Shareowners in Global Corporate Governance OECD/World Bank South East Europe Corporate Governance Roundtable Bucharest, Romania September 2001 Stephen Davis, Ph.D.

Why Corporate Governance? Emerging investor consensus : Activism pays Emerging investor consensus : Activism pays Emerging company response: investor rights and protections are perceived to lower risk, bringing more capital at lower cost Emerging company response: investor rights and protections are perceived to lower risk, bringing more capital at lower cost Better performance Better performance

Activism Findings: McKinsey Investors would pay an 18-28% premium for superior board and disclosure practices Investors would pay an 18-28% premium for superior board and disclosure practices Board quality is often more important than financial issues in stock selection Board quality is often more important than financial issues in stock selection The less investors trust shareholder protections, the more they value governance. Companies with poor governance face a steep barrier in gaining access to capital. The less investors trust shareholder protections, the more they value governance. Companies with poor governance face a steep barrier in gaining access to capital.

UK17.9Chile20.8 Switzerland18.0Argentina21.2 Sweden18.2Mexico21.5 U.S.18.3Italy22.0 Netherlands18.5Brazil22.9 Spain19.2Korea24.2 Belgium19.6Malaysia24.9 France19.8Thailand25.7 Germany20.2Indonesia27.1 Japan20.2Columbia27.2 Taiwan20.2Venezuela27.6

Other Recent Evidence… Stanford U: Strong link between governance and value in Russia (Bernard Black) Stanford U: Strong link between governance and value in Russia (Bernard Black) CLSA: Best governance yields double value in emerging markets CLSA: Best governance yields double value in emerging markets Univ. of Vienna: shareowner monitoring critical where blockholders wield control (Klaus Gugler) Univ. of Vienna: shareowner monitoring critical where blockholders wield control (Klaus Gugler) Wilshire 2001: ‘CalPERS Effect’ activism made companies jump from 96% under to 14% over market Wilshire 2001: ‘CalPERS Effect’ activism made companies jump from 96% under to 14% over market

And still more ANZ study: Poor governance cost NZ 7% ANZ study: Poor governance cost NZ 7% Stiglitz/World Bank: Privatization only works in combination with good corporate governance Stiglitz/World Bank: Privatization only works in combination with good corporate governance Millstein/MacAvoy: Good boards=premium Millstein/MacAvoy: Good boards=premium Harvard Business School: Activist institutions associated with positive corporate performance Harvard Business School: Activist institutions associated with positive corporate performance

Shareowner Trends Routine Voting : More monitoring, less expense Routine Voting : More monitoring, less expense Benchmarks: Codes, pressure on indexers and analysts, ratings Benchmarks: Codes, pressure on indexers and analysts, ratings International Alliances: CalPERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce,, GIGN, ACGA International Alliances: CalPERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce,, GIGN, ACGA Cross-Pollination of Tactics, Ideas: Web Cross-Pollination of Tactics, Ideas: Web Disclosure Rules : Policy statements required UK, Australia, Germany, Disclosure Rules : Policy statements required UK, Australia, Germany, Stakeholder Issues, Unions: ICFTU, Rio Tinto, climate change Stakeholder Issues, Unions: ICFTU, Rio Tinto, climate change Focus Funds: Target under-performing, under-governed companies or tilt toward well-governed Focus Funds: Target under-performing, under-governed companies or tilt toward well-governed

Case Studies: Costly Errors PetroChina PetroChina  Poor governance profile damaged IPO Tomkins Tomkins  Imperial CEO suppressed value, triggering rebellion

Case Studies: Success Stories Daewoo Securities and Grupo Elektra Daewoo Securities and Grupo Elektra  Open governance reform dialogue with foreign investor Shell Shell  Investor rebellion spurs IR overhaul Pfizer Pfizer  Focus on governance wins merger backing Vivendi Vivendi  Governance initiative gains investor support for merger

What Shareowners Want Companies to Do Create a Corporate Governance Balance Sheet Create a Corporate Governance Balance Sheet  Identify CG assets and liabilities  Consider a CG rating Overhaul Investor Relations Overhaul Investor Relations  Add research & development—find best new ideas  Re-position road shows to reach right investors  Gather intelligence on investor priorities Modernize the proxy/AGM notice—use web Modernize the proxy/AGM notice—use web Introduce a code, IAS, governance disclosure Introduce a code, IAS, governance disclosure

What Shareowners Want Policymakers to Do McKinsey 2001 : improve law, regulation and attack corruption McKinsey 2001 : improve law, regulation and attack corruption Local benchmarks reflecting global standards Local benchmarks reflecting global standards Disclosure rules to allow application of benchmarks and promote integrity Disclosure rules to allow application of benchmarks and promote integrity Law & regulation empowering shareowners— easier voting and communication, protection of minorities Law & regulation empowering shareowners— easier voting and communication, protection of minorities Tax and statutes to spur shareowner value —incentive pay, end to cross-holdings, fair takeover rules Tax and statutes to spur shareowner value —incentive pay, end to cross-holdings, fair takeover rules

Conclusion Assume there are no borders in corporate governance. Institutional investors from any part of the globe are monitoring markets and companies everywhere and basing decisions, in part, on how they rank with global competitors on governance criteria. Assume there are no borders in corporate governance. Institutional investors from any part of the globe are monitoring markets and companies everywhere and basing decisions, in part, on how they rank with global competitors on governance criteria.

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