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Corporate governance : another investor relations trick ?

by Agnes a Paris Mon Dec 18th, 2006 at 04:33:15 PM EST

The widely respected and powerful credit rating agency Standard& Poor's have recently launched a "wide-ranging round table discussion". Topics of conversation are reported to have included executive compensation issues, corporate board structures, the regulation of corporate governance, and the role of non financial stakeholders in companies' decision-making processes. The speakers were top executives of the rating agency. <sic>
As a foreword general considerations come in handy :

In 2006, corporate governance continued to affect investor interests and influence the public policy dialogue globally, and is likely to remain an area of relevance and concern in 2007.
While the numerous corporate governance reforms, laws, and code implemented earlier in the decade in markets around the world have in many ways improved governance standards globally, governance issues continue to present challenges to investors in complex ways that extend beyond regulatory purview. And within the regulatory context itself there is an open and unresolved public debate about the most effective regulatory framework to address corporate governance-related risks and abuses in financial markets around the world.

Introspection within the U.S. about the effectiveness of its more legalistic approach to governance regulation features prominently in this discussion, with Europe's more flexible 'comply or explain' approach offering a more flexible, but possibly weaker, alternative.

Interestingly enough, the European regulatory framework is considered less conducive to efficient corporate governance.
To start with the basics, what would be needed to ensure a decent level of corporate governance ? The French system is undoubtedly flawed, with the so-called "independent" board members paid as much as 75, 000 Euro a year (in a big investment bank)for endorsing the options taken by the regular board members. What are your views on the subject and how is corporate governance implemented in your countries ?

Some facts about the rights of individual shareholders to start with.
The main legislative focus is the shareholder rights directive, one of the few hard law measures relating to corporate governance that is being introduced at the EU level. This directive focuses on a number of specific aspects of shareholder rights, including the right for shareholders to ask questions of management at the annual general meeting (AGM) and establishing a minimum notice period (21 days) for calling AGMs and extraordinary general meetings.
That is a piecemeal, patchy measure. As an individual shareholder in a bunch of companies, I have always received the AGM program and the resolutions submitted for voting in such tight timetable that I had to review and send my vote my mail almost the very same day to make sure it is taken into account. A trick to avoid individual shareholders being too nosey ?

Indeed, a more "sensitive" issue that remains outside the scope of legislative initiative relates to differing ownership rights in many EU member states. Roughly two-thirds of the top 300 European companies have some form of unequal voting rights, providing certain investors with voting privileges in excess of their economic ownership, which, in turn, limits the ability of other shareholders (individual shareholders) to vote in proportion to their economic stake. This represents longstanding patterns of ownership and control in several European jurisdictions, and serves as a form of anti-takeover mechanism in many instances.
Advocates of this system stress legal argument of freedom of contract, and that willing and informed investors should not be prevented from purchasing equity securities with little or no voting rights. However, the concern relating to disproportionate voting rights in the current climate is that the voice of small shareholders can be disenfranchised. No way ? <s>

An interesting extract of the round table focusing on executive compensation

Question : Are executive pay issues also a large corporate governance concern in Europe?

If we are talking specifically and only about the backdating of stock options, the answer is simple: To date, we have not had any European companies involved in this. But what does that mean? First, I don't think it means that it cannot happen here or that Europe is more frugal. Although Europe (particularly some parts of continental Europe) has not been so highly extravagant in terms of executive pay, particularly compared to the U.S., I think the concern regarding executive pay is creeping into Europe--for a number of reasons, including internationalization of corporate boards, with board members sitting on boards across the Atlantic.

I'd like to follow up on the compensation point. You read about it a lot, but to keep things in proportion, recognize that the average ratio of chief executive pay to employee pay in Germany, for example, is about 15 to 1. In the U.K., this ratio has been traditionally higher, at about 25 to 1.
However for FTSE 100 CEOs, it is now reported around 130 to 1, and is regarded as a problem. But in the U.S., depending upon how it's calculated, this pay ratio is around 350 to 1. So it really is a different order of magnitude here in Europe versus the U.S.

