announces a set of disclosure requirements it expects any bidder to comply with, plus a waiting period between receipt of information and the bid, before any offers are made. Advance warning defenses do not require shareholder approval, but in most cases, companies are choosing to put them to a shareholder vote, believing that doing so will put the company in a stronger position in the event of a lawsuit. As long as the bidder complies with the rules, the company “in principle” will take no action to block the bid, but will allow shareholders to decide.

Exceptions are usually allowed when the bid is judged to be clearly detrimental to shareholder interests. These include cases involving “greenmail” (when the bidder buys enough shares to threaten a takeover and forces the company to buy the shares back at a premium to avoid a buyout), a possible stripping of company assets by the bidder, or coercive two-tier offers. Usually, judgments on shareholder harm are made by a “special committee” or “independent committee,” which may or may not include members of the board, but the committee’s decision is usually subject to being overruled by the board. At some companies, the decisions are made by the board with no committee input at all.

Many of the poison pills introduced in the past few years will be up for renewal in 2008. Shareholders at Shin-Etsu Chemical and Sharp, for example, will vote on takeover defense renewals this year. Some companies, while not putting a poison pill on the ballot, will seek to pave the way for the eventual introduction of a pill through measures such as increasing authorized capital. Investors also will be asked to approve other article amendments designed to ward off hostile takeovers, such as the elimination of vacant board seats that could be filled by shareholder nominees, and the tightening of procedures for removing a director from office.

Continue reading "Proxy Season Preview: Japan
Submitted by: Marc Goldstein, Director of Governance Research-Japan" »

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Friday, May 9, 2008

Proxy Update: E. Europe/Russia
Submitted by: Aneta McCoy, International Analyst

The 2008 proxy season in Russia and Eastern Europe has been notable so far for hostile takeover activity and shareholder power struggles. A number of Eastern European countries--such as Poland and Bulgaria--have adopted new codes of corporate governance, which will take effect this year.

The Hungarian proxy season peaks in late April and early May, while annual meetings in the Czech Republic, Poland, and other Eastern European markets occur with more frequency in late April and May. The majority of Russian meetings take place in late May and early June.

Some of the most closely watched shareholder meetings--such as the annual meeting at MOL Hungarian Oil and Gas, and the special meeting at Russian mining firm MMC Norilsk Nickel--took place early in the season.

At the MOL meeting on April 23, 80 percent of investors approved a proposal submitted by OMV, an Austrian energy firm that has been trying to take over MOL since making an initial $15.7 billion bid in 2007. The resolution asked MOL to commission a special audit of management activities since 2005, including a number of share-lending agreements aimed at insulating MOL from a takeover.

When OMV increased its stake in MOL from 10 percent to 18.6 percent in June, MOL had already been building defenses against a possible hostile takeover for two years. Since December 2005, MOL has repurchased $4.8 billion in shares, as well as initiating a number of share lending agreements with companies such as Dutch banking firm ING and the Czech nuclear power company CEZ Group that were considered “friendly” to MOL’s interests. The company also adopted a 10 percent cap on voting rights. In September 2007, OMV raised its offer to around $20 billion, but MOL dismissed the offer again as not in the company’s best interests, according to the International Herald Tribune. MOL officials said a merger would destroy shareholder value, lower competition, and create a regional monopoly.

At the MOL meeting, a management-sponsored resolution for another share buyback program was opposed by approximately 20 percent of shares voted. Share repurchase programs at the company have typically not run into much opposition. A repurchase plan won 99.9 percent shareholder support in April 2007, and similar proposals in 2006 and 2005 were majority-supported, though the company did not disclose results.

The Hungarian government is under investigation by the European High Court of Justice regarding its response to OMV’s takeover bid. In October, the administration of Prime Minister Ferenc Gyurcasny adopted a law called the “Lex MOL,” which applies only to companies like energy firms that are “assets of strategic importance.” The law specifically eliminates the 10-percent voting cap on treasury shares--repurchased shares held by the company--and allows shareholders to approve a limit on the voting rights of an individual or group of shareholders if company bylaws permit it. The law also requires potential bidders to submit a business plan to Hungary’s financial market regulatory agency for approval. As soon as the law was passed, the European Commission announced it would open an investigation and would bring the case before the high court.

OMV’s bid also faces scrutiny. In March, European Union regulators voiced antitrust concerns, saying a merged company may decrease competition in Central Europe. The European Commission plans to rule on the transaction by July 22.

Continue reading "Proxy Update: E. Europe/Russia
Submitted by: Aneta McCoy, International Analyst" »

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Friday, April 25, 2008

Governance Reforms on the Rise in Spain
Submitted by: German Vargas, Global Research Analyst

Spanish companies have begun committing to greater board independence and the unbundling of director elections because of a new corporate governance code that comes into effect this year. Though Spanish companies do not often disclose their efforts to recruit independent directors or detail their executive pay practices, more firms likely will seek to improve their governance in 2008.

In 2006, a number of Spanish corporate governance experts--including the Comisión Nacional del Mercado de Valores (CNMV or National Stock Market Commission)--published the Código Unificado de Buen Gobierno (Unified Good Governance Code). In crafting the code, Spanish authorities were also influenced by the European Union, which is putting pressure on all member and prospective-member nations to have companies in their markets comply with corporate governance best-practice guidelines. The EU does not employ a unified set of governance guidelines, but many member nations, like Spain, follow recommendations like those in the Organisation for Economic Co-Operation and Development’s Corporate Governance Principles and the principles of the International Corporate Governance Network.

Spanish companies could begin complying with provisions of the code when it was introduced in 2006. Although the recommendations in the code are not legally binding as it becomes effective this year, it states that companies should “comply or explain,” that is, each company must provide a corporate governance report stating whether has adopted the tenets of the code, and, if not, the reason(s) for noncompliance. Companies began to add resolutions to implement code provisions last year, but in 2008 the rate of voluntary compliance likely will rise, especially in the areas of board composition and shareholder rights. The Spanish proxy season begins in late April and peaks in May.

The code covers board composition, operation, and reporting to shareholders. Recommendation 15 of the code highlights the importance of women in Spain’s economy, particularly in managerial positions, and emphasizes the need for companies to seek out female candidates to fill vacancies on their boards of directors. Though the code specifies that gender diversity is a managerial responsibility, so far, no companies have put forward specific proposals on director diversity issues.

Recommendation 13 calls for at least one third of a company’s board members to be independent of management and major shareholders. However, it will be difficult to assess how many companies are actively pursuing greater board independence as opposed to those that end up with more independent boards this year because of the departure of an executive or shareholder representative from the board. Spanish companies largely do not announce to shareholders their intent to bring on more independent directors.

Under Recommendation 5, all directors should be elected with a separate resolution, rather than bundled together as one slate. Although this recommendation still falls under the comply-or-explain guideline, the unbundling of director elections reflects a new emphasis on shareholders’ right to vote on proposals individually. There is a similar trend among Spanish companies to present article and bylaw amendment proposals as separate requests. As of the end of 2007, most Spanish companies put forward individual resolutions. Some of the companies that have unbundled include telecom provider Telefónica, Banco Santander, and utility company Iberdrola--which first offered separate resolutions in 2007. Firms that still have bundled resolutions in 2008 include insurance company Mapfre, construction materials firm Grupo Uralita, and electric utility Red Eléctrica de España.

Finally, Recommendation 40 suggests that a “Director Remuneration” report be put up for shareholder approval annually. This year, the first year in which Spanish companies have put remuneration reports before shareholders, about eight have gone to a vote.

According to the code, an ideal report would include details of the remuneration for board members, the remuneration suggested by the board/compensation committee for the company’s executives, and changes to the company’s remuneration policies in the past year. A report would also include, when appropriate, planned remuneration policies for the future. Although the shareholder vote to approve this report is not binding, the level of disclosure and the possibility for shareholders to express their discontent with a company’s compensation policies are both significant steps toward improved governance, in line with changes made in other markets over the past few years. The United Kingdom and Australia have implemented mandatory annual non-binding votes on executive pay, while such votes are binding in the Netherlands and Norway. The issue is also receiving a great deal of attention in the United States (where seven companies have agreed to put an advisory vote on executive pay on the ballot) and Canada.

Spanish companies include director pay information in their annual reports, but the disclosure standard varies by firm. Most include general information that is focused on director as opposed to executive compensation. However, a few companies, like Banco Español de Crédito (BANESTO), this year provided detailed information on performance criteria, share-based compensation plans, and peer groups.

Advisory pay vote resolutions have differed greatly so far this year. Investors were asked to vote on a general remuneration report at BANESTO on Feb. 26, and at recycling company Befesa Medio Ambiente and commercial bank Bankinter on April 17. Pay reports for directors only went to a vote at Mapfre on March 8 and television production firm Gestevisión Telecinco on April 9--and will be voted on at paper manufacturer Iberpapel Gestión on June 6.

It is still unclear as to how Spanish companies would react if a majority of shareholders were to reject a remuneration report proposal. All resolutions have received majority support thus far, according to company reports.

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Friday, March 14, 2008

Nordic Proxy Season Report
Submitted by: Karin Lindh and Markus Seppala, International Analysts

A number of regulatory changes and emerging trends will have investors focusing on incentive plans and variable pay in the Nordic markets this year. While Danish companies will begin to see the effects of new regulations on shareholder ratification of pay plans, Swedish firms are expected to diversify their methods of director pay to better tie compensation to performance.

The Nordic proxy season usually peaks around mid-March to April, but many meetings will be held early this year because companies want to meet before first-quarter reports are due. The Easter holiday, which is early this year, has prodded many Danish and Swedish firms to move up their meetings.

Denmark
This is the first proxy season since an amendment to the Danish Companies Act (lov om aktieselskaber) established a vote on executive pay. The legislation stipulates that, at all listed companies, the board must establish guidelines concerning variable pay to members of the supervisory and executive boards before making agreements on bonuses or stock compensation. Before they are implemented, the guidelines are put to a binding shareholder vote. Unlike in Norway and Sweden, which have binding annual shareholder votes on some aspect of executive pay, the guidelines at Danish firms only need to be approved when the board makes a material change, not annually like many pay votes.

Since the law was enacted in July, 13 proposals to approve guidelines for incentive-based compensation have gone to a vote. Eight of those proposals were approved by shareholder vote; the results at the other five firms have not been disclosed. According to Danish law, the complete proposals for the general meeting do not have to be made available until eight days prior to the general meeting. Market analysts are still concerned this year that the level of disclosure included in the proxy documents is not adequate to allow shareholders to make an informed decision on the pay guidelines. Large-capital Danish companies are expected to provide greater disclosure than mid- and small-cap firms, which may see more opposition to their proposed pay guidelines, analysts say.

Even under the new law, Danish shareholders will still have to separately ratify any incentive pay and bonus plans based on issuance of new shares.

Sweden
After shareholders of electronics firm Ericsson voted down the company's long-term incentive plan last year, focus on incentive plans has intensified in Sweden. Specifically, two new initiatives are drawing both analyst and shareholder attention this year.

In the past, Swedish directors have been compensated via fixed fees for board and committee work, and, in rare cases, attendance fees. Proposals for board remuneration are usually prepared by the company's nominating committee and approved by shareholders every year at the annual meeting.

During the 2008 proxy season, nominating committees at a significant number of companies, such as Ericcson, plan to propose that part of director pay be made up of variable elements. Specifically, some Swedish firms are considering offering board members phantom shares. In the Swedish system, a phantom share constitutes a cash equivalent of the share price on the grant date. Swedish companies propose to pay a certain portion of director remuneration--such as 25 percent--in phantom shares, which will be deferred for five years then paid in cash. Phantom shares differ from options in that there is potential of both upward and downward movement of the share price and therefore the value of the phantom shares. Depending on the share price, the director could receive either a higher or a lower level of remuneration when compared to fixed fees.

