Corporate Governance Forum

Function, role and qualities of Compliance Officer

2005-08-02T18:29:00.000+02:00

Where the accountants have failed, a new supervisor is rising: the (Chief) Compliance Officer.

In an article in the Financieele Dagblad (a Dutch newspaper), Edwin Weller, CCO of Robeco (a Dutch Financial Institution) discusses the function, role and qualities a Compliance Officer should have.

He says that the compliance function is an independant function in an advisory role, aimed at controling the risks that are relevant for maintaining or strenghtening the corporate reputation. However, the final responsibility for controling these compliance risks and for the definition of integrity remains a task of the Executive Board.
Mr Weller says the main personal qualities of a Compliance Officer are discreetness, objectivity, independence, professionalism, and that he should be experienced in relation to the activities of the corporation.
The Compliance Officer should have knowledge about legal, economic, social, operational and commercial aspects and preferably have a legal background.

Do you agree that the role of the Chief Compliance Officer is merely an advisory one? Is protecting the corporate reputation his most important goal? Are the mentioned qualities and expertise areas complete?

2005-04-25T11:29:00.000+02:00

hello, i'am searching for information on corporate governance ratings, in particullar for the belgian market and on the ussefulness of such instruments.

Ruben De Meyer

Downsizing the CEO

2005-04-18T16:25:00.000+02:00

According to Business Week,"directors, auditors, and lawyers are more powerful than ever. That shift has fundamentally altered relations between CEOs and the advisers they depend on. At their best, these supposed guardians of shareholder value, chosen for their ability to complement the CEO and provide specific areas of expertise, were trusted advisers. At their worst, they were little more than bag carriers and sycophants. Either way, these advisers -- who were always supposed to work for the shareholders, not the CEO -- usually exercised their power as watchdogs only in moments of genuine crisis. But now the chumminess and banter have given way to a more adversarial attitude...Even CEOs who don't lose their jobs are finding that their ability to impose their will, whether it's in setting strategy or hiring a successor, has been severely curtailed."

David Henry, Mike France and Louis Lavelle argue "the new rules may initially go too far and create their own distinctive set of problems." Candid conversarions are gone. CEOs are being micromanaged by boards and now seek safe strategies rather than risk confrontations. Pay for performance is the new standard. Board independence makes it harder for CEOs to put together boards that compensate for their weaknesses. CEOs are being bullied by boards, auditors and attorneys. "The downsizing of the CEO has led, to a certain extent, to the supersizing of the advisers. That's not necessarily a cure for everything that ails Corporate America. It is a clue that successful CEOs will have to be consensus builders in the future. And should be a warning to CEOs everywhere: The age of the absolute corporate monarch, such as AIG's Greenberg, is over." (The Boss On The Sidelines, 4/25/05) http://www.businessweek.com/magazine/content/05_17/b3930015_mz001.htm

Really? CEOs still seem to have the power to block the SEC from finalizing its "equal access rule." True, they are less likely to be out and out crooks and that's certainly a step in the right direction. Is the imperial CEO dead?

FTSE and ISS reveil Corporate Governance indices

2005-04-17T09:28:00.000+02:00

The six new CGI indices focus on the US, UK, Japan, Europe, the eurozone and the developed world and rank about 2,200 companies. Companies are rated on a scale of one to five, with the higher scores for the best governed. The top five sectors for good governance include oil and gas, while the bottom five sectors include construction and materials, and healthcare.

The FTSE ISS CGI Series contains six regional indexes. The ratings, which cover over 2,200 companies from 24 countries are based on the following five themes of corporate governance:

- Equity structure and anti-takeover devices,
- Structure and independence of the Board,
- Independence and integrity of the audit process,
- Executive and non-executive director stock ownership,
- Compensation systems for executive and non-executive directors.

The world's top five performers are BHP Billiton; Smith & Nephew, a UK medical devices company; utility Scottish Power; UK telecoms company BT
Group; and Cognos.

