Our study of European companies has shown that UK corporations perform the best with regard to investor demands on corporate governance. And the debate on corporate governance is also gaining considerable momentum in France, the Netherlands, Belgium and Sweden, whereas other countries (Germany, Switzerland, Italy and Spain) are still lagging behind.
Gaps between investor expectation and the corporate governance standards achieved by companies have proved to be very wide for a number of criteria. European corporations wishing to compete for international capital, and therefore wishing to comply with corporate governance standards should: increase transparency by keeping their shareholders better informed of their own governance standards and practices; increase accountability by allowing more independent directors on their board and committees; comply with the one-share, one-vote, one-dividend principle; simplify the voting procedures, such as an early release of the agenda, voting by mail, a free choice of proxy, and insofar as possible, no blocking requirements.
The study, conducted in conjunction with an opinion poll among 110 major institutional investors, the majority of which were European pension funds, looked at a total of 248 corporations on the main stock indices which were analysed.
Primarily, institutional investors evaluated the importance of the following four categories out of 100 points. The results were as follows: information to shareholders (87 points); rights and duties of shareholders (82 points); board structure (79 points) and absence of takeover defences (76 points).
The top five criteria within these main categories were as follows: independent directors (85 points); voting right limitation (84 points); voting issues (83 points); election of the board (80 points); compliance with a code of best practice (79 points).
Information to shareholders is one of the most important aspects of corporate governance as it reflects the degree of transparency and accountability of the corporation vis-à-vis its shareholders. The UK and Sweden provide good information on the composition of the board (see Fig 1), such as the terms of service and the CV of each member, and, with the UK, the numbers of non-executive directors. The issue of independence however still remains a mystery to the shareholder. The UK also provides detailed information about the remuneration policies and together with Switzerland, is the strongest in running investor relations departments.
Generally corporations release limited information about their shareholder structure, with the exception of the UK. Sweden restricts information to listing the largest shareholders in their annual reports whereas three quarters of French corporations mention the type of shareholder.
Investors usually prefer a one-share, one-vote, one-dividend standard which gives them a better appreciation of the power structure in the corporation. The UK, Germany, Belgium, Italy and Spain adhere to this principle to a great extent. France, however, has a significant portion of double voting rights (73% of the companies analysed) and 10% of the corporations pay increase dividends to long term shareholders. In the Netherlands over 70% of corporations hand over their rights to a fiduciary office which hold 50-90% of the rights. Sweden has voting right ceilings in most articles of association and two classes of shares with considerable voting right differences of up to 1/1000th of a vote.
The time for casting a vote is usually kept very short in Europe (15-20 days). Only Germany requires the final agenda to be released one month prior to the general meeting, whereas the UK releases it on average 28 days before, which is earlier than the legal minimum of 21 days. Voting by mail is common in the UK and possible in France. In all other countries this procedure is uncommon or forbidden by law. Proxy voting is generally restricted to another shareholder in Belgium, France, Sweden and Switzerland and to a lesser degree in Italy and Spain. Shareholder proposals are restricted in some form in all countries with the exceptions of Sweden and Germany, where having one share is sufficient to make a proposal or, in the case of Germany, a counterproposal.
The presence of NEDs and independent directors is considered to be the most important corporate governance parameter, as reflected in the opinion poll conducted among the institutional investors. The issue of independence, however is, without exception one of the most neglected issues in all countries.
A division between the position of chairman and the CEO is preferred by most investors to prevent the accumulation of too much power in the hands of a single person. This concept is fully implemented in Germany and the Netherlands on the grounds of legislation (both countries have two-tier boards). In Sweden and the UK, on the other hand, such a division was brought about voluntarily.
Board committees (audit, remuneration and selection committees) are prevalent in the UK, which has pursued this concept since 1992 with particular strength in the audit and remuneration sector. More recently France, and to a lesser degree the Netherlands and Belgium, has seen a perceptible rise in the number of committees. In most cases, however, it is unclear to what degree the members of such committees are independent.
Jean-Nicholas Caprasse and Shervin Setareh are with Deminor which has offices in Brussels and Paris. This is based on a presentation to the recent EFRP/NAPF international conference