Swedish pension fund Alecta and Stockholm-based investment firm Investor, which have representation at many Swedish firms, urged the change in order to make board compensation more responsive to company performance. Unlike many other markets, where board nominating committees are composed of board members only, Swedish nominating committees typically consist of representatives for the company’s largest shareholders, sometimes with the addition of the board chairman. Both Alecta and Investor have representatives on numerous nominating committees because of their large holdings in the Swedish market.

The use of phantom shares is intended to replace the prevalent Swedish company practice of recommending that directors own stock corresponding to 25 percent of their net pay. Although this approach worked in the sense that most directors followed the recommendation, strict holding requirements are not legally enforceable in Sweden. Furthermore, insider trading regulations place restrictions on when directors can acquire shares. These restrictions do not apply to phantom shares, which are technically just promissory notes.

In February, the Swedish Securities Council (Aktiemarknadsnaemnden), a body that promotes good practice in the Swedish stock market, endorsed the use of phantom shares, as long as general principles on incentive plans are followed. The securities council outlined these general principles--including the need for disclosure of planned incentives, anticipated stock dilution, and reasons for adopting the incentive plans--in a 2002 statement. Swedish law dictates that the board cannot make changes to, or adopt, a plan affecting share transfer and issuance to company employees without the approval of nine-tenths of the shares present at the annual meeting.

At the moment, share-based remuneration for non-executive directors is extremely rare in Sweden. SKF Group, a ball-bearing manufacturer, pays its directors the value of a certain number of SKF shares, in addition to a fixed fee, every year. Before this proxy season, only a few companies--such as security products firm Gunnebo, medical equipment company Sectra, and pharmaceutical firm Orexo--granted stock options to non-executive directors.

In Sweden, all share-based incentive plans require the support of 90 percent of both the votes cast and the shares represented at the meeting where the plan is proposed, which means that minority shareholders have a real opportunity to influence the vote.

Sweden is a well-developed market in terms of incentive plans, with a multitude of different types of schemes. There are no signs of a decrease in either the number of plans or their complexity. Share matching plans, where participants make an initial investment in company shares in order to receive free or discounted shares after a vesting period, continue to be popular. Unlike some other markets, the initial investment has traditionally not been a portion of the employee's annual bonus. This year, however, analysts expect that a few deferred bonus plans will be seen in Sweden.

The 2008 proxy season could also see an increased number of plans in which incentive awards are adjusted for dividends accrued between the grant date and the exercise date. A method commonly seen in Finland, namely the lowering of the strike price of options by the amount of accrued dividends, is rarely found in Sweden. However, the number of shares per options will most likely be adjusted in a few plans, and in some share matching plans, accrued dividends on the matching share will be paid out at the end of the vesting period.

Continue reading "Nordic Proxy Season Report
Submitted by: Karin Lindh and Markus Seppala, International Analysts" »

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Thursday, March 6, 2008

Finnish Market Removes Barrier to Proxy Voting
Submitted by: Gary Hewitt, Marketing

The necessity for multiple copies of a Power of Attorney (POA) signed by the beneficial owner is seen by many to be a deterrent to vote, given the additional complexity, cost and administrative burden – particularly for cross border votes. We're pleased to announce some positive developments in this area in Finland.

On 27 February 2008 the major Finnish sub-custodians announced that power of attorneys (POAs) signed by the beneficial owner will no longer be required to vote at shareholder meetings in Finland. This positive market practice change, which is effective immediately, is the result of discussions between market participants that have been ongoing for several months. These discussions culminated in several sub-custodian banks obtaining a legal opinion confirming that there was no legal obstacle for removing the requirement for PoAs.

While we agree that this is a great step forward for corporate governance, there remains a possibility that an Issuer will not accept the new practice with immediate effect and will demand to see a signed POA. All participants will be monitoring the situation to ensure that the Issuers accept the new process.

About 15% of markets, many of them European, still require that beneficial owners sign a power of attorney (POA) in order to be eligible to vote. It remains to be seen if other markets will follow the Finnish example and remove existing barriers to cross-border proxy voting.

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Friday, February 29, 2008

Proxy Preview: South Korea
Submitted by: Daniel Oh, Korea Market Analyst

The 2008 Korean proxy season will be marked by the effects of a number of high-profile regulatory reforms, as well as a greater number of contested director elections.

The majority of South Korean annual meetings will take place on three consecutive Fridays this year: March 7, 14, and 21. Korean companies are required to publish official agendas only 14 days before the meeting date. Though some companies have begun to disclose agendas as much as 20 days beforehand, the short release window remains a significant obstacle for proxy voting by foreign investors in the Korean market.

Meeting agendas and proxy statements are released online via the Korean Financial Supervisory Commission’s (FSC) Data Analysis, Retrieval, and Transfer system (DART) Web site. Like the U.S. Securities and Exchange Commission’s EDGAR site, DART is a searchable repository for all Korean company filings. Most companies continue to file in Korean, though a small percentage of firms have co-released their proxy information in English. The agendas are often less detailed than U.S. proxy statements, containing the time and place of the meeting and brief biographical information on director and auditor nominees.

It is unlikely that the 14-day release requirement will be extended, according to market regulators, because the country’s Parliament believes that an extension would benefit foreign investors more than domestic investors. Such a measure would need the approval of two-thirds of the Parliament to pass into law, which is historically hard to achieve.

Last year, Korean regulators did make a number of legislative changes that will affect the way companies interact with their shareholders and do business in 2008. The first was a series of amendments to the Securities-related Class Action Act (SCA Act), which took effect Jan. 1, 2007. Prior to 2007, shareholders could only bring suits against companies holding assets of more than KRW 2 trillion ($2.1 billion), and a group of at least 50 investors owning at least 0.01 percent of the company was required for the suit to be valid.

The 2007 amendments allow investors as a class to sue smaller companies. However, no lawsuits have been filed under the new rule yet because the costs are high for individual shareholders. In August of last year, press reports indicated there may be a class-action suit filed against Youngjin Pharmaceutical, which had admitted earlier to the FSC that it falsified accounting records from 2004 through 2006, according to the Joongang Daily News.

In a 2007 paper, University of California at Berkeley Law School Professor Stephen J. Choi suggested that a functioning class-action system in Korea may still run into hurdles even after the new amendments because the country has comparatively very few attorneys--and those attorneys are relatively inexperienced in litigating class-action cases.

Continue reading "Proxy Preview: South Korea
Submitted by: Daniel Oh, Korea Market Analyst" »

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Monday, February 25, 2008

European Voting Policies--What You Need to Know for 2008
Submitted by: Christel Dumas, Marketing

RiskMetrics Group welcomes three governance expert speakers in its next online forum : John Garbutt of HSBC in the UK, Kris Douma of MN Services in the Netherlands, and David Diamond of Crédit Agricole Asset Management in France. All three have developed their own voting policies which they will apply during this proxy voting season. All three have chosen to focus on different issues which they believe are important when exercising shareholder rights: be it differentiated requirements per market; labor issues; social issues and more.

They will share their experience and focus tomorrow February 26 at 3.30 PM CEST; 2.30 PM GMT; 9.30 a.m. EST, as part of RiskMetrics Group's ongoing What You Need to Know series. Join these leading European Asset managers and discover how they address key topics that arise in general meetings. Compare their approach to yours and learn more about RiskMetrics’ European updates on proxy voting policies. To register for the webcast, please visit here.

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Friday, February 22, 2008

Norway’s “Golden Skirts”
Submitted by: Amir Maki, Scandinavian Market Analyst

As of Jan.1, it became mandatory for all Norwegian companies listed on the Oslo Stock Exchange (Oslo Børs or OBX) to ensure that at least 40 percent of directors were women.

Non-compliance, according to the Norwegian Public Companies Act, can result in a company being de-listed from the OBX. It is also possible for the government to dissolve a company for not fulfilling board requirements.

The gender requirement applies to all publicly owned enterprises (state-owned limited liability and public limited companies, state-owned enterprises, companies incorporated by special legislation and inter-municipal companies) and all public limited companies (PLCs) in the private sector. Limited liability companies are excluded from this regulation. Currently there are about 500 PLCs in Norway.

The gender equality initiative in Norwegian firms began in 2004, when all government-owned companies were required by the Companies Act to maintain boards with 40 percent representation of each gender. For the non-state owned PLCs, the requirements were initially voluntary. However, a July 2005 assessment by the government revealed that only 16 percent of board members were women. In light of the slow progress, Norway’s Parliament in 2006 made the 40 percent requirement mandatory for non-state owned companies after Jan. 1 of this year. PLCs registered before Jan. 1, 2006, were given a two-year transitional period to comply with the law, all firms registered after that date were required to follow the conditions immediately.

The law states that both genders must be represented if the board consists of two or three members. If the board consists of four or five members, at least two must be women. If the board consists of six to eight members, three must be female. At least four women must be on the board if it has nine members, and if the board consists of 10 or more members, then at least 40 percent should be female. If there is more than one employee representative on the board, then both genders must be represented, unless one gender constitutes less than 20 percent of the work force.

As a result, companies have had to recruit about 1,000 female directors, and many firms have claimed it is difficult to find experienced candidates, The Economist reported in January. Some of the most qualified women sit on 25 to 35 boards, leading the Norwegian business community to label them “golden skirts.” As a consequence of the limited supply of experienced female directors, some Norwegian investors have become concerned about “overboarding,” or directors sitting on too many boards. Overboarding, the investors say, can compromise director attendance, adequate preparation for board meetings, and overall performance. In response to the increased demand for female leadership, the Confederation of Norwegian Enterprise has launched a program, called Female Future, and has trained about 600 women in preparation for board and leadership positions.

According to a study by the Norwegian Statistical Bureau (Statistik sentralbyraa), 24.6 percent of Norway’s 2,639 directors were women as of January 2007. The same study revealed that 38.2 percent of the PLCs complied with all the gender representation requirements by the end of 2006, double the number of compliant companies in 2005. However, companies still needed about 460 women at the start of 2007. The search for competent board members and executives stretched across borders to neighboring Nordic countries and to the public sector. For example, Aker Kvaerner, one of Norway’s largest oil companies, has recruited four former ministers to several of its subsidiary boards. By the end of 2007, the Statistik sentralbyraa noted that 84 percent of public firms attained the female board representation requirement.

The oil and gas sector, according to The Economist, possibly had the greatest difficulty in finding qualified female candidates. For instance, DNO, a Norwegian oil firm with operations in the Middle East, found women for its board in November, but they are experienced in human resources and finance rather than oil extraction and supply, company President Helge Eide told The Economist.

Globally, the nomination committees of corporations are dominated by male directors who generally propose men to serve on the boards. Although the 40 percent rule in Norway has put a burden on boards, studies have shown that greater female representation has positive effects. For example, a study by the Conference Board of Canada in 2002 found that corporations with female board directors have superior governance practices, particularly on oversight and control of audit and risk. A joint study of 89 European companies by McKinsey and Amazone Euro Fund concluded that companies with the most gender-diverse management teams outperformed their peers in return on investment by 10 percent, and in pre-tax and pre-interest earnings by 48 percent. The study also noted that stock prices at gender-diverse companies grew 1.7 percent faster than the share prices of less diverse peers.

