The April edition of RiskMetrics "In the Market" compares the equity price movements now to the previous high volatility period from 1998-2003. In that span, there were 19 extreme days which were greater than the biggest moves we've seen in the current environment. To read more and view the chart, please visit here.

After more than one-third of investors protested executive pay practices at energy firm BP, executive retention bonuses and stock plans at other large U.K. firms may also see opposition this year.

According to a BP release, 9 percent of shares were voted against last year's pay packages at the April 18 annual meeting. An additional 27 percent withheld their votes, amounting to a cumulative 36 percent not cast in favor of the remuneration report, according to news reports. BP spokesman David Nicholas told Risk & Governance Weekly that the company does not count votes withheld as cast either "for" or "against."

The protest votes, which are the largest at a U.K. company so far this year, came in response to the company's award of £1.5 million ($3 million) retention bonuses to two executives who were passed over for the CEO's post. The executives, Iain Conn and Andy Inglis, were in the running for the top spot at the London-based company after former CEO Lord John Brown resigned in 2007. The board decided to offer the retention bonuses to Conn and Inglis in February as incentive to stay with the company after a third candidate, Tony Hayward, was named CEO. Conn and Inglis will receive the bonuses in the form of stock awards that vest over the next three years.

Prior to the meeting, the Association of British Insurers (ABI), whose members hold approximately 20 percent of stocks listed on the London Stock Exchange, weighed in on retention bonuses. Though the association does not make vote recommendations for its members, the ABI sent a letter to compensation consultants warning them of possible shareholder opposition to one-off retention bonuses. In the letter, which was sent to many of the large global pay consultancies--including BP's primary adviser Towers Perrin--the ABI wrote that non-performance-based awards to unsuccessful executive candidates should be the exception rather than the rule in pay decisions. The ABI letter did not mention any companies by name.

"The issue of retention pay-outs is becoming one which gives shareholders serious food for thought especially when no consultation is advanced," Peter Montagnon, director of investment affairs for ABI, told the Financial Times.

DeAnne Julius, a director at BP who also previously served as chief economist for Royal Dutch Shell Group, defended the retention bonuses. Julius told the U.K. newspaper The Daily Mail that the payments were intended to signify important safety improvements and make up for the reduced bonuses paid in 2007 due to a legal action against BP officers and directors because of a 2006 oil spill in Alaska, and a 2005 Texas oil refinery explosion that killed 15 people. BP agreed to settle a shareholder derivative suit in early April by instituting a number of governance reforms. (For more on this settlement, please see the "Global Roundup" section of the April 11 issue of Risk & Governance Weekly).

Hayward's 2007 bonus was about £1 million ($2 million) less than that earned by his predecessor, Lord Browne, the London-based Independent reported. The article also noted that Conn and Inglis received lower bonus payments for fiscal 2007.

These assurances did not seem to mollify investors, who expressed greater dissatisfaction than last year, when shareholders voted about 17 percent of shares against the pay report in protest of Lord Browne's £5 million ($10 million) exit package. Shareholder Standard Life Investments has voted against BP's remuneration packages since 2006. Standard Life spokeswoman Hilda Stewart told R&GW the organization could not comment on its BP proxy votes this year.

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.

Scandals, concerns over control, and heavy losses at several large European firms have led some investors this year to consider voting against resolutions to ratify board actions.

Shareholders at many European companies are asked each year to retroactively "discharge," or ratify the actions of, the management and supervisory boards and to indemnify directors against loss or legal action. At most firms, these management proposals are considered routine and pass with minimal resistance. However, at companies like Germany's Volkswagen and Siemens, and Switzerland's UBS, shareowners are expressing a greater reluctance this year to sign off on directors' past decisions.

Wolfsburg-based Volkswagen likely will see resistance to its discharge resolutions and board nominees at its April 24 annual meeting. In October, the European High Court of Justice struck down a 47-year-old German law that capped investor voting rights in German companies at 20 percent regardless of equity stake. Dubbed the "Volkswagen Law," the measure was primarily intended to prevent a hostile takeover of Volkswagen, Europe's largest automaker. The law also imposed an 80 percent supermajority requirement to pass proposals at shareholder meetings, and gave the State of Lower Saxony--which owns a 20.1 percent stake in Volkswagen--the right to name two directors to the supervisory board.

Expecting the court ruling, Porsche--the German-based luxury automaker--increased its stake in Volkswagen to 31 percent, beginning in 2005, and said in January it would seek a majority stake to keep the company largely German-owned, the Associated Press reported. Porsche's shareholders approved the strategy at a special meeting in March. Volkswagen also nominated Porsche's chairman, Wolfgang Porsche, to the supervisory board at Volkswagen. These moves have drawn fire from investor groups who claim that management has allowed Porsche to gain control of the Volkswagen board with little resistance.

