The plethora of governance codes keeps on growing. How are IROs expected to keep up?
Scour the international news clippings on corporate governance in recent years and a number of trends emerge. First up, despite huge variations in culture and market approach, the general principles and aims espoused by investors and regulators are remarkably similar. And they are becoming even more so over time.
Next, look for the corporate comment. Company executives complaining about the level, complexity and number of corporate governance codes remains common. Why? Because the people willing to make such comments remain relatively easy to find. Often talking off-the-record for fear of a backlash from investors, executives protest about the increasing levels of bureaucracy that force them to take their eyes off running the company.
Every now and then a key figure comes out of the woodwork and has a direct, on-the-record rant. One of the latest of these comes from Rolf Breuer, chief executive of Deutsche Bank, who gave a lecture in Brussels in March complaining that dealing with the new generation of active institutional shareholders was not always a good experience. He went on to intimate that the big US pension funds imposing their own codes of corporate governance on his bank were especially tiresome.
But Breuer is by no means alone. And the premise for his complaint is at least understandable - even if his approach is a little misguided for any company serious about its desire to compete for international capital. A quick count of corporate governance codes, principles and practice guidelines across international markets reveals a plethora of approaches. Some suggest there are well in excess of 100 different statements out there doing the rounds in the major markets alone (the European Corporate Governance Network gives a handy - if somewhat out of date - overview of the various codes at ecgn.org/ecgn/codes.htm). How can any company crossing borders with its investor relations program be expected to cope with all this?
Smoke screen
'My perspective is that complaints about the multiplicity of corporate governance codes can often be seen as a screen for doing nothing,' says Stephen Davis, president of Davis Global Advisors, a leading international corporate governance consultancy. 'The variety is actually a mask for a general and remarkable homogeneity.' Davis points out that recent years have seen a convergence taking place in the way that different markets approach corporate governance issues. Those that previously promoted the primacy of other stakeholders have tended toward a growing accountability to shareholders. Markets that took the other tack - such as the UK and US - have introduced the idea of remaining accountable to shareholders but retaining a responsibility for the interests of stakeholders.
This convergence has been backed up by two major attempts to make governance more of an international discipline. The Organisation for Economic Cooperation and Development (OECD) came out with its set of principles in May 1999, swiftly followed by those of the International Corporate Governance Network in July 1999(see sidebar, page 48). The ICGN's approach is largely based on OECD thinking but, being a grouping of institutional investors, it has added to its principles some performance guidelines for companies to consider.
While it would be wrong to view these two efforts as lowest common denominator compilations of national codes, most commentators advise companies to 'look to their own' in the first instance. In other words, if your own market has a well-developed and respected corporate governance approach, then ensure your company is doing its level best to conform with the national thinking before searching for a multinational answer.
Holly Gregory, a partner in the corporate governance practice at law firm Weil Gotshal & Manges in New York, goes a little further by advising companies to look long and hard at their shareholder base. She points out that if she was advising, say, an Egyptian firm that was looking to list on a foreign, developed market exchange, she might advise them to look to their local market and then add in a number of elements from the OECD or ICGN principles. Alternatively, they might want to consider guidelines from the regulators or major investors in their target markets. 'None of these principles are set in stone,' says Gregory. 'They are not legislative and are often linked to disclosure standards. Nearly every code or principle says it recognizes that not one size fits all.'
Talk to the owners
Davis builds on that advice by suggesting that companies struggling to find the best corporate governance code should simply talk to their shareholders; find out the code that their owners want the most. He argues that, in any case, the differences are more usually technicalities rather than major principles. Sure, US shareholders do not call for a split in the role of chairman and chief executive, unlike their counterparts in the UK. On the other hand, 'There is no US code that says, We do not support splitting the chairman and chief executive,' says Davis. That is not to say that there are no conflicts: there are. But they are on the periphery rather than at the core of the codes and principles. One common point of discussion is how to define 'independence' when talking about boards of directors. For example, several view the Washington, DC-based Council of Institutional Investors as taking a fairly hard, precise tack on this issue, whereas pension fund TIAA-Cref allows a lot more leeway. Allan McDougall, managing director of Pension Investment Research Consultants (Pirc) in London, notes that there are also differences in approach between the UK and the US on issues of executive remuneration.
Despite these marginal disputes, Davis remains convinced that anyone complaining that there is too much differentiation is trying an unnecessary get-out clause. 'What is remarkable is not the vast number of different codes but how similar they are to one another. To be quite honest, the Malaysian corporate governance code could have been written in the City [of London]. It is also a fallacy to argue that corporate governance is an Anglo-Saxon concept. The values of ownership are similar across the globe,' Davis states.
