1. THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE Agata Waclawik-Wejman Center for Banking Law, Jagiellonian University Cracow IQPC Corporate Governance Summit Dubai - February 9-10, 2009

2. Re-focusing corporations on long-term objectives – the key issues  What are the binding corporate goals for the corporate decision-making?  The recent developments in corporate governance mechanisms to ensure the long-term success of the corporation

3. Structure of this presentation  I. The key corporate decision-makers  II. The increasing role of shareholders in corporate governance  III. Other CG actors: auditors, rating agencies

4. I. The Corporate Decision-Makers  Corporate agents’ (Management/directors/key shareholders) duty to pursue corporate goals  Decision-making in a multi-stakeholder environment  Short-term v. long-term objectives

5. 1. Corporate Agents’ Duties  Centralized management and the duty to pursue the corporate goals:  The common goal of shareholders?  The multiple goals of all stakeholders?  Corporate law protections against mismanagement? Stealing and shirking

6. 2. Decision-making in a multi- stakeholder environment  Shareholders  Financial investors as shareholders  Creditors  Clients  Employees  Environment  Public interest - new: financial stability concerns  Giving back to the society: charitable donations

7. 3. Short-term v. long-term objectives  Reconciling the conflict:  Short-term success and forgoing of long-term objectives  Indefiniteness of „long-term” and the managerial risk averseness  Maximizing profits v maximizing the market value

8. Solutions  Designing the decision-making process, including the board’s involvement in: Strategy Setting appropriate long-term objectives and interim milestones Continuous assessment of the management’s performance Risk management Executive compensation Alignment with long-term objectives

9. II. The increasing role of shareholders in corporate governance 1. Enhancing shareholder rights 2. Facilitating the exercise of the existing shareholder rights The Underlying Issues:  Growing institutional ownership  Internationalization of shareholdings  Shareholder passivity/Shareholder activism  The alignment between the economic interest and voting rights  Infrastructural barriers and integration processes

10. 1. Enhancing Shareholder Rights  General Meetings European Union: Shareholder Rights Directive 2007/36/EC  Adding items to the GM agenda (Art. 6.1a)  Shareholder Proposals (Art. 6.1b)  Rights to ask questions (Art. 9)  Shareholder approval and communication requirements  Board Appointment/Compensation Directors’ remuneration European Union: EU Commission’s Recommendation 2004/913/EC  Strategic decisions European Union: Takeovers Directive 2004/25/EC

11. 2. Facilitating the exercise of shareholder rights  The Shareholder Rights Directive 2007/36/EC  The EU initiatives to remove barriers to clearing and settlement of securities transactions

12. Shareholder Rights Directive removes some barriers…  Equal treatment (Art. 4)  Easier access to GM-relevant information (Art. 5, 14)  Easier access to the GM (Art. 7)  Striking down the personal presence requirement  Exercise of voting rights through proxies and nominees (Artt. 10-11, 13)  Electronic voting (Art. 8)  Voting per mail (Art. 12)

13. … but the key barriers in cross-border voting in Europe are related to securities infrastucture  Longer chains of intermediaries  Late or missing GM-relevant information  Fragmentation of the securities clearing and settlement infrastructure: non-recognition of cross-border intermediary chains  The last intermediary in the local chain considered the shareholder Property-system-driven fragmentation Regulation-driven fragmentation  Uncertainty as to the role of the intermediary  Some consequences: Application of mandatory bid thresholds to the holdings of the intermediary Split Voting and Partial Voting not permitted Non-recognition of proof of shareholdings issued by a foreign intermediary

14. Intermediated holding systems The modified relations between the issuer and investor  The intermediary system substitutes the “evidentiary system” of certificated securities.  The effect: the investor enters into a legal agreement with its intermediary/account provider to purchase and manage securities.  The issuer – investor relationship is substituted by a set of legal relationships, with various rights and obligations related to the administration of this evidentiary system by the account provider, which:  Facilitate and streamline the process of mass turnover of securities / can channel certain communication between the issuer and the investor,  Are more complex from the legal point of view: the relationships between the issuer and account providers, and between the account providers and the investors /account holders.

15. Fragmentation and complexity of account provider chains – a simplified scheme Issuer Account Provider Country B Country A Account Provider Investor […] ?

16. The EU works on cross-border securities clearing and settlement  The EU identified the fragmentation of the securities clearing and settlement infrastructure as a key barrier to the capital markets integration in Europe  The Giovannini Reports - Barriers: technological, legal and tax  Three expert groups: CESAME, Legal Certainty Group and FISCO  Private sector best practices as the primary solution, subsidiarity of the harmonisation through legislation – the private sector work is still ongoing  Code of Conduct  Target2-Securities

17. III. Other external monitors in CG  Auditors  Credit rating agencies

18. Conclusions (I) Bottomline  The key factors of a long-term focus in corporate governance:  The goals  The actors  The process

19. Conclusions (II)  The corporate governance tools for re-focusing on the long-term success of the corporation:  Corporate Decision-Makers Focus on the long-term corporate goals and prevent conflict of values/interests Focus of shareholder interest within the limitations of the multi-stakeholder framework Ensure a decision making process for the realization of long-term objectives – board cooperation  Shareholders Growing importance of shareholders as corporate governance actors Enhancing and facilitating shareholder involvement in key corporate decisions Identifying and resolving conflicts of interest The alignment of the economic interests and voting rights  Other corporate governance actors Auditors, rating agencies: Improving assessment criteria and tools Identifying and resolving conflicts of interest

20. Thank you! Agata Waclawik-Wejman agata at wejman.pl Center for Banking Law Jagiellonian University Cracow ul. Bracka 12 31-005 Cracow, Poland Tel./Fax. +48 12 422 09 08