Vive la différence?
One of the biggest challenges of an investor seeking to engage on matters of corporate governance is understanding and then working with the multiplicity of different corporate structures and share-owning cultures that exist around the world.
Hermes Pensions Management, 100% owned by the BT Pension Fund, is just such an investor. The chief executive of its equity ownership service, Colin Melvin, notes that the principle of one share one vote that is so common in the Anglo-Saxon area is something of a rarity when viewed in a world setting.
Hermes stresses the importance of working as far as possible to improve the existing local structure and supporting local business practices, not imposing another system simply because it works well in another market.
One of the key features of Japanese corporate culture is the keiretsu: a set of companies with interlocking business relationships and shareholdings. “The multiple cross-shareholdings of banks meant that companies tended to be run for debt rather than equity holders,” notes Melvin.
He adds: “Companies in Japan are becoming more independent as these cross-shareholdings unwind and they starting to attract more overseas shareholders with an interest in their corporate governance.”
The traditional board structure in Japan is to have an outside board consisting of the statutory internal auditors as well as the board of management. “The traditional Japanese board structure is less adversarial than those found in the west and many board members are from connected or affiliated companies,” notes Melvin.
The government has encouraged companies to adopt US-style boards which can now be found in over 50 Japanese companies.
But Hermes stresses the importance of working with the local system. “Our view is that we should not impose the western structure,” Melvin continues. “We find most benefit can be derived from making the Japanese model work, namely making sure that there is sufficient independence on Japanese boards. Trust is very important in Japan.”
Europe has its own challenges too. The states of Europe most in need of improvement in governance are the former communist countries of central and eastern Europe. “The transparency and disclosures that are necessary to gain the trust of shareholders are absent in many cases,” Melvin explains. “Often the board appears to be serving its own interests. This is a key question in the region.”
This issue needs to be addressed urgently given its impact on company value. Melvin refers to a survey by McKinsey which showed that a well governed company in the UK would be worth on average 12% more than a poorly governed one; in Russia it would be worth 40% more.”
In the more developed markets of western Europe board structures can present cultural challenges to the unwary.
In Italy, for example, company boards are often filled with representatives of the dominant shareholders. “Through the Assogestioni, the Italian fund management association, we work with shareholders to promote representation on the board of companies for minority shareholders,” Melvin explains.
In Germany, meanwhile, there are separate management and supervisory boards. “The success of this system relies on good communication,” says Melvin.
Another area of the business culture that can present challenges to shareholders is the issue of voting rights. Sweden is an interesting example. A group of shareholders, typically a family, will hold a special class of shares with multiple voting rights, anything up to a thousand times the rights of the basic class of shares. “So there is a group with an economic interest that is disproportionate to the holding,” Melvin notes.
He adds: “But this kind of structure is fundamental in Scandinavia and several other markets. There is a much stronger level of accountability in this system. The difficulties begin when the structure persists beyond its usefulness: when the dominant shareholder loses interest or promotes its own position at the expense of the minority, for example. But to promote one member one vote strongly would alienate a Swedish audience. So we talk to the shareholders. In the case of Ericsson we encouraged a reduction in the multiple voting rights from a thousand times to 10 times those of the ordinary shares.”
Spain has an unusual approach in that voting attracts a small dividend. “The EC is considering whether other countries should adopt this system which is superficially attractive because it increases voting levels,” says Melvin. “But if everyone votes this will include those who aren’t interested in anything but the financial incentive and dilute the influence of the active shareholder.”
Potential drawbacks to voting incentives can also be found in France where long-term share holders sometimes get extra voting rights. “This will tend to benefit block shareholders,” Melvin explains. If one shareholder had a large shareholding then that shareholder’s benefits would double if the shares were otherwise traded widely. This can result in an inefficient market.”