According to Corporate Women Directors International’s 2007 report on board representation, women hold 11.2 percent of the board seats among Fortune Global 200 companies. In the U.S., women hold about 17.6 percent of board seats, in Sweden 19 percent, and in the United Kingdom 13.9 percent. Female board representation is lower in other developed markets, including the Netherlands (12.2 percent), Germany (10.9 percent), Switzerland (9.5 percent), France (7.6 percent), Italy (2.9 percent), and Japan (1.3 percent).

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Thursday, February 21, 2008

European Governance Landscape Webcast--What You Need to Know for 2008
Submitted by: Christel Dumas, Marketing

Are you looking to better understand the European corporate governance landscape prior to the start of proxy season? As part of RiskMetrics Group's ongoing What You Need to Know series, Jean-Nicolas Caprasse, RiskMetrics Group's Head of Governance Services, will be joined by European lead analysts who will share their insight and knowledge of the European Corporate Governance Landscape through an online forum on Friday, February 22 at 3.30 PM CET; 2.30 PM GMT; 9.30 a.m. EST.

During this webcast, RiskMetrics Group analysts will compare and contrast director elections and board compositions in european markets. They'll also highlight new and creative remuneration tools to look out for; the status of remuneration reports approved at general meetings and many more remuneration topics, focusing on recent updates and issues to look out for in the upcoming proxy season. In addition, Jean-Nicolas Caprasse will present recent statistics describing the European Governance Landscape.

To register for the governance landscape webcast, please visit here.

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Friday, January 4, 2008

Analysis: European Defenses
Submitted by: Subodh Mishra, Publications

Investors in European companies may sharpen their focus on takeover defenses this year following a recent decision by Europe’s top regulator to pull back on plans to promote the principle of one-share, one-vote.

The future of European corporate takeover defenses--such as multiple voting rights, voting rights caps, and “golden-shares”--has been a key focus of debate in recent months as governance watchers closely monitor the words and deeds of regulators, who, some argue, have taken an inconsistent approach to curbing their use.

For years, key European Union (EU) officials voiced support for investor efforts to promote the concept of one-share, one-vote, arguing the right was consistent with broader EU efforts to dismantle takeover defenses.

"The [c]ommission intends to undertake a study into the way in which the principle of one-share, one-vote can be translated into reality," Frits Bolkestein, head of the European Commission's (EC) Internal Markets, said in a 2004 speech. Ireland native Charlie McCreevy would succeed Bolkestein shortly after that speech, but the commitment remained, with McCreevy backing the right of one-share, one-vote during his own confirmation hearings.

In 2006, investors concerned with the widespread prevalence of takeover defenses on the continent again took heart when the European Court of Justice ruled against the use of “golden share” takeover defenses--giving the holder veto rights over certain transactions--at Holland's dominant telecommunications provider and postal carrier, holding that the use of such defenses restricted the free movement of capital.

To investors, regulators were taking the right approach, despite ongoing calls (and actions) by politicians in some member states to allow for the use of poison pills and other defenses.

But that sentiment would begin to change this summer when a key EU official backed calls by politicians to implement defenses as foreign investors took equity positions in European aerospace giant EADS. The German and French governments sought to install a golden share at the company following equity purchases by a state-controlled Russian bank and the investment arm of the government of Dubai.

EU Trade Commissioner Peter Mandelson tacitly backed their calls, arguing such a defense was warranted on national security grounds, despite the European high court ruling that just one year earlier that had chastised the Dutch government for doing so.

More recently, those who now question regulators’ commitment to dismantling corporate takeover defenses in Europe point to an October decision by McCreevy to back away from his long-held position on equal voting rights. Indeed, on Oct. 3, McCreevy told European lawmakers that he would no longer push companies to adopt a one-share, one-vote capital structure, leaving investors and other proponents of shareholder democracy frustrated.

“It's a shame that the capital markets integration project can’t muster the strength to take on entrenched positions,” noted Anne Simpson, executive director of the International Corporate Governance Network, on the heels of McCreevy’s announcement. McCreevy’s decision effectively sanctions companies’ continued use of the most common defenses, dubbed “control-enhancing mechanisms,” such as multiple voting rights and voting right limitations, which are common in markets ranging from France to Sweden.

In his comments to lawmakers, McCreevy said that shareholders should use their existing voting rights to push for better dialogue and enhanced transparency. But, he noted, a further layer of EU action is “not the right way to go,” given that existing legislation now helps ensure transparency. McCreevy defended his reversal on the one-share, one-vote principle by citing the results of an EU-commissioned study, published in May, which found control-enhancing mechanisms had little effect on a company’s financial performance and governance.

Continue reading "Analysis: European Defenses
Submitted by: Subodh Mishra, Publications" »

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Thursday, December 13, 2007

New RiskMetrics Group Study: Employee Incentive Plans in Sweden
Submitted by: Christel Dumas, Marketing

Incentive plans of listed companies have become increasingly important and certainly more controversial. In a new study published by our Nordic research analysts titled "Employee Incentive Plans in Sweden," we will shed light on some of the specifics of incentive plans encountered in the Swedish market.

There are generally two categories of equity-based incentive plans in Sweden: option plans and share plans. Among the options plans, we distinguish four instruments – call options, convertible bonds, subscription rights, and stock appreciation rights. Among the share plans are restricted share plans and matching share plans.

In Sweden, market practice indicates that the conversion price of stock options is at least equal to market value on, or close to, the date of grant. What makes Swedish stock option plans interesting are not so much the conversion price or instruments used, but how the taxation of stock options in Sweden has compelled companies to come up with inventive solutions.

To access the report, please visit the "What's New" section of RiskMetrics Group's Knowledge Center.

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Monday, October 29, 2007

A Look at Global Governance Developments
Submitted by: Kosmas Papadopoulos, Custom Research Staff

As a supplement to ISS Governance Services’ recently released 2007 Postseason Report, we’ve published an article titled, Tracking Progress: A Look at Global Governance Developments, which summarizes corporate governance developments in a handful of international capital markets. The overview looks at key legal and regulatory changes in markets such as Denmark, Italy, the Netherlands, Poland, and South Africa, noting, for example, the adoption of a new corporate governance regime by Consob, the Italian regulator, as well as Dutch plans to lower shareholding disclosure thresholds from 5 percent to 3 percent. The article also examines governance developments in Belgium, Greece, and Singapore.

Notably, the article contains interviews with good governance advocates from Hong Kong, Switzerland and Turkey. David Webb, editor of webb-site.com, details changes affecting minority shareholder rights as well as other key governance developments in Hong Kong, while Dominique Biedermann, managing director of the Ethos Foundation, shares insights on recent controversies over executive compensation in Switzerland. Meanwhile, Prof. Melsa Ararat of Sabanci University in Istanbul discusses recent developments in the Turkish market and details an Organization for Economic Cooperation and Development report gauging the efficacy of governance in that developing capital market.

To read the article, please visit “News Articles” on the Trends in Corporate Governance Section of RiskMetrics Group’s Knowledge Center.

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Friday, October 5, 2007

Proxy Season Preview: Australia
Submitted by: L. Reed Walton, Publications

Compensation is once again likely to top investors’ list of issues to watch as the Australian annual meeting season gets underway.

There are about 1,700 listed companies in the country, with around 300 meetings of large-cap companies to take place between mid-October and mid-November.

Investors in Australia’s public companies have an annual non-binding vote on the pay plan for top executives and non-executive directors, and Australian boards have been stepping up engagement with shareholders since those votes began in 2005. However, recent trends in compensation policy and regulation have investors keeping a closer eye on how companies give equity grants to executives and formulate performance-based pay.

All companies listed on the Australian Securities Exchange (ASX) are required to put any planned stock option grants for all directors (including executive directors) to a shareholder vote, according to ASX Listing Rule 10.14. The major exception to this rule--instituted in October 2005--concerns any shares bought on the market using company funds, because they are considered securities acquisitions. Shares purchased on-market (rather than created) cause no stock dilution, and therefore many companies did not disclose grants of securities bought on-market to shareholders.

The rule effectively coincided with the first releases of Rule 10.14 waivers granted to companies. According to documents the ASX began making public in February 2005, several companies had been obtaining listing rule waivers rather than put controversial equity grants to a vote.

The Australian Council of Superannuation Investors (ACSI), a non-profit advising group for the country’s pension funds, pushed the ASX to mandate a vote on all equity grants except those involving salary sacrifice--when the director gives up some of his or her pay to purchase the shares.

“[R]equiring prior approval of equity grants … could reduce the potential for options being ‘back-dated’ or ‘spring-loaded,’” the ACSI wrote in a comment letter in February. Options backdating is a phenomenon that is relatively unknown in Australia because of the standard of prior approval, but the ACSI fears that Rule 10.14 as it stands may lead to misdating of options to get better exercise prices.

Comment letters on the rule show a sharp divide along investor-issuer lines, with most companies advocating keeping the exception the way it is, and most investor groups pushing to refine or reverse it.

This year, investors are also watching the way companies shape long-term incentive plans for their senior executives.

In the past four years, the number of top 300 ASX-listed companies that link equity grants to total shareholder return (TSR) has risen. TSR incentive plans look at the change in share price plus dividend and capital, over three years, as a performance target.

When setting a TSR-based incentive, companies usually choose a set of peer firms in the same industry or same market capitalization for comparison. For instance, a plan may be structured so that if the three-year TSR is at the median of the peer companies, 50 percent of the incentive shares vest. If the company performs at the 75th percentile of the peer group, all shares will vest.

Standard & Poor’s describes TSR performance hurdles as “the most transparent and accurate means of measuring and comparing the performance of companies.” But Australian executives have begun to complain that the performance targets are too strict.

As this type of incentive plan is relatively new, executives have only begun to see incentive shares go unvested in the past year. A major concern among Australian companies is losing executives to private equity firms that are under no shareholder pressure to require performance-based pay. Some companies have indicated this year that they plan to ask shareholders to approve one-time retention payments for CEOs or institute time-vesting shares for some employees.

Continue reading "Proxy Season Preview: Australia
Submitted by: L. Reed Walton, Publications" »

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Wednesday, October 3, 2007

Hong Kong Claims Top Spot in Asian Governance Survey
Submitted by: Subodh Mishra, Publications

A survey released last week of 11 major capital markets in Asia finds Hong Kong to be tops when it comes to corporate governance practices, though more needs to be done regionally for Asian economies to catch up to governance standards in Europe and the United States.

The survey, CG Watch 2007, was produced jointly by brokerage house CLSA Asia-Pacific Markets and the Asian Corporate Governance Association, a Hong Kong-based good governance advocate. The survey, the groups’ first since 2005 and the first to incorporate Japan, comprised 87 questions in five categories covering: corporate governance rules and practices; enforcement; political and regulatory environment; accounting and auditing standards; and corporate governance “culture.”

Top-ranked Hong Kong was followed by Singapore, India, and Taiwan, with Japan rounding out the top five. Laggards included Indonesia and the Philippines which ranked last and second-to-last, respectively.

Hong Kong displaced Singapore atop the rankings because of “a palpable sense that the pace of policymaking [in Singapore] has slowed,” the survey noted. “Hong Kong may not be attacking its problems with vigour or urgency, but at least it continues to progress.” Hong Kong was also lauded for its efforts in the enforcement, political and regulatory environment category, and the corporate governance culture categories, while the survey noted that “its regulatory officials are well aware of the distance between local norms and international standards.”