In the US the top companies are maker of electrical tools and hardware Cooper Industries, car-maker General Motors, bank National City Corp, contract electronics manufacturer Flextronics International and oil and gas producer Occidental Petroleum.

In Europe, top-ranked companies include French cement maker Lafarge and Dutch food group Numico. In Japan, Nomura Holdings is a leader.

In Asia, the top companies are Hong Kong Exchanges & Clearing, Asia Sat Telecom Hldgs, Hysan Development, Parkway Holdings, and Nomura Holdings.

In the UK, top-ranked companies include BHP Billiton, Smith and Nephew, Scottish Power, BT Group and BPB.

Mark Makepeace, chief executive FTSE Group, and John Connolly, ISS chief executive, said: “Until now, quantifying the risk represented by corporate governance practice has posed a challenge for investors. The ratings provide a means to integrate that information into global portfolios.” More on ISS here.

Pressure for stricter corporate governance guidelines has increased in recent years after a series of high-profile corporate collapses, including US energy firm Enron Corp and Italian food company Parmalat.

While the EC has launched a public consultation on shareholders rights, some prefer shareholders vote with their hands and feet. Also the board structure, in particular separating the CEO and Chairman role is part of the debate.

Critics of stricter rules say too much focus on corporate governance could distract top management and lead to higher costs. Also there are doubts about whether check list approaches towards Corporate Governance work work at all.

Sallie Mae Receives Perfect '10' Score for Corporate Governance

2005-03-16T14:52:00.000+01:00

SLM Corporation, commonly known as Sallie Mae and the nation's leading provider of education funding, today announced that it has received a "perfect" score of 10 for corporate governance according to the latest ratings issued by GovernanceMetrics International (GMI), the corporate governance research and ratings agency. SLM Corporation was one of only 34 companies globally -- and one of only 27 American companies -- to receive a 10, GMI's highest rating. The average rating for reviewed companies in the United States was 7.03.

GMI's rating system incorporates hundreds of data points across six broad categories of analysis: board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base and takeover provisions, and corporate behavior and social responsibility. More on Sallie Mae see their website.

Bestselling Corporate Governance Books

2004-12-29T14:41:00.000+01:00

EC launches public consultation on shareholders' rights

2004-09-22T11:14:00.000+02:00

The European Commission has launched a public consultation on facilitating the exercise of basic shareholders’ rights in company general meetings and solving problems in the cross-border exercise of such rights, particularly voting rights. Responses will be taken into account in a forthcoming proposal for a Directive – part of the Commission Action Plan on Corporate Governance. The deadline for responses is 16 December 2004.

The Commission’s May 2003 Action Plan to modernise company law and enhance CG (see IP/03/716 and MEMO/03/112) contains a set of initiatives aimed at strengthening shareholders' rights, reinforcing protection for employees and creditors, increasing the efficiency and competitiveness of European business and boosting confidence on capital markets.

Internal Market Commissioner Frits Bolkestein said: “Shareholders need to be able to ensure that management is acting in the best interests of the company. To do so, they need access to appropriate information and to effective ways of exercising real influence. Making sure shareholders can exercise their rights will help spread cross-border investing and integrate EU capital markets. If we want the extra growth that will result from that, we need to say ‘goodbye’ to opacity and communication from the age of the carrier pigeon and ‘good morning’ to modern, electronic, transparent information systems that result in real rights being exercised. So I encourage all interested parties - companies, individual and institutional shareholders and regulators - to respond. We will listen.”

The Commission’s consultation paper gives first indications as to the possible future EU regime on shareholders’ rights in listed companies. The Commission considers that this should be based on a Directive, since the effective exercise of such rights requires solving a number of legal difficulties.

