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

Shareowners in Global Corporate Governance

OECD/World Bank South East Europe OECD/World Bank South East Europe Corporate Governance RoundtableCorporate Governance Roundtable

Bucharest, Romania September 2001Bucharest, Romania September 2001

Stephen Davis, Ph.D.Stephen Davis, Ph.D.

DAVIS GLOBAL ADVISORS


Why Corporate Governance?

Emerging investor consensus : Activism paysEmerging investor consensus : Activism pays

Emerging company response: investor rights Emerging company response: investor rights and protections are perceived to lower risk, and protections are perceived to lower risk, bringing more capital at lower cost bringing more capital at lower cost

Better performanceBetter performance


Activism Findings: McKinsey Investors would pay an 18-28% premium for Investors would pay an 18-28% premium for

superior board and disclosure practices superior board and disclosure practices Board quality is often more important than Board quality is often more important than

financial issues in stock selection financial issues in stock selection The less investors trust shareholder The less investors trust shareholder

protections, the more they value governance. protections, the more they value governance. Companies with poor governance face a steep Companies with poor governance face a steep barrier in gaining access to capital. barrier in gaining access to capital.


UKUK 17.917.9 ChileChile 20.820.8

SwitzerlandSwitzerland 18.018.0 ArgentinaArgentina 21.221.2

SwedenSweden 18.218.2 Mexico Mexico 21.521.5

U.S. U.S. 18.318.3 ItalyItaly 22.022.0

NetherlandsNetherlands 18.518.5 BrazilBrazil 22.922.9

SpainSpain 19.219.2 KoreaKorea 24.224.2

BelgiumBelgium 19.619.6 MalaysiaMalaysia 24.924.9

FranceFrance 19.819.8 ThailandThailand 25.725.7

GermanyGermany 20.220.2 IndonesiaIndonesia 27.127.1

JapanJapan 20.220.2 ColumbiaColumbia 27.227.2

TaiwanTaiwan 20.220.2 VenezuelaVenezuela 27.627.6


Other Recent Evidence… Stanford UStanford U: : Strong link between governance and Strong link between governance and

value in Russia (Bernard Black)value in Russia (Bernard Black) CLSACLSA: : Best governance yields double value in Best governance yields double value in

emerging marketsemerging markets Univ. of ViennaUniv. of Vienna: shareowner monitoring critical : shareowner monitoring critical

where blockholders wield control (Klaus Gugler)where blockholders wield control (Klaus Gugler) Wilshire 2001Wilshire 2001: ‘CalPERS Effect’ activism made : ‘CalPERS Effect’ activism made

companies jump from 96% under to 14% over companies jump from 96% under to 14% over marketmarket


And still more

ANZ studyANZ study: : Poor governance cost NZ 7%Poor governance cost NZ 7% Stiglitz/World BankStiglitz/World Bank: : Privatization only works in Privatization only works in

combination with good corporate governancecombination with good corporate governance Millstein/MacAvoyMillstein/MacAvoy: Good boards=premium: Good boards=premium Harvard Business SchoolHarvard Business School: A: Activist institutions ctivist institutions

associated with positive corporate performanceassociated with positive corporate performance


Shareowner Trends

Routine VotingRoutine Voting: More monitoring, less expense: More monitoring, less expense

BenchmarksBenchmarks: : Codes, pressure on indexers and analysts, ratingsCodes, pressure on indexers and analysts, ratings

International AlliancesInternational Alliances: : CalPERS/Hermes, ICGN, World CalPERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce, , GIGN, ACGABank/OECD GCGF Investor Taskforce, , GIGN, ACGA

Cross-Pollination of Tactics, IdeasCross-Pollination of Tactics, Ideas: : WebWeb

Disclosure RulesDisclosure Rules: : Policy statements required UK, Australia, Germany, Policy statements required UK, Australia, Germany,

Stakeholder Issues, UnionsStakeholder Issues, Unions:: ICFTU, Rio Tinto, climate change ICFTU, Rio Tinto, climate change

Focus FundsFocus Funds: : Target under-performing, under-governed companies or Target under-performing, under-governed companies or tilt toward well-governedtilt toward well-governed


Case Studies: Costly Errors

PetroChinaPetroChina Poor governance profile damaged IPOPoor governance profile damaged IPO

TomkinsTomkins Imperial CEO suppressed value, triggering rebellionImperial CEO suppressed value, triggering rebellion


Case Studies: Success Stories

Daewoo Securities and Grupo ElektraDaewoo Securities and Grupo Elektra Open governance reform dialogue with foreign investor Open governance reform dialogue with foreign investor

ShellShell Investor rebellion spurs IR overhaulInvestor rebellion spurs IR overhaul

PfizerPfizer Focus on governance wins merger backingFocus on governance wins merger backing

VivendiVivendi Governance initiative gains investor support for mergerGovernance initiative gains investor support for merger


What Shareowners Want Companies to Do Create a Corporate Governance Balance SheetCreate a Corporate Governance Balance Sheet

Identify CG assets and liabilitiesIdentify CG assets and liabilities Consider a CG ratingConsider a CG rating

Overhaul Investor RelationsOverhaul Investor Relations Add research & development—find best new ideasAdd research & development—find best new ideas Re-position road shows to reach right investorsRe-position road shows to reach right investors Gather intelligence on investor prioritiesGather intelligence on investor priorities

Modernize the proxy/AGM notice—use webModernize the proxy/AGM notice—use web Introduce a code, IAS, governance disclosureIntroduce a code, IAS, governance disclosure


What Shareowners Want Policymakers to Do McKinsey 2001McKinsey 2001: improve law, regulation and attack corruption: improve law, regulation and attack corruption

Local benchmarks reflecting global standardsLocal benchmarks reflecting global standards Disclosure rules to allow application of Disclosure rules to allow application of

benchmarks and promote integritybenchmarks and promote integrity Law & regulation empowering shareowners—Law & regulation empowering shareowners—easier easier

voting and communication, protection of minoritiesvoting and communication, protection of minorities

Tax and statutes to spur shareowner valueTax and statutes to spur shareowner value—incentive —incentive pay, end to cross-holdings, fair takeover rulespay, end to cross-holdings, fair takeover rules


Conclusion

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


Davis Global Advisors, Inc.Davis Global Advisors, Inc.57 Hancock Street Newton MA 02466-2308 USA57 Hancock Street Newton MA 02466-2308 USA

TT +1 617 630 8792+1 617 630 8792 F F +1 617 630 0398+1 617 630 0398 E E [email protected]@davisglobal.com

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