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.
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Friday, May 9, 2008 |
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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 |
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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 |
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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.
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Thursday, March 6, 2008 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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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