The main issues on which the Commission is seeking responses are:

the entitlement to control the voting right - investors in shares are often not recognised as shareholders, in particular in cross-border situations, and are in practice deprived of their right to vote as they wish
the dissemination of information before the general meeting and the possible need for minimum standards to ensure that all shareholders, irrespective of where they live, get information in time
the criteria for participation in general meetings, and the removal of overly cumbersome criteria, such as share blocking requirements
possible minimum standards for the rights to ask questions and table resolutions
possible measures to enable shareholders to vote by post, electronically, or by proxy
the dissemination of information following the general meeting and the possible need for confirmation that votes have been executed.

The consultation paper is available here.

Responses should be sent by 16 December 2004 to DG Internal Market - Unit G4, European Commission, B-1049 Brussels, or emailed to: Markt-COMPLAW@cec.eu.int

Do you agree with Frits Bolkenstein that "(...) modern, electronic, transparent information systems that result in real rights being exercised (...) are important for additonal economic growth?

Checkbox approach to CG doesn't work

2004-09-09T17:56:00.000+02:00

Wharton accounting professors David Larcker, Irem Tuna and Scott Richardson say the check-box approach to CG doesn't work, because companies and their situations are too diverse. "The recipe book is big, and there's a different recipe for each company," Richardson notes. Even worse, the professors say, are consultants and ratings services that use formulas - which they typically refuse to reveal - to boil down a company's CG to a single number or grade.

Yep.

"Lots of people are coming up with G. scorecards," Larcker explains. "They're coming up with best practices and selling this stuff. As far as we can tell, there's no evidence that those scorecards map into better C. performance or better behavior by managers."

Larcker, Tuna and Richardson tried to create a magic formula of their own. But no matter how they sliced and diced G. data (consisting of more than 30 individual measures) on more than 2,100 public companies, they couldn't find one. The three professors have released their findings in a working paper titled, "Does CG Really Matter?" The title is intentionally provocative. They do think CG matters, but after puzzling over reams of company numbers, they are not confident that anyone can measure whether one firm's G. is better than another's at least, not by using typical metrics.

As they say in their paper, "Our overall conclusion is that the typical structural indicators of CG used in academic research and institutional rating services have a very limited ability to explain managerial decisions and firm valuation."

CG pays

2004-09-08T09:39:00.000+02:00

A new study released today by GovernanceMetrics International shows corporations that are rated highest for governance practices have delivered superior investment returns.

GovernanceMetrics International said its latest data on 2,588 global companies found that 26 companies receiving the highest score of 10.0 outperformed the Standard & Poor's 500 stock index total return by 10 percent over the last five years.

Over a three-year period the companies outperformed by 8.3 percent and over one year they outperformed by 4.9 percent. The 26 companies included 20 American companies, five Canadian and one Australian.

GMI said the companies also outperformed when measured against the Morgan Stanley Capital International World Index.

"This suggests a correlation between CG practices and portfolio returns when measured across a number of variables and across a multi-year period," GMI Chief Executive Gavin Anderson said in a statement.

Anderson said that U.S. companies as a group had improved ratings over the past two years, with the average rating rising to 7.2 from 6.5. He attributed the better showing in part to the Sarbanes-Oxley Act, a U.S. law that required a series of accounting and CG reforms.

The report said that 95 percent of U.S. companies now say they have a qualified financial expert on their audit committee, compared with 65 percent in an earlier study in 2002.

Nearly three-quarters have hiring policies concerning employees or former employees of auditor firms compared with only 14 percent in 2002.

Just over half of the companies have adopted a policy on rotation of audit personnel compared with 8 percent in 2002.

A big majority of audit committees, 83 percent, now perform self-evaluations compared with 17 percent in the earlier study.

In other changes, 90 percent of companies now have board evaluation policies versus 35 percent in 2002. Director training is provided by 80 percent of companies compared with 14 percent in the earlier study. Only 11 percent of companies say they are paying auditors more for non-audit work as opposed to audit-related work, down from 48 percent in 2002.

The study found that U.S. companies have also improved in independent board leadership, but are behind the UK.

GMI said 95 percent of rated companies in the UK have separated the roles of chairman and chief executive, while only one-third of rated companies in the United States have done so. In the earlier study, 22 percent of U.S. companies had separated the chairman and chief executive roles.

