The American Society of Corporate Secretaries has the motto ‘promoting excellence in corporate governance’. But this organisation has no monopoly on this laudable objective.
You might well think these days that almost every other organisation in the investment industry has adopted this motto but have we gone too far. In a few respects just possibly yes, but there is still a large part of the global investment community where much better corporate governance is urgently required.
Some areas that require attention are obvious such as Japan where just this summer many of the world’s largest investors gathered for the annual conference of the International Corporate Governance Network (ICGN).
Institutional investors representing some trillions of dollars in capital met in Tokyo to discuss improvements in global corporate governance. Possibly the most relevant question discussed at the conference was whether better corporate governance could help rally Japan’s stumbling economy and thus its stockmarket.
The ICGN model solution is legal and economic reforms that emphasise companies’ accountability and reporting to shareholders. Boards of directors need to be restructured so that they become meaningful bodies able to monitor management; and take-overs need to be facilitated as a means of disciplining poor performers.
International investors hope they will shortly have an ally in this quest in the rapid growth of Japan’s private pension fund industry. The question is whether the local pension fund industry can really grow into its potential to provide a powerful domestic lobby with an interest in improved share price performance.
At the moment even Japanese corporates admit there is something of a governance vacuum in Japan. Apparently, however, the Japanese Pension Fund Association has pledged that Association funds would begin to use their votes to reflect independent corporate governance assessments, they just have not said when they will start.

While Japan has slumbered for the last decade, each year since 1991, the American Council of Institutional Investors has released a list of underperforming corporations, known as the ‘Focus List’. The focus list is intended to be used as an educational tool for council members. Many members apparently use the list as a supplement to their own corporate governance activities.
The big question is whether coordinated ‘institutional activism’ works? Unfortunately, we have to go back to October 1995 to find a fully documented analysis of the activities of the Council by Tim Opler and Jonathan Sokobin
The Council of Institutional Investors deserves attention as, unlike the Corporate Governance Network, it is a group of public and private pension funds which collectively now own over $1,000bn in financial assets, admittedly only from within the US. The council has provided a forum for these funds that want to coordinate and communicate with each other on a variety of matters including activism programmes aimed at facilitating solution of problems in underperforming portfolio firms.
The 1995 study documented the performance of the firms which appeared on the council’s focus lists in 1991, 1992 and 1993 relative to several control groups. Firms on council focus lists experienced poor share price performance in the year before before being included on a focus list. In the year after being listed, these firms experienced an average share price increase of 11.6% above the S&P 500. This increase is broadly consistent with the view that coordinated institutional activism creates shareholder wealth and agrees with evidence subsequently gathered independently by other funds including the large Californian State pension fund CALPERS.
CALPERS is, I think, rightly seen as one of the leaders in US corporate governance and one of its most interesting features, is that it makes so much information publicly available on its website. One really useful item, admittedly not easily found, on the website is CALPERS performance assessment of funds in its private equity portfolio.
Performance information on individual private equity funds is notoriously hard to come by. So by putting into the public domain the information they have, I believe CALPERS has providing a public service and if other pension funds could be encouraged to do the same the investment world would be so much the wiser.
One of the most fascinating features of the report is the disparity in the results of individual funds, The figures start to get very interesting from 1994 onwards however and are recommended reading for any fund investing in the sector. Unless you know how to guarantee to pick only winners they certainly make the case for a portfolio approach to private equity investment.

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