Corporate governance code sets a benchmark
ING Nationale Nederlanden Poland OPF has become a trailblazer for all Polish pension funds in the realm of corporate governance. In May last year, the fund announced a code of corporate governance that set out underlying principles and rules for conduct and disclosure in the execution of fiduciary duties.
The code has received a lot of attention from the press, which has hailed it as a milestone in the development of a framework for corporate governance in Poland. Soon after the code was published, other funds followed suit.
The most important accolade for the fund came when the pension fund regulator imposed rules on disclosure which were similar to those included in the fund’s own code.
In mid-2005, as a result of its own experience and the market feedback it had received, ING Nationale Nederlanden Poland OPF published a revised version of the code. This contained crucial changes relating to the disclosure of the fund’s voting conduct – mainly at shareholders’ meetings – and the acceptance of stock option programmes.
The original version of the code had required all votes made by the fund to be disclosed on an annual basis. The maximum time span between a shareholders’ meeting and the disclosure date would then have been 15 months.
A year later, this period was cut significantly, to just seven months. The fund now publishes voting records on a quarterly basis. The voting records covering the first two quarters of 2005 are now on the fund’s website.
So far, ING Nationale Nederlanden Poland OPF is the only pension fund in Poland to have published all its voting records, including votes on the approval and dismissal of supervisory board members.
One of the areas of particular interest to all the fund’s stakeholders are the management stock option programmes.
For a long time, it has been common practice in Poland to set the exercise price of shares significantly below the market price. In contrast, ING Nationale Nederlanden Poland OPF insists that the fair market value of the stock is applied; originally, the fund also limited the size of the programme to 5% of the company’s issued share capital.
But the original version of the code did not give any time-specific constraints relating to the overall share dilution. This provoked a lot of comment from stakeholders.
The rule has now been revised so that the number of common shares issued through stock option programmes cannot exceed 10% of the issued capital in any 10-year period. At the same time, the number of common shares issued to the members of the management board cannot exceed 5% of the issued capital in any 10-year period. This restriction is intended to ensure that the programme benefits are not enjoyed exclusively by the executives.
Furthermore, the revised code has abolished the granting of stock options to members of the supervisory board. One of the board’s primary responsibilities is to protect the company’s long-term well-being, and it was thought that any benefits dependent on short-term share price performance might encourage short-term thinking.
The revised code also includes several recommendations for setting up stock option programmes.
The code advises that rewards should be based simultaneously on at least two challenging performance criteria. Preferably, one should be dependent on absolute economic measurements, with the second dependent on relative measurements (such as comparison with a suitable peer group).
The code also recommends that members of the management board only exercise their options after more than the standard period of three years – preferably after five years. Again, this is aimed at aligning the executives’ own interests with the long-term prospects of their company.
Another proposal is that the company should give its shareholders an estimate of the expected value of potential benefits of the stock option programme being proposed.
Over and above its pioneering work in the field of corporate governance, ING Nationale Nederlanden Poland OPF has continued to attract the most new members of any Polish pension fund, an annual record which has remained unbroken since 2000. It has also maintained a high level of loyalty from members. The fund’s lapse ratio is the lowest in the industry: since 2000, only 5.7% of its members have left to join other funds, while the market average is 14.1%.
In terms of performance, the fund is also head and shoulders above the rest. It has enjoyed a first quartile spot in the last 12 official rankings of investment rate of return, published by the Supervisory Commission. This makes it the only fund to have outperformed the industry benchmark in all of those time periods.
Finally, the fund has won general recognition from the Polish press. The two biggest Polish dailies, Gazeta Wyborcza and Rzeczpospolita, have both voted it the ‘Best Polish Pension Fund’ three times in a row, in July 2003, January 2004 and April 2005.
Highlights and achievements
At a time when corporate governance is one of the key drivers to the European economy, ING Nationale Nederlanden Poland OPF has led the way for transparency in the management of pension funds. It has done this by implementing a code requiring the publication of its voting record, as well as containing rules for the company’s stock option programme. The rules include restrictions on the number of shares held through stock options, and a ban on the granting of stock options to members of the supervisory board.
These rules are intended to ensure benefits are not restricted to executives, and that the personal interests of executives run parallel to the company’s long-term interests. This pioneering work has been recognised by the pension fund regulator, which has included much of the original provisions in its own formal code.
ING Nationale Nederlanden Poland OPF has also achieved a pre-eminent investment performance, outperforming the industry benchmark for the last 12 rankings published by the Supervisory Commission.