Vereinigung Institutionelle Privatanleger (VIP), a European association of institutional shareholder groups, on April 10 filed a counterproposal to Volkswagen's discharge requests. The group complains that the company has done nothing to follow up on the "Volkswagen Law" court decision, nor has it endorsed either of two shareholder proposals to modify company practices in accordance with the ruling. Those proposals, one submitted by Porsche, and the other by Hannoversche Beteiligungsgesellschaft--the holding company for Lower Saxony--will be voted on at Volkswagen's meeting.

Porsche is asking the company to scrap the 80 percent requirement. That move is opposed by Volkswagen's works council (labor union), which has 10 representatives on the 20-member supervisory board. One of these labor representatives, director Bernd Osterloh, has denounced the actions of Porsche CEO Wendelin Wiedeking (also a supervisory board member), calling him a "Napoleon," news reports indicate. Company insiders say that Volkswagen chairman Ferdinand Piech plans to oust Wiedeking to preserve his expansive powers at Volkswagen and maintain union strength, German newsmagazine Der Spiegel reported in March.

Lower Saxony has submitted a competing proposal that would retain the supermajority standard. This measure is opposed by Deutsche Schutzvereinigung für Werzpapierbesitz (DSW), which represents individual German investors and called the "Volkswagen Law" in any form an "anachronism," the Associated Press noted.

In January, the German Ministry of Justice drafted new legislation that would end the voting rights cap but would keep the 80 percent supermajority rule and require shareholder approval of any plant relocation or construction. On April 14, European Commission Internal Markets Commissioner Charlie McCreevy sent a letter to German Justice Minister Brigitte Zypries, warning her that the supermajority requirements would not pass EU scrutiny. "All [the] provisions … need to be abolished in order to implement the ruling correctly," McCreevy wrote.

Despite a "vote no" campaign supported by labor investors and public pension funds, all the directors at Morgan Stanley were re-elected with at least 90 percent shareholder support, the Wall Street firm announced after its April 8 annual meeting.

The shareholder campaign was led by CtW Investment Group, the investment arm of the Change to Win labor federation. CtW urged investors to vote against directors C. Robert Kidder, Sir Howard J. Davies--former head of Britain's Financial Services Authority--and Chairman/CEO John J. Mack. Davies received a 9.5 percent withhold vote, while Kidder had 9 percent opposition. Mack received a 5.5 percent negative vote, according to a company press release.

The labor federation claimed that Kidder and Davies failed to stop Mack from implementing a business strategy focused on risk-taking and greater investment in residential mortgages and collateralized debt obligations (CDOs). Morgan Stanley announced $3.7 billion in losses for the fourth quarter of 2007, its first quarterly loss as a publicly traded company.

"We knew going into the meeting it wasn't going to be a high vote, based on talking to shareholders over the past few weeks," CtW Director of Value Strategies Michael Garland told Risk & Governance Weekly.

At the meeting, Mack told shareholders he appreciated their "strong support" in electing the board members by "substantial margins." Morgan Stanley was the first of six U.S. financial firms with significant credit-related losses to hold its annual meeting this year. The results suggest that most Morgan Stanley investors were either satisfied by the steps that the company has taken in response to the credit crisis or didn't think that board members should be blamed for the losses.

CtW also pushed Mack to step down as chairman of the board, claiming the combined positions created a captive board that was reluctant to challenge Mack's decisions. Though many pension funds agree that Mack should step down as chairman, many institutional investors support Mack as CEO, Garland said.

Roy Bostock, a member of the board's nominating committee, received the lowest support of all directors on the ballot: 90.1 percent, the company reported. Bostock's re-election was opposed by the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS).

CalPERS spokesman Clark McKinley told R&GW that the pension system elected to vote against Bostock because he was classified as non-independent under the pension fund's governance guidelines, which mandate independent directors on key committees such as nominating or governance committees. Bostock's son-in-law is managing director of Morgan Stanley's asset management division.

In addition to Bostock, CalSTRS voted against eight of the 11 directors, including Mack and Kidder, who chairs the compensation committee, Bloomberg News reported. The pension fund cited pay concerns as the reason for withholding support from the eight directors. Regulatory filings indicate that Mack received $1.6 million in salary and pension benefits, plus $8.43 million in vesting stock options last year, though news reports indicated he declined a performance bonus because of the company's "embarrassing" fourth-quarter loss. Kidder's fellow compensation committee members, Donald Nicolaisen and Erskine Bowles, received 93.5 and 96.9 percent support, respectively.

