The relationship between institutional investors and corporations is changing as corporate governance awareness is increasing across Europe.
The UK, for instance, is many years ahead on corporate governance related issues where other countries have only started to take them into greater consideration. Statements of codes and principles have been published in practically every European country during the last few years. The Combined Code in the UK, the Cardon Report in Belgium, the Viénot Report in France, the Code of Good Governance in Spain and the recent rules published by the German Panel on Corporate Governance, are some of the examples of the different approaches to corporate governance in Europe. Although the fundamental rules behind them are practically the same, the way these are being applied still remain linked to national circumstances. Differences regarding shareholders’ voting rights, accountability policies and reporting practices make the idea of achieving pan-European standards on corporate governance a long-term project.
However, some believe that the adoption of a Europe-wide policy on corporate governance is the only way to improve companies’ transparency and diminish confusion among investors. “With falling barriers, a Europe-wide approach to corporate governance is required,” says Leo Goldshmidt, chairman of Brussels-based European Association of Securities Dealers (EASD). “Companies that do not recognise this will be at a disadvantage in terms of share liquidity and price that would impair their cost of capital.” EASD has just issued a pan-European corporate governance principles and recommendations statement based on a comparative study of national and international best practice. “Our international team had to work hard to arrive at a practical, workable corporate governance framework applicable anywhere in Europe that nevertheless fully respects diversified law and culture,” Goldshmidt says. This initiative, which has been welcomed by the European Commission as an important contribution to the corporate governance debate in the European Union, brings up the question on whether these issues should be regulated at an European level or not.
“We certainly don’t need a European law on corporate governance from the European Commission,” says Peter Butler, chief executive at London-based Hermes Lens, part of Hermes Investment Management, which has around £50bn (E80bn) funds under management. “I know the Commission is looking at these issues and supports different initiatives, but this is something to do with the companies and their shareholders.”
In 1998, Hermes, who has been leading the UK’s corporate governance scene for years and is a wholly-owned subsidiary of the BT pension scheme, released its statement on corporate governance and voting policy in the UK. Most recently, they also released their international corporate governance principles for all companies outside the UK in which Hermes’ clients invest. “When working on our international corporate governance principles, we felt that we could not be as precise as we were in our statement for the UK because you can’t expect the rest of the world to adopt UK standards,” Butler says. “These principles are very much in line with the OECD’s approach (OECD’s Principles of Corporate Governance, May 1999), and we’ll follow them whenever we invest in international companies.”
“We believe that the role of the shareholder as the owner of the company depends on regulation and culture, so different models will develop in different countries,” Butler says. “We can’t give rules to companies operating around the world thinking that because we are in the City of London we know which is best. We have to adapt to national criteria.”
Being mainly a passive investor, Hermes has always recognised the responsibility of being an active shareowner. Two years ago, in a joint venture with US-based Lens Investment, Hermes launched the UK Focus Fund for investing in underperforming companies which are part of their UK index portfolio to create value with actively involved shareholders.
“We do that because, as index-trackers, we have a lot of money invested in these companies, but also because we fundamentally believe that companies that have actively involved shareholders are worth more than those which don’t,” Butler says.
They are also planning to set up a European shareholder activism fund some time next year which they hope will be seen as a catalyst for change across the continent. “Europe is changing fast and this is enabling us to export some of our policies,” he says.
In fact, in Germany the awareness for the need of good corporate governance is progressing more than anywhere else in the continent. The German Corporate Governance Panel, formed by fund managers, company directors, academics and lawyers, has published a paper on corporate governance rules for German quoted companies which has had a significant backing within the country.
In France, things have also improved since the first Viénot report with recommendations on corporate governance, published in 1995. The government has adopted proposals to allow companies to split the roles of chairman and chief executive. Many companies have appointed independent directors and managers’ salaries are being supervised by committees and will be disclosed in the annual reports. However, the question of incorrect voting procedures including discrimination (France is one of the few countries that still does not recognise the one share/one vote principle) and managers’ power to issue shares during take-over battles are just two of the main problems that are stopping French corporate governance to develop further.