Newcomer Japan scored well in the categories of enforcement and culture, owing to recent company law changes and a new omnibus securities law dubbed “J-SOX.” The survey points out, however, that Japan has far to go, given it “has no real concept of ‘independent director,’” and lacks a code of corporate governance, unlike others surveyed. Ninth-ranked China, meanwhile, is praised for its achievement over the past two years in the regulatory realm, noting securities law and exchange listing rule changes that have helped shore-up governance practices, as well as efforts by officials to enhance the quality and quantity of English language material on regulatory Web sites.

Looking broadly, the survey warns that regulators, issuers, and investors have become complacent, placing less emphasis on corporate governance as capital markets in the region have roared in recent years. The lack of movement implies a “degree of regulatory perfection that does not yet exist in any Asian market,” the survey’s authors caution.

Copies of the report are available for purchase by contacting the Asian Corporate Governance Association.

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Wednesday, June 20, 2007

European Commission Formally Adopts Shareholder Rights Directive
Submitted by: Vaughn Stewart, International Analyst

On June 12, 2007, the European Commission announced the formal adoption of the "Directive on the Exercise of Certain Rights of Shareholders in Listed Companies." This new measure not only increases shareholders' access to information but also increases their ability to exercise their rights. According to Internal Market and Services Commissioner Charlie McCreevy, "These new rules will mean that shareholders, no matter where they are located in the EU, can have their say about the way companies are run and can hold management accountable."

Among other noteworthy improvements, the Directive requires minimum notices periods of 21 days for general meetings, mandates disclosure of voting results on company Web sites, and abolishes the old practice of share blocking. Furthermore, it abolishes many of the obstacles preventing shareholders from participating electronically at meetings (including electronic voting). The protection of a shareholder's right to ask questions and the company's obligation to answer them are also set out in the Directive.

The Directive represents a significant step forward for European corporate governance. Member States now have two years to implement the Directive in their national laws.

More information on the Directive and the consultation is available here.

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Friday, March 2, 2007

Novartis Investor Challenges Exit Pay and Combined Chair-CEO
Submitted by: Roland Escher, International Research Analyst

At the March 6 annual meeting of Swiss pharmaceutical giant Novartis, chairman and CEO Daniel Vasella and Hans-Joerg Rudloff, chair of the compensation committee, are up for reelection.

Last week, the Ethos Foundation said it would vote against Rudloff, asserting that he presided over the approval of excessive "golden parachute" severance packages for five top executives, including Vasella. Ethos, which was created by Swiss pension funds, has been at the forefront of shareholder engagement in Switzerland.

Ethos estimates that Vasella received CHF 44 million ($36 million) in total compensation in fiscal 2006. Severance for Vasella and four other senior executives is three times annual pay, and five times annual pay in case of a change in control. However, the company has not disclosed what would constitute "annual pay" for purposes of applying the multiple. Yola Biedermann, head of corporate governance at Ethos, told Governance Weekly that "it is clearly not just base compensation. In a worse case scenario, the golden parachute would amount to five times CHF 44 million, i.e., CHF 220 million."

To help investors raise these concerns at other firms, Ethos has called for an annual investor vote on executive pay in Switzerland. Ethos made this request in November as part of a study on the compensation of executive and non-executive directors at the 100 largest Swiss companies. Investor votes on compensation are a common practice in the United Kingdom, Australia, Sweden, and the Netherlands. In the United States, shareholders have filed more than 50 proposals this proxy season that request an advisory vote on pay practices.

Ethos also plans to abstain from reelecting Vasella, because the foundation contends there is no justification for continuing to concentrate the roles of chairman and CEO in one person. In 2005, Ethos filed a resolution at Nestlé to separate the chairman and CEO roles, which received 36 percent support from shareholders.

At Novartis, Vasella became CEO in 1996 and has held the chairman position since 1999. At the time, the company justified the combination of the chairman and CEO roles as a temporary measure, following Novartis' creation by the 1996 merger of Sandoz and Ciba-Geigy.

While the combination of the chairman and CEO positions is losing favor in Europe, the practice is still common in the United States. In Switzerland, according to Ethos data, only 17 of the largest 100 companies combine the positions, and three of those have announced a planned separation. The Swiss Code of Best Practice for Corporate Governance allows a combination but calls for "adequate control mechanisms."

Novartis has structures in place to offset the combined roles, as many U.S. issuers do. Based on ISS classification criteria, Novartis' board is 75 percent independent. In addition, no executives serve on the audit and compensation committees, and all three key committees have independent chairs, as well as a majority of independent members.

When asked why he won't give up one of his dual roles, Vasella turned the question back to shareholders. "Since there is no conclusive evidence of any downside to a combination, critical investors should demonstrate that there would be a clear upside to a separation," Vasella told Governance Weekly.

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Monday, January 29, 2007

ThyssenKrupp Grants New Voting Power to Foundation
Submitted by: Roland Escher, International Research Analyst

At the Jan. 19 annual meeting of German steelmaker ThyssenKrupp, shareholders approved an article amendment that gives the Alfried Krupp von Bohlen und Halbach Foundation (Krupp Foundation) the right to appoint three out of the 10 supervisory board members elected by shareholders.

The foundation, which was set up by the founder of a predecessor company, is ThyssenKrupp's largest investor, and recently increased its stake to 25.1 percent. The direct appointment of foundation representatives will bypass the traditional director election process.

If the three foundation appointees join forces with the 10 members who are elected by employees, they would outnumber the seven members who will continue to be elected by outside shareholders. Against the background of a rapidly consolidating steel industry dominated by emerging-market players, some analysts see this as a defensive measure to protect the company against hostile takeovers.

The story has taken on added significance because the chairman of ThyssenKrupp's supervisory board, Gerhard Cromme, who defended the measure in front of angry shareholders attending the annual meeting, is also the head of the government commission that created the German Corporate Governance Code (Kodex). According to provisions of the Kodex, it is the general meeting that should elect shareholder representatives on the supervisory board, and those members should represent the interests of all shareholders. Those critical of Cromme's support for the change also point to his role as CEO of ThyssenKrupp until 2001 and longstanding close ties to the Krupp Foundation.

In defending the move, Cromme argued that giving the Krupp Foundation the right to appoint supervisory board members would actually improve transparency, one of the main aims of good governance, by clearly disclosing the foundation representatives' allegiance.

Cromme also sits on the supervisory board of Siemens, which is under criminal investigation by the state attorney's office in Munich in a bribery scandal involving 420 million Euros ($557 million) of payments under review. A large number of shareholders were expected to vote against the annual management proposal to absolve the management and supervisory boards from liability for their actions at Siemens' Jan. 25 annual meeting.

The controversial ThyssenKrupp resolution received 289.8 million votes in favor, or 78.9 percent of votes cast, according to a company press release. Press reports indicated that a number of large German investors voted with ThyssenKrupp management for fear of upsetting Cromme, who sits on nine German supervisory boards.

Vereinigung Institutionelle Privatanleger (VIP), a German association of shareholders, filed a counterproposal opposing the measure. According to Hans Buhlmann, head of VIP, the measure is "a poison pill, which can only be removed by a three-quarters majority vote." However, shareholders voting by proxy were not able to vote on the counterproposal because of the compan's procedural rules.

Some industry observers, including Dieter Fockenbrock of the German-language daily Handelsblatt, expressed concern that the ThyssenKrupp vote will set a precedent whereby other large shareholders will try to enshrine their representation on German supervisory boards. One example is Porsche, which owns a 29.1 percent stake in Volkswagen, and has openly called for more influence at the German carmaker.

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Wednesday, January 24, 2007

Swissair Trial Targets Directors Over Perceived Mismanagement
Submitted by: Roland Escher, International Research Analyst

A criminal trial over the collapse of Switzerland's national air carrier, which began this week in a Zurich suburb, may help define the extent to which Swiss boards can be held accountable by investors and stakeholders.

Most shareholders of SAirGroup, the holding company for Swissair, have long written off their investment after the corporate icon went bankrupt in October 2001. However, the trial may set an important precedent regarding the liability of directors and executives over what ended up as the country's largest corporate collapse--estimated at CHF 17 billion ($13.6 billion).

Nineteen former directors, executives, and outside advisors are on trial on charges that they breached their fiduciary duties by granting fraudulent authorizations, making false reports, and committing personal income tax fraud, among other crimes.

After originally being rejected by a court as too broad, the case was re-filed in July 2006 by the office of the state prosecutor for financial crimes for the Canton of Zurich. The office has set up a separate team focused exclusively on investigating the circumstances surrounding Swissair's collapse.

The current criminal case is the result of only the first half of the team's investigation. Prosecutors expect to file a second criminal case based on violations of accounting rules, at the earliest in the second half of the year. According to Bloomberg News, the trial is the first time that outside directors have faced criminal charges for their involvement in a Swiss corporation's failure.

The list of defendants reads like a who's who of Swiss industry. Those being prosecuted include Mario Corti, a former CFO of food multinational Nestlé; Eric Honegger, a former director of Swiss banking giant UBS and former government official for the Canton of Zurich; Lukas Muehlemann, a former CEO of both Credit Suisse and insurer Swiss Re; and Thomas Schmidheiny, the former chairman and CEO of cement conglomerate Holcim.

Because of the precedent-setting nature of the trial and the stature of those targeted, commentators have compared the proceedings to Germany’s Mannesmann trial, in which Josef Ackermann, the powerful chairman of Deutsche Bank, and other members of Mannesmann's supervisory board, were accused of illegally approving payments made to Mannesmann executives during a 2000 buyout by Britain's Vodafone. That trial had wide-ranging implications for the German market and helped spur best practice regulations including those to improve pay disclosure.

Germany's Lufthansa agreed to buy Swiss International Air Lines, Swissair's successor airline, in 2005. However, Karl Wuethrich, the liquidator appointed to oversee the winding up of SAirGroup, has filed a number of civil proceedings to recover damages on behalf of former creditors and shareholders, in parallel with the criminal case now underway.

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Wednesday, December 20, 2006

Equity Grants to Directors Should Require Consent
Submitted by: Sarah Cohn, Director of Communications

Interesting opinion piece in the Australian Financial Review by Geof Stapledon, Managing Director of ISS Australia, and Martin Lawrence, Lead Analyst of ISS Australia, titled "Equity Grants to Directors Should Require Consent."

The piece highlights the need to reinstate the shareholder approval requirement to issue equity grants to directors. Currently, the ASX is seeking comment on this rule.

Please Download file to read the entire article. We welcome your thoughts on restoring this rule in Australia.

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Thursday, December 14, 2006

Changes to Proxy Voting and Shareholder Communication in France
Submitted by: Christel Dumas, Marketing and Communications Manager, ISS Europe

A new French decree law was published this week, on December 12, in the "Journal Officiel" and will be fully effective as of Jan 1, 2007. The decree takes into account the recommendations issued by the Autorite Des Marches Financiers (AMF) workgroup --which ISS' French office contributed to.

In spirit, many of these changes are a step in the right direction for improving shareholder rights. However, there may be unintended consequences due to practical implementation and due to the short deadlines of this decree. This decree was expected and brings significant changes to the following areas:

- It introduces a record-date system. The record date must be three days before the general meeting and replaces the blocking shares requirements. As a result, we could see a rise in proxy voting volume and more participation by foreign shareholders who disliked blocking requirements.

However, a record date set so close to the date of the general meeting is an operational challenge that will have to be resolved by the intermediaries. Investors can only hope that, faced with a short two weeks to implement this law, the intermediaries' answer will not be to impose earlier instruction deadlines or blocking of shares at intermediary stages.