Overall, the level of dissent at Morgan Stanley was less than at last year's meeting. In 2007, director Roy Bostock received almost 12 percent opposition due to independence issues, and director Laura Tyson had a 10.9 percent negative vote. Former director Klaus Zumwinkel had 25 percent opposition in 2007 and 12.5 percent in 2006 over concerns about the number of boards he sat on. In 2006, shareholders also withheld 3.5 percent support from Kidder and 2.8 percent from Mack amid criticism of the CEO's compensation.

At this year's meeting, investors gave 36.8 percent support to a shareholder proposal asking for an annual advisory vote on executive pay, the company's press release indicated. The proposal, submitted by the American Federation of State, County, and Municipal Employees (AFSCME), was backed by CtW, CalPERS, CalSTRS, and the State Universities Retirement System of Illinois, among others. Richard Ferlauto, director of pension and benefit policy for AFSCME, said the measure likely didn't pass because Morgan Stanley was able to explain its pay practices to shareholders, and has had good financial performance on average.

A survey of U.S. corporate directors commissioned by the Center for Political Accountability, the Washington, D.C., group that has advised a five-year shareholder campaign for better disclosure and governance of corporate political contributions, finds evidence that its message is taking root in corporate boardrooms.

The survey, conducted by Mason-Dixon Polling & Research, showed corporate political giving to be a significant issue for directors, a strong majority of whom also support disclosure. However, the survey also indicated that directors possess considerably less knowledge about campaign finance rules and their own companies' policies and activities than they say.

Read more about the survey results and corporate political giving here.

As the credit crisis evolves, the financial community is focusing on the corporate governance implications, especially board structure, oversight and risk management disclosure practices, and how the crisis is prompting a wave of securities litigation.

RiskMetrics Group today published two separate studies examining shareholder responses to the subprime credit crisis. The first report, Credit Crisis and Corporate Governance Implications, identifies the corporate governance factors involved in the credit crisis, how stronger provisions might have mitigated investor risk, and the ways investors are evaluating boards' risk management and disclosure practices. The second report, The Subprime Meltdown Heads to Court, follows the consequences of weak risk oversight, providing an overview of the wave of securities litigation and regulatory enforcement actions beginning to swell. A major finding from both reports is that shareholder activism and litigation has increased as a result of the credit crisis.

To help investors better understand the implications of the credit crisis, RiskMetrics Group has created an educational resource center here. The center contains both reports as well as other information related to the current credit crisis. RiskMetrics Group will also share the findings from both reports in a special forum, Subprime Litigation and Liability, on April 11, 2008 at 11 a.m. EDT. To register for the forum, please visit here.

RiskMetrics Group has just published a new report, Infrastructure Funds: Managing, Financing and Accounting. Infrastructure as an asset class has commanded increasing attention from investors and the financial press over the last few years. Major asset sales in the UK - most notably of ports and water utilities such as Thames Water - and ongoing attention on road infrastructure in the United States and Europe, has been met with increased competition for assets, not from 'trade buyers' (such as utility companies) but from investment banks and asset managers. The asset manager model for infrastructure, where a sponsoring manager - usually but not always an investment bank - acquires assets and then on-sells them into a separate fund or publicly traded entity but retains management rights - was pioneered in Australia.

Even as the managed infrastructure model has grown in popularity, at least among potential and actual asset managers, there are some signs of investor unease with the existing model. At the basis of these concerns is the unique governance structure that has emerged among publicly traded infrastructure vehicles.

This report initially outlines the main features of infrastructure assets. It then explains the importance of distinguishing between infrastructure assets and infrastructure funds. The predictable, and steadily growing, cash flow associated with infrastructure assets is commonly highlighted as a basis for providing an attractive, and steady, yield. However, the yield delivered by several infrastructure funds is sourced from operating cash flows of the fund's assets and from capital.

The paper summarizes the key features of the infrastructure fund model and highlights a range of investment-related concerns with the model. The paper then describes a series of governance concerns with the infrastructure model. For instance, the existence of 'special shares' in some funds which entitle the external manager to appoint a majority of the fund's directors. The paper concludes with a series of reform proposals.

To read the report, please visit here.

RiskMetrics Group's Governance Services unit just released a study contrasting the corporate governance protections available to investors in Hong Kong and China. The report, which examined the governance practices prevalent in these two markets, including regulatory and exchange requirements, found that Hong Kong enjoys a comparative advantage over mainland China in protecting minority investor interests.

RiskMetrics Group will hold a special forum, Corporate Governance in Greater China, to share the findings from the study on Tuesday, April 8 at 1:00 pm Australia EST, 11:00 am HKT, SGT, CST, 12:00 pm JST. To register for the webcast, please visit here. To read more about the study, check out today's article in the Financial Times.