The Netherlands, which probably recognises less rights for shareholders than many other countries do, is also showing greater interest in corporate governance especially coming from the major pension funds. The fact that their exposure to Euroland is increasing at the same time that pension funds are switching very heavily from bonds to equities, is forcing Dutch investors to look more carefully at international governance standards.
On the same tack, the developments of equity investments by institutional investors, will also bring greater interest in good corporate governance to countries like Spain. Even though the fixed-income exposure of the Spanish pension fund market is still dominating portfolios, big pension funds like Fonditel will increasingly invest in equities and realise the importance of corporate governance.
Spain, along with Portugal, will also have to play an important role in the further development of socially responsible investment (SRI) and corporate social responsibility (CSR) regarding their investments in South American-based companies’ stocks.
SRI is indeed one of the motors behind developments in corporate governance. “There is a growing consensus that the success stories of the new century will be those inclusive companies which look after their employees, the environment and other stakeholders,” says Alan MacDougall, managing director at London-based PIRC. PIRC has recently launched a new ratings service providing analysis on company performance on corporate social responsibility issues. “At the moment there is an information gap on how companies are managing these key relationships,” he says. He believes their service will fill that gap by providing institutional investors with the research they need to assess and engage with companies.
“You cannot treat your employees unfairly or pollute the environment time after time and expect to generate value in your business. You just can’t do this,” says Hermes’ Butler.
Disclosure policies regarding companies’ approaches to social, ethical and environmental issues is making the good companies look even better. Those which have previously shown little regard will have to change their attitude. “There is not doubt that if you are in the wrong side of an environmental issue for instance, it’s bad news for the company and for the shareholders,” says Butler. He adds: “You cannot create long-term shareholder value without looking after the interests of the shareholders.”
In order to protect these interests, shareholders have to accept all the responsibilities of owning shares which include the responsibility to vote. Until now, paper-based voting systems have made this process very difficult – however, things are changing. In March, the UK’s National Association of Pension Funds (NAPF) joined forces with Thomson Financial E-Vote, the first total electronic shareholder voting service, to offer electronic voting to major institutional investors and raise the quality of proxy voting by its members. John Rogers, director of the NAPF’s voting issues service (VIS) says: “By introducing E-vote to VIS subscribers and allowing them to bypass the present cumbersome paper-based process, we are confident that voting by institutional investors will considerably increase.” He adds that new services will not only enable institutional shareholders to vote quickly and simply at general meetings of Britain’s top 400 companies, but also on a well-informed basis.
The initiative comes ahead of the government’s E-Commerce bill which has just received Royal Assent and will lead to changes to company law allowing the replacement of
written signatures with digital ones.
Hermes has also embraced E-Vote. “We are in the UK’s peak voting season and voting electronically is a great advantage,” says Michelle Edkins, corporate governance executive for Hermes. She says that the system is now safe and confidential and avoids the risk of error providing comprehensive voting research and information.” She says: “Hermes has for some time now advocated the development of an electronic voting system as a necessary foundation to improve voting and corporate governance in the UK.”
Robert Hayim of E-Vote says: “Institutional investors have come under pressure because of low voting levels at company meetings and there is a growing recognition that the vote is an asset.”
Across the board, fund managers and institutional investors are aware that good governance means good business. This is since the application of specific rules regarding the conduct and control of listed companies contribution to the optimisation of company performances. In turn, this is affecting the relationship between investors and industry, reflected in a greater co-operation and an increased exchange of information regarding corporate issues.
Institutional investors are now considering the need for the disclosure of their standards of corporate governance and their implementation with respect to companies in which they have shareholdings. By improving board practices and transparency companies will also attract more foreign investors and business growth.
“For many years, everything has been about governments telling companies what to do, but now it’s about shareholders doing more and about directors supporting the right policies to allow shareholders to be more actively involved in corporate governance,” says Butler. IPE

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