Comparing nations, U.S. companies had the highest overall average rating, 7.23. Canada was second with a 7.19 score, followed by the UK with a 7.12 rating and Australia with 6.73.

Greek companies had the worst overall average rating, 2.93, followed by Japan, with 3.57.

Examples of the 26 companies with the highest rating included Eastman Kodak in the United States, Suncor Energy in Canada and Westpac Banking in Australia.

The GMI rating system uses hundreds of data points that fall into the broad categories of board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base and takeover provisions, corporate behaviour and social responsibility.

Had Sarbanes-Oxley preceded Enron they probably would have checked the boxes on that, too.

2004-09-01T09:24:00.000+02:00

The title of this blog is a final remark in a highly intersting discussion between 3 leading FTSE-100 Financial Directora discussing the burden of CG. Taking part were Michael Queen, FD of 3i; Jonathan Symonds, CFO of AstraZeneca; and Ken Lever, FD of Tomkins.
Some other highlights of this excellent discussion are:
- I have no particular problem - being the director of a public company - that my remuneration should be disclosed for all the world to see, so that my friends and relatives can see, and so that all the shareholders can see. The issue I have a bit of a hang-up with is that we don't see disclosure of remuneration of fund managers, for instance, and we don't see the disclosure of remuneration of people in hedge funds or, indeed, private equity. Equally, we don't see the remuneration of partners of major accountancy firms and law firms. I am all for disclosure, and all for making sure people get paid a fair amount of money for a good job well done if it applies generally across everybody who is contributing to this value-creation process in our capitalist society.
- Your average punter, someone who has 500 quid in Marks & Spencer, is not going to look at the annual report and read it in great detail, but there will be people who will understand all 160 pages or 350 pages and actually make use of that information.
- Managing the performance of the organisation and delivering the value inherent within a business is more important than CG. I accept that balancing that with good governance is perfectly appropriate, but I think the scales have tilted.
Read the full article

CG analytics, proxy voting and restoring investors trust

2004-08-19T10:10:00.000+02:00

Worldwide, institutional investors are gradually becoming more active in monitoring and interfering on C. strategy, policy, and major decisions taken by management.
I would like to point to two important but often overlooked enabling components of this monitoring process and of the CG dialogue. Electronic proxy voting by pension funds, mutual funds and alike, is recently being combined with the use of CG analytics tools and software, providing electronically calculated quotients that indicate the quality of G. in a corporation.
The organizations that use these tools, institutional investors, have a natural long-term perspective towards investing and value creation. 10 years or more is normal.
I believe the combination of these factors will over time play out to have been as relevant to restoring investors trust as Sarbanes-Oxley, accounting restructuring or in fact any other measure being taken, because they increase and restore the influence and power of the shareholders. Institutional investors are ideally suited to increasingly play this important task, because they are professionally educated investors, have a natural long term view towards value creation, and they can also represent and balance out the interests of the stakeholder categories they represent. In the case of pension funds: the employees. After all, it's their pensions that must be ensured.

Bring shareholders into the boardroom

2004-08-10T10:38:00.000+02:00

The many C. scandals of the past two years have highlighted the importance of effective CG. Cases that are by now notorious, such as Enron, WorldCom, Tyco, and Healthsouth, provided vivid examples of how companies and investors can be hurt when boards of directors do not do their jobs well. How can we improve board performance? One main way is by reducing the extent to which boards are now insulated from, and unaccountable to, shareholders. We need to rethink the arrangements that determine the current power of the board vis-à-vis shareholders.
Of course, in the wake of the C. scandals, some significant reforms have already taken place or are pending.
To begin, the Sarbanes-Oxley Act and the subsequent actions and rulemaking of the Securities and Exchange Commission (SEC) have imposed additional duties on boards and have tightened enforcement. For example, the new legislation prescribes procedures for the audit committees of boards, increases penalties for noncompliance with securities laws, and prohibits the granting of personal loans to executives. Still, as a good C. system must do, these reforms have left substantial discretion in the hands of C. boards.
Continue