Banging the drum
That's a view backed by the institutional investors and their representative bodies. Peter Clapman, senior vice president and counsel for investment at TIAA-Cref, says that his organization gained 'kudos and praise' from across the corporate spectrum for telling people what it thought was important in corporate governance terms. 'The differences with others are really at the margin. There's not necessarily a total overlap between codes - issuers can decide what's important and what they'd like to observe. Even internationally, there are not competing codes designed to confuse management. If they believe that's the case then it's because they are lacking a willingness to examine what is actually being said and check their practices against them.'
Clapman, who is also co-chair of the ICGN, believes there is a role for major investors such as TIAA-Cref in helping other institutions and regulators develop best practice corporate governance. In that way, comments from other markets are taken into account as new codes are developed. That communication process then helps create a more harmonized approach across major markets.'
Of course, it is not all sweetness and light in terms of corporate governance harmonization. One of the obstacles may lie in the fact pension funds tend to be among the most activist institutions on the corporate governance front - yet the vast majority of them remain domestically focused in that activism. The international names - Calpers, TIAA-Cref and Hermes, for example - are few and far between. McDougall at Pirc agrees that there is an element of pension funds remaining intent on their own back yard: 'There is a lot of international goodwill but most pension fund investors still focus on their own market and will look at overseas companies from the point of view of [domestic] guidelines.'
Pirc believes this situation is changing. Indeed, it is about to introduce a Europe-wide corporate governance service for the first time with an alliance of local advisors from key markets. McDougall says that the window of opportunity for such a service has only just opened up. Put into the perspective of globalization of markets, the internationalization of corporate governance seems relatively slow.
Even at a major international investor such as TIAA-Cref - which invests some $40 bn of its $280 bn portfolio outside the US - the corporate governance view it takes overseas will be different than the one it espouses at home. 'We've found a growing perception that corporate governance is important to our overseas investments,' says Clapman. 'But it would be a very rare occurrence for, say, a continental European company to come to us and say, We know we don't exactly meet the TIAA-Cref guidelines but we are focused on the spirit of those principles. Most companies still expect investors to raise those types of issues. Greater lip service is paid by companies nowadays to corporate governance issues but whether they have a true understanding of what it actually means is a very different point.'
Helpful understanding
Despite these concerns, institutions are keen to ensure that companies do not view the proliferation of corporate governance codes as obstructive to their relationships with investors. 'Where we have guidelines we do so in order to try and help companies understand what their owners believe is best practice,' says Peter Montagnon, head of investment affairs at the Association of British Insurers. 'They are certainly not designed to make life difficult but to help us explain our responsibilities as owners and help companies respond to our needs,' Montagnon continues. 'I also believe there is a great deal of understanding in the institutional investment community.
For example, I don't think that any British or US investor would refuse to buy a German company simply because of differences in board structure or pay.'
So what if a company believes it cannot possibly follow corporate governance best practice because there are too many codes in too many markets? Holly Gregory believes it would be missing the point. 'These codes don't tend to be inconsistent. Nor are they a simple checklist. Most are there to educate companies and help them make a decision. It's all a case of whether they want to attract equity capital by being seen as a well-governed company.'
Content to be different
Although broadly similar in content, the development of international corporate governance guidelines by the OECD and ICGN in 1999 was driven by very different thinking. The OECD had come to the conclusion that certain economies were failing to attract capital due to their failure to follow good governance practice. With its remit to aid economic development it established a committee to develop international principles of good corporate governance practice.
The ICGN on the other hand was intent on making it easier for its institutional investor members to operate across different markets. With a representative on the OECD governance committee, the ICGN took the OECD principles and added its own institutional investor twist. Andre Baladi, head of Geneva-based Baladi & Associates and co-chair of the ICGN, explains that the addition of corporate return and performance benchmarks to the OECD's base principles is designed to help institutional investors as they evaluate companies on a global basis.
'Corporate governance on its own is not enough,' says Baladi. 'Corporate governance inputs represent only about one third of what we wanted to do with the ICGN principles. Yes, corporate governance has a long-term impact but it is not immediate. That is why we also introduced shareholder value measures into our principles', he adds.
Baladi's advice to companies looking for corporate governance inspiration remains simple: 'They should consider their domestic guidelines - if they exist - but also take into consideration the international principles formulated by the OECD and ICGN.'
Readers interested in pursuing Baladi's suggestion should point their internet browsers toward oecd.org/daf/governance/principles.htm for the OECD governance guidelines and icgn.org/principles.html for the ICGN principles.