- Meeting agendas will be notified 35 days before a meeting instead of the current 30 days before the AGM. This measure will allow ISS to announce meetings and agendas earlier. Time will tell whether this will be accompanied in practice with better and earlier disclosure of data needed to make informed voting decisions.

-Shareholder proposals must be sent at the latest 25 days before the general meeting if the notice is published up to 45 days before the meeting, instead of the current 20 days before the meeting. If the notice is published more than 45 days before the meeting, shareholders need to send their resolutions at the latest 20 days after the publication of the notice. This should give other investors more time to consider shareholder resolutions.

-Shareholders must send written questions to management at least four days before the AGM. This imposes a stricter deadline than before as shareholders could previously send questions within a "reasonable" deadline. This change places the burden back on the shareholders instead of on the representatives.

-Finally, during a takeover period, an EGM can be called with a 15 day notice. In that case, shareholder resolutions must be received 5 days after the publication of the meeting notice. This is a significant change as shareholder meetings could previously not be called during a takeover because an offer period is limited to 25 days, while the minimum notice period for an EGM was 30 days. This caused inconsistencies with the national Breton law on hostile takeovers of French companies, since shareholders could not be consulted on issuance of warrants during a takeover.

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Wednesday, November 22, 2006

OECD Notes Governance Progress in Turkey
Submitted by: Tad Kopinski, Staff Writer

The Organization for Economic Cooperation and Development (OECD) issued its first report on corporate governance in Turkey, praising progress made and itemizing a long list of necessary improvements.

"Although the overall corporate governance outlook is positive, the assessment reveals some key areas for improvement by companies and the authorities," the OECD concluded in a 150-page report issued last month.

The report notes that corporate ownership in Turkey tends to be concentrated in family-controlled, financial-industrial company groups. Free floats are often low, pyramidal structures are common, and there is a high degree of cross-ownership within some company groups. Controlling shareholders often play a leading role in the daily management and strategic direction of publicly held companies.

These challenges notwithstanding, the country's securities regulator, the Capital Markets Board (CMB), receives high marks from the OECD for "playing a leading role in setting corporate governance standards for publicly held companies, enforcing the applicable standards, and fostering market integrity." In recent years, Turkey has adopted a corporate governance code (CMB Principles) and implemented a wide range of fundamental regulatory reforms.

The report calls for further improvements in the disclosure of related-party transactions and self-dealing, the protection of minority shareholders, and the role of the board in overseeing not only management but also controlling shareholders.

"Some of the existing shortcomings can be addressed only by the private sector, including controlling shareholders, board members, senior management, company advisers, auditors, and investors," the report notes. "In particular, board members and controlling shareholders need to show they are adhering to the spirit, and not just the letter, of the relevant standards."

Proposed amendments to the company law provisions in the Turkish Commercial Code (TCC) would call for more disclosure about company groups and would require controlling companies to compensate controlled companies for losses incurred as a result of their exercise of control. This should strengthen the protection of minority rights, according to the OECD report.

The revised code proposal has been submitted to the Grand National Assembly and is now under consideration in the appropriate subcommittees.

The proposed amendment designating Turkish Accounting Standards (TAS) as the sole source of general financial reporting standards for all companies (including financial firms), represents a major step forward, as does the proposal requiring all companies to make investor-related information available on company Web sites, according to the report.

The OECD report also recommends that the CMB place more emphasis on comprehensive risk-based approaches to standard-setting, supervision, and enforcement, and that the agency include corporate governance factors in its risk assessment criteria. The report also encourages formalizing and enhancing the transparency of the CMB's consultation practices, including the publication of regulatory impact analyses.

"Turkey has gone a long way to achieving many of the outcomes advocated by the OECD principles," the report concludes. 'In several key areas, however, more needs to be done to ensure satisfactory outcomes."

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Wednesday, November 15, 2006

Companies Bill Ushers in Key Changes for U.K. Companies
Submitted by: Sarah Cohn, Director of Communications

Some of the most sweeping changes for U.K. companies since passage of the Companies Act of 1985 took effect when the Companies Bill became law on Nov. 8.

The 696-page bill, considered Britain's longest piece of legislation, is intended to enhance shareholder engagement and promote a long-term investment culture, among other objectives.

The new law would implement several key changes such as requiring more detailed reports on environmental and social impacts, and calling for shareholders to ratify directors' acts. The latter is standard practice in several European countries, including Germany, the Netherlands, Austria, and Switzerland.

Other changes include requiring shareholder approval of director severance contracts that allow for awards of more than two-times a director's annual salary, as well as provisions allowing for auditor indemnification with shareholder approval.

Investors also have focused on measures that ostensibly place greater liability on directors, though some experts believe that the new rules allowing shareholders to sue directors who "don't promote the success of the company," will not lead to an up-tick in lawsuits against directors.

"I don't think this act will make a blind bit of difference to my practice," Edward Sparrow, a partner at London-based Ashurst, told Bloomberg News. Sparrow noted it is more difficult to prove fraud in England than it is in the U.S., and that lawyers had little incentive to take on such cases because the law barred them from receiving a percentage of winnings when working on a contingency basis.

Other experts warn that rules empowering investors to go after directors could be far-reaching but that it is too early to determine their precise impact.

The new law also affects rules on mergers and acquisitions. The new Companies Bill codifies European Union rules on takeovers, replacing the City Code on Takeovers. Britain's Takeover Panel will remain the regulatory authority overseeing such transactions and will receive greater statutory powers.

The new law will include squeeze-out and sell-out rights under which a bidder has the right to buy out minority shareholders, and minority shareholders have the right to require a successful bidder to acquire their shares, respectively. Both provisions would come into effect once a bidder has acquired 90 percent of the target firm's shares.

Meanwhile, companies whose reporting years begin after Nov. 1 must disclose compliance with new provisions of Britain's Combined Code on Corporate Governance, a set of best practice requirements that govern all London Stock Exchange-listed companies. The code, dubbed Britain's governance "bible," was last revised earlier in the year.

The changes will:

*Amend the existing restriction on the company chairman serving on the remuneration committee. The changes would allow the chairman to do so (but recommends against serving as chair of the committee) if the chairman is deemed independent on appointment.
*Provide a "withheld" vote option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. Many listed companies already provide this option. A "withheld" vote is not a vote in law and would not count in the calculation of the proportion of the votes for and against the resolution.
*Enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web sites.

The code was last revised in 2003.

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Tuesday, November 14, 2006

Advancing the Dialogue: The Pernod Ricard Case
Submitted by: Catherine Salmon, Research Manager France and Christel Dumas, Marketing and Communications Manager, ISS Europe

At a November 7, 2006 AGM, the shareholders of French Pernod Ricard, the second largest spirits and wine operator worldwide, voted against Resolution 13 with the board's blessing. How did such a turn in management recommendations come about?

Resolution 13 concerned an amendment of the company's voting right ceiling. In the present version of the company's bylaws, no shareholder could vote for more than 30 percent of the company's total share capital. This means that a shareholder with a 30-percent stake, voting at an AGM with an attendance rate of 60 percent (standard attendance rate according to a Pernod Ricard spokesman) could still represent 50 percent of the number of votes cast at the meeting (30 votes out of 60 cast; excluding possible double-voting rights).The new version of the company bylaws proposed to calculate the 30 percent ceiling based on the votes actually cast at the general meeting. This could have significantly reduced the number of votes a single shareholder could cast.

As a result, a shareholder with a 30-percent stake, participating in an AGM with an attendance rate of 60 percent would vote for only 18 percent of the total share capital (18 percent = 30-percent ceiling multiplied by 60-percent cast; excluding possible double-voting rights). In this example, the shareholder would be able to vote only 60 percent of his total voting rights (18 votes out of the 30 held). Furthermore, Pernod Ricard's resolution proposed to add a new paragraph to article 32.3. This new paragraph would have made the voting right ceiling stricter because the 30% limit would apply to shareholder groups as well. All shareholders linked by a concert action would only be allowed to vote a total of 30% of votes cast at a meeting. In its report, ISS recommended voting against resolution 13.

After discussion, the board of Pernod Ricard decided to take the concerns of its shareholders into account. As it was too late to modify the agenda, the board told shareholders present at the general meeting that it would vote against its own resolution and asked shareholders to do the same. This last minute turn of the situation is a victory for all champions of good corporate governance, achieved through a constructive dialogue between interested parties.

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Friday, November 3, 2006

Canadian Investors Argue for a Vote on Acquisitions
Submitted by: Tad Kopinski, Staff Writer

Goldcorp's former CEO Robert McEwen has broadened his battle for a shareholder vote on the company's purchase of Glamis Gold into a campaign to revise Canada's securities regulations.

In an Oct. 30 open letter, McEwen called on "all shareholders of all Canadian public companies" to take action to "correct a fundamental flaw in the Canadian securities regulations that allows management to circumvent your essential shareholder rights."

Continue reading "Canadian Investors Argue for a Vote on Acquisitions
Submitted by: Tad Kopinski, Staff Writer" »

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Wednesday, October 25, 2006

Stock Options Law Advances in France
Submitted by: Tad Kopinski, Staff Writer

On Oct. 11, France's lower legislative chamber passed a bill that tightens restrictions on executive stock options. To become law, the measure must still pass the senate, which is scheduled to consider the bill in early November.

In addition to tax breaks for companies that issue free shares to rank-and-file employees, the bill would limit executives from exercising part of their options during their tenure. The measure leaves it up to the company's board of directors, or the supervisory board at companies with two-tiered boards, to determine what percentage of option packages must be held while the executive is in office--as long as the option incentives are properly disclosed, according to Agence France-Presse.

The share ownership legislation that applies to listed companies is one of a series of measures promised by Prime Minister Dominique de Villepin to promote "economic patriotism" among investors and reduce French companies' vulnerability to foreign hostile takeovers, according to the Associated Press (AP).

Initially, the legislation, as introduced by opposition legislator and former Prime Minister Edouard Balladur, called on shareholders to decide on what proportion of options were to be subject to the holding requirement. This provision was strongly opposed by the French employer association, Medef.

The Minority Shareholders Defense Association (ADAM) said it would continue to push for stockholders to have a direct say on the conditions attached to any option grants, just as they now have the right to approve the issuance of stock options. "Ever since stock options came into being, company boards have proven themselves incapable of tackling their abuse," Colette Neuville, ADAM's executive director, told the AP.

The measure follows public and investor complaints over executives' stock option entitlements, as well as the timing of some of their transactions.

Perhaps the most spectacular was the sacking of Noel Forgeard, the co-CEO of the European Aeronautics Defense and Space (EADS), in June following revelations that he sold millions worth of shares a few weeks before the announcement of production delays on the A380 Airbus.

The French financial markets authority, AMF, which is investigating the case, alleged Forgeard made a 2.5 million Euro ($3.6 million) profit on the options sale, and each of his three children made a profit of 1.4 million Euro ($1.75 million) two days later. Several other senior EADS executives made substantial profits on their option sales at that time, according to The Times of London. A spokesman for EADS said those involved "had no specific information" about the production delays when they sold their shares, The Times reported.

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Monday, October 23, 2006

Court Rules Against Dutch Takeover Defense
Submitted by: Sarah Cohn, Director of Communications

The European Commission moved a step closer to its goal of establishing the fundamental shareholder right of "one-share, one-vote" when the European Court of Justice (ECJ) ruled late last month against the Dutch government's holding of "golden share" takeover defenses in two firms.

European governments should "avoid wasting their time in introducing special share arrangements," commission spokesman Oliver Drewes told the International Herald Tribune following the ruling. Drewes said the ruling would aid the commission as it turned its sights on Germany, where for years the body has sought to repeal defenses protecting Volkswagen.

