by Agnes a Paris
Mon Dec 18th, 2006 at 04:33:15 PM EST
The widely respected and powerful credit rating agency Standard& Poor's have recently launched a "wide-ranging round table discussion". Topics of conversation are reported to have included executive compensation issues, corporate board structures, the regulation of corporate governance, and the role of non financial stakeholders in companies' decision-making processes. The speakers were top executives of the rating agency. <sic>
As a foreword general considerations come in handy :
In 2006, corporate governance continued to affect investor interests and influence the public policy dialogue globally, and is likely to remain an area of relevance and concern in 2007.
While the numerous corporate governance reforms, laws, and code implemented earlier in the decade in markets around the world have in many ways improved governance standards globally, governance issues continue to present challenges to investors in complex ways that extend beyond regulatory purview. And within the regulatory context itself there is an open and unresolved public debate about the most effective regulatory framework to address corporate governance-related risks and abuses in financial markets around the world.
Introspection within the U.S. about the effectiveness of its more legalistic approach to governance regulation features prominently in this discussion, with Europe's more flexible 'comply or explain' approach offering a more flexible, but possibly weaker, alternative.
Interestingly enough, the European regulatory framework is considered less conducive to efficient corporate governance.
To start with the basics, what would be needed to ensure a decent level of corporate governance ? The French system is undoubtedly flawed, with the so-called "independent" board members paid as much as 75, 000 Euro a year (in a big investment bank)for endorsing the options taken by the regular board members. What are your views on the subject and how is corporate governance implemented in your countries ?
Some facts about the rights of individual shareholders to start with.
The main legislative focus is the shareholder rights directive, one of the few hard law measures relating to corporate governance that is being introduced at the EU level. This directive focuses on a number of specific aspects of shareholder rights, including the right for shareholders to ask questions of management at the annual general meeting (AGM) and establishing a minimum notice period (21 days) for calling AGMs and extraordinary general meetings.
That is a piecemeal, patchy measure. As an individual shareholder in a bunch of companies, I have always received the AGM program and the resolutions submitted for voting in such tight timetable that I had to review and send my vote my mail almost the very same day to make sure it is taken into account. A trick to avoid individual shareholders being too nosey ?
Indeed, a more "sensitive" issue that remains outside the scope of legislative initiative relates to differing ownership rights in many EU member states. Roughly two-thirds of the top 300 European companies have some form of unequal voting rights, providing certain investors with voting privileges in excess of their economic ownership, which, in turn, limits the ability of other shareholders (individual shareholders) to vote in proportion to their economic stake. This represents longstanding patterns of ownership and control in several European jurisdictions, and serves as a form of anti-takeover mechanism in many instances.
Advocates of this system stress legal argument of freedom of contract, and that willing and informed investors should not be prevented from purchasing equity securities with little or no voting rights. However, the concern relating to disproportionate voting rights in the current climate is that the voice of small shareholders can be disenfranchised. No way ? <s>
An interesting extract of the round table focusing on executive compensation
Question : Are executive pay issues also a large corporate governance concern in Europe?
If we are talking specifically and only about the backdating of stock options, the answer is simple: To date, we have not had any European companies involved in this. But what does that mean? First, I don't think it means that it cannot happen here or that Europe is more frugal. Although Europe (particularly some parts of continental Europe) has not been so highly extravagant in terms of executive pay, particularly compared to the U.S., I think the concern regarding executive pay is creeping into Europe--for a number of reasons, including internationalization of corporate boards, with board members sitting on boards across the Atlantic.
I'd like to follow up on the compensation point. You read about it a lot, but to keep things in proportion, recognize that the average ratio of chief executive pay to employee pay in Germany, for example, is about 15 to 1. In the U.K., this ratio has been traditionally higher, at about 25 to 1.
However for FTSE 100 CEOs, it is now reported around 130 to 1, and is regarded as a problem. But in the U.S., depending upon how it's calculated, this pay ratio is around 350 to 1. So it really is a different order of magnitude here in Europe versus the U.S.
Strictly speaking, executive compensation, in terms of salary, bonus, and option issues, is not the same issue in Europe. In part, that reflects differences in ownership structure. But one important area of debate here is the fact that maybe we don't really know as much as we need to. Because the area of executive compensation disclosure, generally speaking, remains in some parts of the continent incomplete.
And we see in certain jurisdictions, notably Germany, it becoming not at all infrequent for companies to obey almost all aspects of their national corporate governance codes, except for the one that deals with disclosure of individual executive compensation. So, it's an issue here, but not to the same degree as we see in the U.S.
My impression was that France was at the forefront as far as extravagant top executive/CEO compensation was concerned. Would be interesting indeed to know whether US CEOs get as preposterous golden parachutes as do French CEOs. Opinions from the other side of the Atlantic welcome.