Strictly speaking, executive compensation, in terms of salary, bonus, and option issues, is not the same issue in Europe. In part, that reflects differences in ownership structure. But one important area of debate here is the fact that maybe we don't really know as much as we need to. Because the area of executive compensation disclosure, generally speaking, remains in some parts of the continent incomplete.

And we see in certain jurisdictions, notably Germany, it becoming not at all infrequent for companies to obey almost all aspects of their national corporate governance codes, except for the one that deals with disclosure of individual executive compensation. So, it's an issue here, but not to the same degree as we see in the U.S.

My impression was that France was at the forefront as far as extravagant top executive/CEO compensation was concerned. Would be interesting indeed to know whether US CEOs get as preposterous golden parachutes as do French CEOs. Opinions from the other side of the Atlantic welcome.

is to have a Strategic Board and a Tactical Board. The Strategic Board is made up mostly of outsiders, but with minority representatives of both control and process.

The SB's job is to take legal responsibility for the actions of the company in it's interface with the rest of society (0beying the law). SB members are paid by a fixed percentage of company value in any company. They may serve on as many SB's of different companies as they wish/are invited to. They are hired and fired by the shareholders at AGMs or extraordinaries. Votes are simple majorities, but dissenters may enter opinions that may relieve them of full legal repsonsibility. Immediate abdications from the board within 24 hours following votes with which a board member diagrees, excuse them from  legal responsibility for such votes.

The TB is made up 50/50 of representatives of both control and process. All members are paid exactly the same -  based on a bottom up system (below)

The Chairman is nominated by the SB only, from the ranks of the SB, and approved by the TB by majority vote. But can be fired by the TB (from the TB) at any time by unanimous vote.

All salaries including TB and below are decided annually by a bottom-up review system. In a hierarchical system, the salaries are set at a base rate when the company adopts this structure, Thereafter annually, all those immediately below a certain salary window can decide by majority secret ballot to vary the salary of those immediately above them by a maximum of plus/minus 5% - or anywhere in between.

Self-Organizing companies are excused firom all of the above ;-)

You can't be me, I'm taken

by Sven Triloqvist on Mon Dec 18th, 2006 at 05:18:10 PM EST
Self-Organizing companies are excused from all of the above ;-)

Companies??!! I speeet on zem...pttuh...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Dec 19th, 2006 at 08:51:26 AM EST
[ Parent ]
(eh eh :)

Currently most of the "voters" of the shareholder ploutocracy aren't those who have invested their money, that's the biggest problem.

Currently, when someone invest in a mutual fund (or many other financial products) he gives away two rights:

  1. the right to choose which shares to hold (the "money manager" will make this choice)
  2. the right to vote on shareholders elections of shares choosen in 1.

There is no reason to give away right number 2 to the "money manager".

That is the real problem: it creates a caste of people who make obviously bad choices (as seen in top management compensation), and hopefully the solution is simple: let the vote to the person investing, not the middleman.

by Laurent GUERBY on Tue Dec 19th, 2006 at 07:34:43 AM EST
There are two very different things:

  • holding corporate officers accountable to shareholders (with regards to the profit maximisation goal)

  • holding corporate officers accountable to society (with regard to compliance with law, regulations and the fuzzier notion of "decency").

Only the first one is debated.

I'd be favorable to stiff prison sentences for corporate officers that allow their companies to break the law - any law (and ironically the USA does that better, at least in some high profile cases).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Dec 19th, 2006 at 07:49:15 AM EST
It should be noted that most cases of so-called "white-collar" crime to which you refer to as being prosecuted in the US revolve around defrauding either banks or shareholders. Kozlowski got nailed for fraud against shareholders ("misappropriation of corporate funds"). Lay, Fastow and Skilling were on the hook for insider trading (the ultimate in shareholder fraud), securities fraud, and bank fraud among other things. Ditto Ebbers, Sullivan and Myers.

And the most popularized prosecution, that of Martha Stewart? Insider Trading.

All examples of stealing from the owners.

Rarely is there civil prosecution for corporate malfeasance.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Dec 19th, 2006 at 11:23:30 AM EST
[ Parent ]
I mean, rarely is there criminal prosecution for corporate malfeasance, by which I mean for crimes not involving theft of owners' money.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Tue Dec 19th, 2006 at 11:26:33 AM EST
[ Parent ]

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