In 2003, the commission filed suit against the Dutch government, arguing the golden shares it held in telecommunications giant Royal KPN and postal-services company TNT hindered foreign investment in those firms and violated the principle of the free movement of capital.

The two companies were privatized in 1994, but the government retained a 20 percent stake in KPN and a 35 percent stake in TNT, formerly known as TPG. The golden shares give the Dutch government veto power over stock issues; restrictions on, or removal of, priority rights of ordinary shareholders; acquisitions, disposals or dissolution; withdrawal of the special share, bylaw amendments; and dividend distributions.

The Dutch government argued that its golden shares complied with Article 56 of the European Community that prohibits restrictions on the free movement of capital across national borders. "Even if a link were to be established between the special shares at issue and the decision to invest, such a link would be so uncertain and indirect that it could not be regarded as constituting an obstacle to the free movement of capital," the Dutch government contended, according to court records. Amsterdam also argued its golden share in TNT was justified because it would guarantee "universal postal service" and thus represented an "overriding reason in the general interest."

The court agreed with commission officials who argued that the special shares convey disproportionate influence to the government over important management decisions such as the structure of the companies and business activities. The fact that the special shares could only be withdrawn with the government's approval also provided ammunition for commission lawyers arguing against the defenses.

The commission views the ruling as a critical step toward removing barriers to cross-border acquisitions in what many investors view as an environment of renewed protectionism in Europe. After Mittal Steel launched a takeover of Arcelor earlier this year, Luxembourg and France enacted laws making it easier for firms to deploy takeover defenses.

Last month's ruling, however, may discourage such initiatives and put greater pressure on Germany to remove limitations that bar any investor from acquiring more than 20 percent of Volkswagen's voting rights. Commission spokesman Drewes said he "was absolutely confident that this case [Volkswagen] will go in the way that is favorable to the opinion of the European Commission." In 2003, the commission won similar cases against the Spanish and U.K. governments' golden shares in national champion companies, including airport operator BAA in Britain and Spain's Telefonica and energy giant Repsol.

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Tuesday, September 26, 2006

European Commission Assigns ISS to Lead Research on Proportionality Between Ownership and Control
Submitted by: Sarah Ball, Director of Marketing and Communications, ISS Europe

In the European Union, numerous mechanisms exist that allow limited numbers of shareholders to exercise significant influence on companies disproportionate to their financial contribution to the wealth of the company. For this reason, the European Commission has decided to take a closer look at the question of proportionality and capital in companies listed in the EU.

Those that advocate a move away from control-enhancing mechanisms and towards 'one-share-one-vote' being the norm, acknowledge that although there may be implementation challenges, these would be outweighed by the creation of a true single EU marketplace in which all shareholders could exercise their rights in a democratic manner.

Detractors point out that control-enhancing mechanisms in the EU are created by shareholders at the general meeting and are acquired voluntarily and knowingly by investors. They argue that many EU countries have applied the system of multiple voting shares, for instance, for over 100 years and have no knowledge of any difficulties or complaints.

The situation in the US is very different with 92% of market capitalization including companies that have voluntarily chosen to align cash flow and control rights. This is a high number compared to the EU.

ISS has been selected to lead an important research project, in collaboration with the global law firm Shearman and Sterling LLP and the European Corporate Governance Institute (ECGI), on the proportionality between ownership and control for the European Commission. This EC research initiative will tackle the important corporate governance concept of "one share-one vote" and lead to more insightful discussion within the industry.

Led by Managing Director of ISS Europe, Jean-Nicolas Caprasse, ISS' team of European researchers working from our Brussels, London, Paris and Amsterdam offices will produce profiles on the structure of over 450 companies in 16 EU member states. ISS has also been asked by the EC to survey institutional investors in European and international markets about their views on control-enhancing mechanisms.

The final report will include an overview of European regulatory frameworks by Shearman and Sterling plus a review of existing theoretical and empirical research by ECGI. Both the overview and review will contain a comparison of the situation in some key jurisdictions outside the European Union. To view the full announcement, please click here.

What are your thoughts on the one share-one vote principle? We welcome your thoughts.

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Friday, September 1, 2006

Professional Directors More Prevalent in Australia
Submitted by: Martin Lawrence, Lead Analyst of ISS Australia

The prevalence of professional non-executive directors at Australia's largest companies is growing, according to a recent study commissioned by the Australian Council of Super Investors (ACSI) and conducted by ISS Australia.

The study, which looked at several key corporate governance features detailed in the most recent annual report filing, focused on firms listed on the Australian Stock Exchange's (ASX) top-tier S&P/ASX 100 index. For the majority of companies, the most recent annual report covered the financial year ending June 30, 2005. For others, annual reports are for the year ended Sept. 30, 2005, or Dec. 31, 2005.

Continue reading "Professional Directors More Prevalent in Australia
Submitted by: Martin Lawrence, Lead Analyst of ISS Australia" »

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Tuesday, August 15, 2006

Takeover Attempt May Set Precedent on Pill Adoptions
Submitted by: Valentina Judge, Research Analyst

A controversial takeover battle between two of Japan's largest paper manufacturers may prompt a legal ruling on how and when Japanese companies can deploy poison pill defenses.

The use of pills has grown exponentially in Japan over the past 18 months, but the legality of their use in some circumstances remains questionable, leaving both issuers and shareholders searching for guidance from Japan's judiciary.

Continue reading "Takeover Attempt May Set Precedent on Pill Adoptions
Submitted by: Valentina Judge, Research Analyst" »

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Wednesday, August 9, 2006

Changing Governance of Australia's Banks
Submitted by: Stephen Chu, Senior Research Analyst, Australia

The boards of Australian banks have become smaller and more independent since the 1980s, while increases in executive pay have far outpaced the banks' performance, according to a recent ISS analysis.

This analysis of governance trends at banks listed on the Australian Stock Exchange (ASX) includes various indicators, such as: the number of directors; board composition and committees; and executive remuneration levels in the 1980s, 1995 and 2005.

Since the 1980s, bank boards on average have become smaller. In the 1980s, Westpac Banking and Australian and New Zealand Banking had the largest boards each with 15 directors.

This changed little in 1995, with the largest board having 14 directors.. However, between 1995 and 2005 there was a marked decrease in board size, with all but three banks in the sample decreasing their directors to below 10. Two banks, Commonwealth Bank of Australia and Suncorp-Metway had 10 directors and National Australia Bank had 14.

Continue reading "Changing Governance of Australia's Banks
Submitted by: Stephen Chu, Senior Research Analyst, Australia" »

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Wednesday, August 2, 2006

Support for French Option Law Grows
Submitted by: Stacy Redding, International Custom Research Analyst, and Tad Kopinski, Staff Writer

Amid growing international concerns over stock option practices, a group of French lawmakers and politicians are backing legislation that would significantly limit the ability of company executives and directors to exercise their stock options.

The bill, introduced June 28 by former Prime Minister Edouard Balladur, would prevent board members and executives from exercising their stock options while in office. At least 138 of the National Assembly's 577 members have signed a request to put the legislation on the lower chamber's agenda, according to Challenges, the French electronic business journal.

In a July 14 interview, President Jacques Chirac said he favored the bill and asked his finance minister, Thierry Breton, to propose appropriate measures. While the bill has not been formally endorsed by the government, it likely will be, especially in light of presidential elections next year and the fact that Breton is the author of the 2005 law that requires greater transparency in executive pay, according to the daily Le Monde.

Medef, the union of French employers, has called Balladur's proposal to limit the exercise of stock options "absurd" and counter-productive because it would undermine executives' incentives to increase shareholder returns.

The legislation was proposed after news reports of stock options exercised by high-profile executives. Noel Forgeard, a former top executive at the EADS aerospace and defense company, earned 2.5 million Euros ($3.2 million) from exercising options weeks before a profit warning was issued. At the Vinci construction group, former Chairman Antoine Zacharias took home an estimated 250 million Euros ($320 million) after cashing in his stock options, in addition to a 13 million Euros ($16.4 million) severance package.

In a study published by L'Expansion, an online business journal, top executives at the CAC 40 companies hold stock options that are worth as much as 700 million Euros ($884 million).

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Tuesday, August 1, 2006

EC Governance Priorities Get "Split" Response
Submitted by: Tad Kopinski, Staff Writer

The European Commission's report on corporate governance priorities found "split views on corporate governance," suggesting that support for new European-wide directives has diminished.

Internal Market Commissioner Charlie McCreevy attributed the results to "regulatory fatigue," but there was some consensus that the principle of "one share/one vote" needs to be addressed. The commission has ordered a fact-finding study on the proportionality between ownership and control in EU-listed companies, to be done by the European Corporate Governance Institute, the law firm of Shearman & Sterling, and ISS Europe.

Continue reading "EC Governance Priorities Get "Split" Response
Submitted by: Tad Kopinski, Staff Writer" »

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Friday, July 21, 2006

Investors Press for Reform in BRIC Markets
Submitted by: L. Reed Walton, Staff Writer, and Andrea Musalem, International Research Analyst

The emerging markets of Brazil, Russia, India, and China have seen a flurry of corporate governance reforms in the last five years as economies develop and competition for foreign investors increases.

These four countries, given the acronym "BRICs" by global banking firm Goldman Sachs, have some of the building blocks of solid corporate governance in place. But progress is erratic and sometimes hindered by government control and ineffective legal systems.

Still, as outside investors continue to press for reform at home and abroad, Brazilian, Russian, Indian, and Chinese companies and regulators are taking a greater interest in improving transparency in meeting practices, voting, board processes, ownership, and shareholder rights.

Continue reading "Investors Press for Reform in BRIC Markets
Submitted by: L. Reed Walton, Staff Writer, and Andrea Musalem, International Research Analyst" »

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Wednesday, July 19, 2006

Investor Engagement on the Rise in Europe
Submitted by: Natalie De Filette, ISS Europe Research Manager

Shareholders are filing a growing number of resolutions at continental European companies, according to an analysis of ISS proxy data.

ISS has tracked a total of 299 shareholder proposals filed at continental European firms through June 30, which traditionally marks the end of the European proxy season. The figure represents a 25 percent increase over the number of proposals tracked during the same period last year. For the entire year, ISS is projecting that the total number of shareholder resolutions will significantly exceed the 384 investor resolutions filed in calendar year 2005.

Of the shareholder proposals filed thus far, a majority--57 percent--were board related, such as proposing shareholder nominees to the board (46 percent of all shareholder resolutions), attempting to remove an existing director (3 percent), requiring a majority of independent directors on the board (1 percent) or introducing an age limit for board members (1 percent).

Non-board related shareholder resolutions covered miscellaneous topics, such as environmental and social considerations (3 percent of resolutions). Proposals related to these issues--addressing environmental, human rights, or labor concerns, for example--were added primarily to the agendas of Scandinavian companies, reflecting an interest in environmental, social, and governance matters on the part of some investors in Sweden, Finland, Norway and Denmark.

By market, the most significant increases were in the Netherlands, where ISS tracked 10 shareholder resolutions, compared with none last year. The majority of those proposals were put forward by foreign investors, thus illustrating the growing internationalization of the market's corporate shareholder base, as well as the introduction of U.S.-style shareholder engagement.

Significant increases in the volume of proposals also occurred at Nordic countries, with 32 shareholder proposals so far in Sweden (versus 21 over the same six-month period last year); 16 shareholder proposals in Denmark (compared with one during the first half of last year); and 15 in Norway (compared with seven during the same period last year).