McKinsey survey: Separate the roles of CEO and Chairman

2004-08-06T13:28:00.000+02:00

According to a recent McKinsey survey at 150- US Directors and 44 US institutional investors, the direct impact of Corporate Governance reforms so far hasn't been particularly troublesome for executives and directors, although it has created more work for finance departments, as well as higher accounting expenses. But the reforms now being demanded by investors and activist advisory groups will be much more of a burden. The investors and directors McKinsey surveyed want companies to:

Move toward separating the roles of CEO and chairman,
Make directors more independent and accountable, and
Scale back and restructure executive compensation so that it is aligned more closely with the creation of long-term value.

CEOs, though, are resisting the change. Yet given the growing demand for change, CEOs, directors, and investors must form a plan that works for everyone accoridng to Robert Felton from McKinsey. Since the topic of separating the roles of CEO and chairman can be highly charged and very personal, the board should discuss it solely as a business problem. Collectively, the board and the CEO need to come up with an approach that satisfies investors while retaining and motivating the CEO. At a minimum, a lead (or presiding) director should be appointed as an interim step. To bring more credibility to a role that many shareholders view as merely symbolic, however, the lead director must have clearly defined responsibilities and meaningful authority.
At the same time, the board should at least consider the idea of installing a nonexecutive chairman over time.

Should shareholders vote with their hands or feet?

2004-07-06T13:39:00.000+02:00

In a contribution in Forum Magazine (Spring 2004), former INSEAD-Dean Antonio Borges makes a number of interesting observations on Corporte G.
- G. is about finances, about the sense of justice and about in whose interests organizations operate.
- Nowadays, companies cannot operate properly without a good level of trust.
- This leads to deep challenges, emotional issues, political interests as well as economic issues and social ones; this is a world of compromises, a world of balance.
- Regulations are needed but not sufficient.
- Proper values must be in place.
- Without strong markets it is very difficult to deliver good G.
- G. is associated to investor protection.
- Key elements are transparency and accountability.
- With good G, trust and access to capital, low cost capital increases.
One remark of Borges on increasing shareholder activism in particular caught my attention:
(...) "shareholders, if they want to intervene more in the G. of their corporations, are not necessarily knowledgeable about those corporations. Shareholders are not necessarily specialists in the industries in which they invest. And the whole point in the capitalistic systems is that you can go in and out". So what do you think: should shareholders be allowed to increasingly vote with their hands or should they stick to voting with their feet?

BAH: Separating CEO and Chairman decreases shareholder value

2004-06-27T13:47:00.000+02:00

Separating the roles of CEO and chairman of the board has become a popular objective in the U.S. among certain CG activists. A recent comprehensive study of the worlds 2.500 largests companies by Booz Allen Hamilton (S+B, June 2004) shows that splitting the roles of chief executive and chairman does not result in higher returns for shareholders. The norm in Europe for at least a decade, dividing the positions of CEO and chairman has become the G. movement’s cause célèbre in the U.S. But returns to investors are lower — 4.7 percentage points per year lower in Europe, and 4.1 percentage points lower in North America — when the roles are split.
BAH seems to conclude that there is a causal relation between splitting the roles of CEO and Chairman on one side and shareholder value creation on the other side. Do you agree? Or do you believe the fact that Europe is lagging in shareholder value creation is due to other reasons?

Building Better Boards

2004-06-23T16:05:00.000+02:00

According to Nadler in the HBR of May 2004, boards know what they ought to be: seats of challenge and inquiry that add value without meddling and make CEOs more effective but not all-powerful. A board can reach that goal only if it functions as a high-performance team, one that is competent, coordinated, collegial, and focused on an unambiguous goal. Such entities must be constructed. Do you agree with Nadler that an ambitious board-building process, devised and endorsed both by directors and by management, can potentially turn a good board into a great one?