In all other continental European markets, the number of shareholder resolutions remained similar to last year.

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Friday, July 7, 2006

Japanese Investors Step Up Activism
Submitted by: John Taylor, Principal Researcher, Governance Research Service

Japanese firms once again overwhelmingly concentrated their annual shareholder meetings on a frenzied single day this year--June 29--as shareholders, together with their voting agents and proxy advisers, struggled to execute votes during the world's most challenging proxy voting marathon.

But while voting Japanese equities remains a daunting task, institutional activism, once almost exclusively associated with foreign pension giants like CalPERS and TIAA-CREF--both of which were instrumental in enabling international proxy voting in Japan in the early 1990s--is finally spreading to the long sleeping giant of Japanese institutional money.

In the past year, the Japanese business community has become increasingly sensitive to the growing clout of domestic institutional activism. Corporate managements, many of which are sitting on sizeable cash reserves, are facing hostile takeover threats for the first time in recent years. Moreover, the web of management-friendly cross-shareholding has steadily eroded, stemming primarily from the collapse of the economic bubble that peaked 16 years ago, forcing many banks and old-guard firms to sell off paper assets. Abysmal stock performance simultaneously drove many pension funds that were just starting to dabble in equity into under-funded positions, making them increasingly desperate for higher investment returns.

Continue reading "Japanese Investors Step Up Activism
Submitted by: John Taylor, Principal Researcher, Governance Research Service" »

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Thursday, July 6, 2006

U.K. Regulators Revise Governance Bible
Submitted by: Subodh Mishra, Managing Editor

On June 27, U.K. regulators announced amendments to the Combined Code on Corporate Governance, a set of best practice requirements that govern all London Stock Exchange-listed companies. The code, dubbed Britain's governance "bible," was last revised in 2003.

Britain's Financial Reporting Council said the changes would:

--amend the existing restriction on the company chairman serving on the remuneration committee to enable him or her to do so where considered independent on appointment as chairman (although it is recommended that he or she should not also chair the committee);
--provide a 'vote withheld' option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. Many listed companies already provide this option. A 'withheld' vote is not a vote in law and would not count in the calculation of the proportion of the votes for and against the resolution, however;
--recommend that companies publish on their Web site the details of proxies lodged at a general meeting where votes are taken on a show of hands. The Company Law Reform Bill currently with Parliament includes clauses that would require companies to publish details of votes taken on a poll. This amendment to the Combined Code means that details of all votes would be made available; and
--enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web site.

"When the FRC reviewed the implementation of the 2003 Code in the second half of 2005, we found that it was generally felt to be bedding down well," FRC chairman Sir Christopher Hogg said in a press release. "But the review did identify a small number of modifications that have now been endorsed by both listed companies and their investors, and these have been incorporated into the updated version of the Code."

According to the FRC, listing rules will not formally apply to the revised Combined Code until the Financial Services Authority has carried out a separate consultation, which is expected to start in September. The FRC will encourage listed companies and their investors to adopt the updated code on a voluntary basis for reporting years beginning on or after Nov. 1 2006, however, "in view of the limited nature of the changes and the strong support that they have received."

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Monday, June 26, 2006

Listing Rules Tilt Level Playing Field
Submitted by: Geof Stapledon, Managing Director of ISS Australia, and Martin Lawrence, Lead Analyst of ISS Australia

ISS Australia's Geof Stapledon and Martin Lawrence had a piece published in the Australian Financial Review on why the Australian Stock Exchange (ASX) listing rule exception should be removed. We welcome your comments on the ASX listing rule.

Listing rules tilt level playing field
Geof Stapledon and Martin Lawrence. Geof Stapledon is managing director, and Martin Lawrence lead analyst, of Institutional Shareholder Services, Australia.

22 June 2006
Australian Financial Review

Stock exchange shareholders suffer at the hand of the ASX itself, write Geoff Stapledon and Martin Lawrence.

The merger of the Australian Stock Exchange and the Sydney Futures Exchange highlights an inequity in the way ASX listing rules apply to mergers and scrip-funded takeovers.

Due to a little-publicised exception in the rules, only the target company's shareholders get to vote on mergers. Despite often having their shareholdings diluted materially, the bidder's shareholders don't get a vote. At the moment it is the shareholders of the ASX - of all organisations - that are faced with being diluted, without any right to vote on the deal.

Continue reading "Listing Rules Tilt Level Playing Field
Submitted by: Geof Stapledon, Managing Director of ISS Australia, and Martin Lawrence, Lead Analyst of ISS Australia" »

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Monday, June 19, 2006

Looking back at the 2006 French Proxy Season: Use of Poison Pills
Submitted by: Catherine Salmon, Research Manager, France

In March 2006, a new law on hostile takeovers of French companies was issued in application of an EU directive and proposed by the French finance minister Thierry Breton. The changes were seen by the market as a direct result of the country's growing protectionism.

Following this new law, companies subjected to a hostile bid would be able to issue free warrants convertible into shares at a potentially discounted price to existing shareholders. These poison pill measures can be used only if approved by shareholders at a general meeting, by a simple majority. Since April 2006, 15 companies, including big names such as Suez, Bouygues, and Compagnie De Saint Gobain, have requested shareholder approval for the issuance of free warrants during a takeover.

The resolution was approved by 55% of Saint Gobain shareholders and 63% of Suez shareholders. This means that in both cases, the resolution would have been rejected had an extraordinary majority been required. In Bouygues, 49.7% of which is held by three strategic shareholders, 85% of votes were cast in favor of the resolution. But based on the 59.7% quorum participating in the meeting, this corresponds to only 50.5% of total voting rights in the company.

Another recurring agenda item since April 2006, consists in authorizations to the Board to issue shares in the event of a public tender offer. This is a takeover defense with respect to the Law of Reciprocity (as for issuances of free warrants). It was submitted to shareholder approval by 15 companies as well, all small caps except for Bouygues.

Currently, we are not aware of any of these resolutions being rejected by the required simple majority. What are your thoughts on economic nationalism as an answer to globalization? We welcome your comments.

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Thursday, June 15, 2006

Investors Focus on Pills, Pay Disclosure as Japan's Proxy Season Begins
Submitted by: Subodh Mishra, Managing Editor of ISS Publications, and John Taylor, Principal Researcher, Japan Governance Research Services

With Japan's proxy season set to get under way next week, market observers are abuzz over this week's arrest of shareholder activist Yoshiaki Murakami, who admitted June 5 to engaging in insider trading.

The 46-year-old Murakami, whose $3.5 billion MAC Asset Management reshaped the governance landscape of the world's second largest economy, is best known for launching the first-ever hostile takeover by a Japanese company when he targeted real estate firm Shoei in 2000.

Since then, MAC, whose stated mission is to promote and unlock shareholder value through effective corporate governance, has been the bane of many old-guard corporate managers who fear the fund will target their cash reserves and non-core assets by forcing them to raise dividends, buyback stock, or sell off assets.

Continue reading "Investors Focus on Pills, Pay Disclosure as Japan's Proxy Season Begins
Submitted by: Subodh Mishra, Managing Editor of ISS Publications, and John Taylor, Principal Researcher, Japan Governance Research Services" »

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Tuesday, June 6, 2006

A Tale of Two Studies: China's Investors, Top Companies, and Corporate Governance
Submitted by: Stephen Deane, Vice President and Director, ISS' Center for Corporate Governance

What progress is China making in building modern capital markets? What are the prospects for success? What is the level of corporate governance among Chinese companies, and what role are institutional investors playing?

Two recent studies shed light on these questions, one focusing on investors and the other on companies:

* The ISS 2006 Global Institutional Investor Study, which features a Special Report on China.

* The Corporate Governance Assessment Report of the 100 Top Chinese Listed Companies in 2006, published by the Chinese Centre for Corporate Governance of the Chinese Academy of Social Sciences and the Faculty of Business of the City University of Hong Kong.

To see the ISS study, click here.

To see the Chinese Academy of Social Sciences Report, Download file

To see an analysis comparing the two reports, Download file

ISS will present the findings from its Global Investor Study the week of June 5 in a series of webcasts. To attend the online forums, please register here.

What are your views on investing in China? We welcome your comments.

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Tuesday, May 23, 2006

Japanese Public Pension Fund Targets Board-Adopted Pills
Submitted by: John Taylor, Principal Researcher Japan Governance Research Services

Japan's Pension Fund Association for Local Government Officials (PAL) has joined its corporate counterpart, the Pension Fund Association (PFA), in opposing "poison pill" defenses adopted without a shareholder vote.

Without targeting specific companies, PAL is publicly urging its external equity managers to vote against the election of directors at firms where boards have formally adopted poison pill defenses. The PFA adopted a similar policy while detailing plans to vote against specific incumbent directors at firms where pills were adopted.

Continue reading "Japanese Public Pension Fund Targets Board-Adopted Pills
Submitted by: John Taylor, Principal Researcher Japan Governance Research Services" »

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Wednesday, May 17, 2006

Resolution: French Government Cleared in Tampering Charges for Suez and Gaz De France Merger
Submitted by: Michael Gray, International Content Manager

The European Commission found that the French government did not overstep its bounds in its actions related to the planned merger between two French energy firms Suez and Gaz de France. The hastily arranged merger was used as a preemptive strike against a potential takeover bid from Italy's Enel energy company. The decision serves to highlight the difficulties involved in cross-border transactions in the EU and as a reminder that shareholders in European companies continue to be subject to the desires of governments over the desires of the marketplace. According to a report in the Financial Times the deal still must clear the regular competition commission, so there is still some chance that the market might still prevail.

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Monday, May 8, 2006

Canadian Banks Lead the Way on Board Elections
Submitted by: Michelle Tan, ISS Senior Analyst

As a group, Canada's banks are a market heavyweight, accounting for about 19 percent of the entire S&P Toronto Stock Exchange Composite Index. They also have been among the corporate governance leaders in Canada.

This season is no exception, as the banks have led the way in adopting director election reforms and improving their disclosure of executive compensation. Nine major banks held their annual meetings in March, and governance developments at these companies often are a sign of what will happen during the rest of the Canadian proxy season.

Continue reading "Canadian Banks Lead the Way on Board Elections
Submitted by: Michelle Tan, ISS Senior Analyst" »

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Thursday, May 4, 2006

Corporate Governance in Sweden
Submitted by: Brandon Meyer, International Ratings Manager

Swedish companies are governed by the Public Companies Act, the Stockholm Stock Exchange listing requirements, and the Swedish Act on Annual Accounts. Recently these rules have been adapted to come more in line with EU regulations and best practice recommendations.

This article examines Swedish companies' practices relating to: board and committee structures, takeover defenses, shareholder rights, and audit issues. CGQ currently rates 51 Swedish companies (out of 2,365 companies covered outside the U.S.) Swedish shareholding structures are very much in line with those of continental Europe and many Asian markets in that shareholdings are not as widely dispersed as the shareholdings in Anglo markets. Since the late 1990s, however, family control of relatively high percentages of the market value of Swedish companies has been declining.

Continue reading "Corporate Governance in Sweden
Submitted by: Brandon Meyer, International Ratings Manager" »

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Monday, April 24, 2006

Japan's Pension Fund Association Targets Poison Pills
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services

The Pension Fund Association (PFA), which represents Japan's corporate pension funds, plans to vote against directors who adopt "poison pill" plans and other takeover defenses without seeking shareholder approval.

The influential PFA manages 12 trillion yen in assets (approximately $104 billion), 4 trillion yen of which are invested in major domestic, exchange-listed corporations. While the association's investments represent only a small fraction of Japanese corporate pensions, it acts as a manager of last resort for insolvent funds.

Continue reading "Japan's Pension Fund Association Targets Poison Pills
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services" »

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Tuesday, April 18, 2006

EC Seeks to Set Future Governance Reform Priorities
Submitted by: Roland Escher, International Research Analyst

The European Commission (EC) plans to hold a public hearing in Brussels on May 3 to gather more input on its future corporate governance priorities.

The EC's Action Plan on Modernizing Company Law and Enhancing Corporate Governance, which was initially adopted in 2003, is set to be updated with a new agenda. The public hearing will have four separate panels: on shareholder rights and obligations, on the modernization and simplification of European company law, on the responsibility of directors and internal controls, and on corporate mobility and restructuring. To participate, one must register by April 20. One may register through by visiting here.

Continue reading "EC Seeks to Set Future Governance Reform Priorities
Submitted by: Roland Escher, International Research Analyst" »

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Monday, April 17, 2006

Responses to April 12 WSJ Article-Corporate Governance Concerns Are Spreading and Companies Should Take Heed
Submitted by: Sarah Cohn, Director of Communications

Below are responses to Alan Murray's April 12 Wall Street Journal article titled "Corporate Governance Concerns are Spreading and Companies Should Take Heed." The responses ran in the Saturday, April 15 edition of the Wall Street Journal in Alan Murray's Talking Business column. Please email us your thoughts on the April 12 Wall Street Journal piece at blog@issproxy.com.

Continue reading "Responses to April 12 WSJ Article-Corporate Governance Concerns Are Spreading and Companies Should Take Heed
Submitted by: Sarah Cohn, Director of Communications" »

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Monday, April 10, 2006

New Japanese Law May Lead to Less Meeting Clustering
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services

Japanese company law amendments, which will be ushered in the coming months, contain a relatively nondescript change that could lead to more advance notice and less clustering of annual meetings in the world's second largest economy.

Though the amendments do not address these two problems directly, the legislation will allow companies to waive the requirement to obtain shareholder approval of dividend allocations. If many companies seek such waivers, this change would weaken the long-standing arguments that underpin laws forcing the concentration of meeting dates and the short notice periods.

Continue reading "New Japanese Law May Lead to Less Meeting Clustering
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services" »

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Thursday, April 6, 2006

Welcome News - News Corp., Shareholders Settle Poison Pill Suit
Submitted by: Patrick McGurn, Executive Vice President

Media giant News Corp. and an international group of institutional shareholders have settled a lawsuit concerning the company's poison pill takeover defense, according to an April 6 announcement by lawyers representing the shareholders. Groups such as the Connecticut Retirement Plans and Trust Funds and the Australian Council of Super Investors (ACSI), argued that the media company broke a promise to shareholders when it decided in August 2005 to extend its poison pill for another two years. In 2004, management, which sought-after shareholder approval to incorporate in Delaware, pledged that the company would refrain from activating a pill for more than 12 months without the prior approval of shareholders.

The settlement is great news on several fronts.

First, the New Corp. board will live up to its pledge to allow shareholders to decide if the pill stays in place. Many shareholders had relied upon this promise in voting on the company's proposal to switch its legal domicile from Australia to Delaware.

Second, the Delaware Court's decision to allow this lawsuit to proceed will make every board think twice before it seeks to back out of governance policies/guidelines that it has adopted in the past. The bulk of the governance reforms that have been adopted over the past several years, including dozens of policies calling for votes on future rights plans (poison pills), are found in these documents. If boards decide to ignore these policies, shareholders must resort to protracted battles to add similar provisions to the formal governing documents--the bylaws and the charter. Such a process would promote confrontation.

The significant collaboration by the Australian pension fund community and its international counterparts to hold News Corp. to its promise is probably one of the best examples to date of collective action by a broad range of global investors. In 2005, ISS recommended withholding votes on all the director nominees for a breach of trust with shareholders on the poison pill policy.

The settlement provides hope that New Corp. may be ready to improve its governance practices. We hope to see News Corp. follow up on this action by adopting more shareholder-friendly policies and practices. Please email us your thoughts about the News Corp. settlement at blog@issproxy.com.

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Tuesday, April 4, 2006

Dutch Take Over Legislation
Submitted by: Paul Frentrop, Senior External Advisor

The Dutch parliament is showing last minute hesitation about tearing down anti-takeover measures for listed companies. All European Union members have to implement the 2004 European Directive on Takeover bids in national legislation by May 20, 2006. So far only Denmark has implemented the legislation.

Both the Dutch employer organisation and labour unions have lobbied parliament with the aim to keep some form of anti-takeover protection and they seem to be successful. Until recently a political majority supported the proposal of the Dutch government: When a bidder controls 75 percent of the shares, he can demand that all existing anti-takeover structures will be deleted and gain control.

Now however both the socialist party (PvdA), the Christian-Democrats (CDA) and even the right wing VVD party have voiced their concerns. The wave of recent takeovers emptying the Amsterdam stock exchange has strengthened this opposition. The Dutch politicians don't want Dutch companies to be unprotected while companies in other countries, dominated by major shareholders, cross holdings or government shareholdings are takeover proof.

This new development comes as something of a surprise. Many Dutch companies had already lowered there anti-takeover measures in anticipation of the new legislation. Many also bowed to shareholder pressure by divesting parts of the company, raising dividends and buying back shares. But now it seems that also in the battle for shareholder rights the old saying is true: It isn't over till the fat lady sings.

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Friday, March 31, 2006

Shareholders Target DaimlerChrysler and Volkswagen
Submitted by: Roland Escher, International Research Analyst

At their upcoming annual meetings, DaimlerChrysler and Volkswagen will face a tough balancing act, trying to reconcile the demands of shareholders with labor union pressures, as senior executives at both companies face possible criminal charges.

Continue reading "Shareholders Target DaimlerChrysler and Volkswagen
Submitted by: Roland Escher, International Research Analyst" »

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Monday, March 27, 2006

Shareholders to Vote on Takeover Defenses in Japan
Submitted by: Marc Goldstein, Director of Research Services-Japan

As Japan's proxy season gets underway, "poison pill" plans and other takeover defenses are shaping up to be one of the major issues of 2006. Three companies have placed such measures on the ballot at their annual meetings next week, but a host of others have announced defenses that do not require a shareholder vote.

The three companies that are submitting their takeover defenses to a shareholder vote later this month are Lion, a manufacturer of home and pharmaceutical products; Torigoe, a flour milling company; and CAC, a computer systems developer.

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Submitted by: Marc Goldstein, Director of Research Services-Japan" »

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Monday, March 20, 2006

Global Roundup
Submitted by: Subodh Mishra, Staff Writer

Swiss Firms in Shareholders' Crosshairs As Proxy Season Commences

Swiss governance watchers are focusing this proxy season on developments at consumer goods giant Nestle and packaging materials manufacturer SIG Holding, albeit for different reasons.

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Submitted by: Subodh Mishra, Staff Writer" »

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Tuesday, March 14, 2006

Update on French Poison Pills
Submitted by: Fassil Michael, Director of Custom Research

In response to recent high profile foreign hostile tender offers in France, the French National Assembly last week began debating the new takeover law that would give French companies the prerogative to use poison pills to thwart hostile tender offers.

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Submitted by: Fassil Michael, Director of Custom Research" »

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Tuesday, February 28, 2006

Australian Listed Infrastructure Market
Submitted by: Martin Lawrence, ISS Australia Lead Analyst

Listed infrastructure is a new asset class around the world. Toll roads, airports, ports and the like have found a way into investor's portfolios, especially institutional investors, largely because of their reliable cash flows. In Australia, investment banks such as Macquarie Bank and Babcock & Brown have helped spur rapid growth in the Australian listed infrastructure market, with Macquarie having three listed infrastructure vehicles on the Australian Stock Exchange and Babcock & Brown two. Macquarie especially is now launching infrastructure funds around the world, including listed funds in Singapore, Korea and the US.

These vehicles have been marked by innovative and complicated structures, including triple stapled securities consisting of domestic and international companies stapled to a trust, and innovative governance arrangements. On 24 February 2006, a conference organized by ISS Australia and the University of Melbourne's Centre for Corporate Law and Securities Regulation, "Corporate Governance: Managing Risk and Driving Value" saw investors, directors, advisers, academics and company in-house governance professionals hear three key investment players speak on the governance challenges listed infrastructure funds posed to investors.

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Submitted by: Martin Lawrence, ISS Australia Lead Analyst" »

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Monday, February 27, 2006

2006 Preview: Continental Europe
Submitted by: Thaddeus C. Kopinski, International Editor

Efforts to facilitate proxy voting, improve executive compensation disclosure, and to limit the use of takeover defenses will likely dominate continental Europe's corporate governance debate this proxy season.

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Submitted by: Thaddeus C. Kopinski, International Editor" »

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Thursday, February 23, 2006

French Poison Pills
Submitted by: Michael Gray, International Content Manager

Just when you might think the Europe is making progress with corporate governance regarding its takeover rules, some Member States seem to be pushing back in the other direction. This week there were reports that France is considering legislation to allow companies to use poison pills. According to an article in the FT (http://news.ft.com/cms/s/95720648-a348-11da-ba72-0000779e2340.html ) the new legislation will allow companies to do a directed issue of discounted convertible warrants to existing shareholders. The part of this that goes against the EU directive is that the new law would not require reciprocity -- companies would only be allowed to use such defenses if the company making the bid also had the same access to a defense. In response to France's action earlier this week, Italy has also started making statements indicating that they might be considering revisions to their takeover laws. (http://news.ft.com/cms/s/8994ecc6-a412-11da-83cc-0000779e2340.html)

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Tuesday, February 21, 2006

Multi-listed companies learn from experience
Submitted by: Stanley Dubiel, International Research Managing Director

Royal Dutch Shell will have hoped to satisfy investors with its annual results, announced last week. Investors in Shell should also be interested in how the Anglo-Dutch company has worked to satisfy regulators of the three exchanges on which it is listed: London, Amsterdam and New York.

Global companies such as Shell are under intense pressure from shareholders in various corners of the world to establish and maintain corporate governance best practices. This is not easy when you have to satisfy different sets of listing requirements, prescribed by the exchanges on which Shell's stock trades. And the fact is that Shell does not. Shell follows the corporate governance principles set out in the UK combined code of corporate governance, but discloses significant ways that its standards differ from those followed in the US. This is in line with NYSE rules, although there is significant deviation in corporate governance requirements in several areas. But before investors sound the alarm bells, this is something for them to be aware of, rather than distressed by. Read the entire article after the jump...

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Submitted by: Stanley Dubiel, International Research Managing Director" »

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China Enacts New Governance Rules
Submitted by: Dennis Eucogco

China has enacted new corporate governance rules, but market observers caution that the impact may be modest and that most Chinese companies still have a long way to go to reach international corporate governance standards.

The amendments to China's Company Law, which took effect Jan. 1, mark the first major changes to the law in several years. China's capital markets have been roiled by several corporate scandals, including the arrest of Delong Group executives. Delong's actions, dubbed by the online China Daily as the "largest financial crime" in Chinese history, involved alleged stock manipulation by management. Delong executives were charged with utilizing company investments in both public and private companies to surreptitiously increase stock prices.

The new amendments reflect the government's interest in preventing future corporate scandals. Significant among these amendments include requirements to seek shareholder approval for the provision of loan guarantees or investment in other enterprises. Read the complete article from ISS' Publications Division after the jump...

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Submitted by: Dennis Eucogco" »

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