Japan’s ‘Show Me The Money’ Corporate Governance

John Vail writes in Forbes that improvements in Japanese corporate governance have led to increased profitability.

[W]hile increasing the number of independent directors and other recent governance issues are very important in the intermediate term for Japan, it is crucial for investors to understand that the profitability message has actually been understood by most Japanese corporates for over a decade. This is shown by the divergence in the profit margins from the trend in GDP growth in the charts above, showing that even though GDP growth has remained subdued, profit margins have surged.

Source: Japan’s ‘Show Me The Money’ Corporate Governance

The Amended Shareholders’ Rights Directive | Company Law and Corporate Governance

EU Directive 2017/828 has now been published in the Official Journal and will come into force in mid-June 2017, amending the Shareholders’ Rights Directive (SRD). Changes include:

Member States shall ensure that companies have the right to identify their shareholders, so companies will have the right to collect personal data on their shareholders “in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company.”

Institutional investors and asset managers must comply with two requirements, or publicly disclose a reasoned explanation as to why they have not complied: (i) institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement into their investment strategy, and; (ii) institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented.

Institutional investors public disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to medium to long-term performance of their assets.

Asset managers must disclose annually how their investment strategy and implementation contributes to the medium to long-term performance of the assets of the institutional investor or the fund.

Proxy advisors must have and disclose a code of conduct.

Shareholders have the right to vote on director pay.

Companies must disclose related party transactions.

Source: The Amended Shareholders’ Rights Directive | Company Law and Corporate Governance

Brazil: Vale minority shareholders nominate candidate to board | Reuters

Brazil’s mining company Vale SA on Wednesday said Aberdeen Asset Management PLC, on behalf of minority shareholders, nominated Isabella Saboya to join the company’s board.

Vale said in a securities filing that Sandra Guerra was also nominated by the minority shareholders as a substitute board member for Saboya in the election scheduled for April 20, 2017.

Source: Vale minority shareholders nominate candidate to board | Reuters

Peter Crow on Corporate Governance Developments in Europe and the UK

New Zealand corporate governance expert Peter Crow writes about corporate governance developments in continental Europe and the UK.

In Europe:

Whereas the focus in the past has been on ensuring management did its job well (an agency-based perspective), the boards and directors I spoke with indicated that they are starting to wrestle with the challenge of understanding the purpose of the company and how the value-creation mandate might be fulfilled. Several folk added that their usage of the term ‘corporate governance’ has changed, returning to the early usage: a descriptor for what boards (should) do when in session (i.e., in board meetings).

Related to the first point, boards in several European countries (well, in Belgium, Netherlands and Finland anyway) are starting to think more carefully about the longer-term implications of their decisions. This is in stark contrast to the short-termism that continues to pervade US and Canada boardroom and shareholder culture.

De Nederlandsche Bank (DNB, the Dutch Central Bank) is increasingly taking a formative view of supervision, expecting financial institutions to not only demonstrate compliance with established statutes and codes, but also to demonstrate how value is being added to the banking community and beyond in the future.Many people (both in public forums and private conversations) volunteered that diversity is important if boards are to make high quality decisions. However, the same people quickly added that their usage of the term meant diversity of thought, not gender or any other observable form of difference between group members. KPMG, IIA and people from several other Finnish agencies were very interested in the implications of the proposal that board involvement in strategy is good for both effective board practice and business performance. It seems that the findings from my doctoral research hit a spot, with both strong support and many questions about the mechanism-based model of corporate governance and the opportunity the model presents to help boards understand how influence can be exerted from the boardroom.

In the UK:

Director recruitment: The criticism levelled by many aspiring directors—that many board appointments are based primarily on prior relationships and not director competency or ‘fit’—remains rife in the UK. Despite a plethora of calls for more a robust process, the dominant question asked by many boards and nomination committees continues to be “Well, who do we know?”

Institutions: Directors’ and governance institutes (including the Institute of Directors and the ICSA: The Governance Institute) continue to promote themselves as champions of board performance and director professionalism, supported by a bevy of training courses, press releases and contributions to emergent practice. However, almost half of the directors that I spoke with (most of whom are members of at least one institution) have concerns over the direction and focus of directors’ institutes. They noted that institutions have become somewhat self-centred, losing sight of their stated purpose of serving the interests of members and promoting the profession. Remedial suggestions included holding directors accountable for performance and any acts of malfeasance (including de-badging miscreant members of their chartered status); moving the discourse away from populist topics to substantive matters; and, weaning boards off the notion that compliance with corporate governance codes is a valid measure of good performance.

Performance: The long-held understanding that the primary responsibility of the board of directors is to recruit the chief executive and to oversee management remains the dominant logic in the UK, especially in the publicly-listed company community. Whereas many commentators and directors (including me) promote a performance-based understanding (whereby the board commits to determining and pursuing a value-creation agenda) most boards remain comfortable limiting their contribution to monitoring and controlling the performance of their chief executive.

Board evaluations: Directors are increasingly aware of the emergent expectations of shareholders and other stakeholders; that a periodic assessment of board performance is appropriate. However, while directors’ institutes have for some time recommended that boards submit themselves to scrutiny, most directors that I spoke with indicated that they remain uncomfortable with formal external evaluations. Privately, they harbour concerns that the results may be used to expose poor practice and, potentially, be used to remove under-performing directors. Sadly, it seems that preservation (of income and status) remains the dominant logic for many directors.

Blueprint for Better Business: After spending a week-and-a-half delivering presentations, meeting with boards and fulfilling advisory engagements my last two days in the UK were spent at Murray Edwards College, Cambridge, at an immersion workshop run by the Blueprint for Better Business organisation. The motivation for attending was straightforward: to understand the organisation’s proposition more fully, especially to determine its applicability in practice. I came away convinced, to the extent that QuarryGroup will become a facilitator of the blueprint to businesses in Australia and New Zealand (at least) from 1 May onwards.

Source: Musings, the blog – Peter Crow

Directors must stand their ground with governance | Netwerk24

Thina Siwendu, Judge of the South African High Court: Gauteng local division was the guest speaker at an Africa Directors Programme (ADP) certificate award ceremony recently held in Johannesburg for the class of 2016. Her comments included:

Good corporate governance offers the ability to generate and create, to produce wealth and products. To solve human problems is one of the greatest human endeavours and is an incredible gift of humanity.“The danger to corporate governance is that it is sometimes still seen as an ‘after the fact process’, unrelated to the day to day being of corporate life. This lack of integration in thinking and behaviour has led to many instances of the slowing down of things, or just the ticking of boxes.“The separation between business, politics and the state has narrowed significantly. The common denominator is the constant distant demand for leadership.“Not just any leadership, but ethical, sound and courageous leadership. This is what we need in boardrooms.“In the context in which we operate, we have noticed a trust deficit and a challenge of a social contract that has collapsed.”

Source: Directors must stand their ground with governance | Netwerk24

MSCI report points out weak corporate governance practices in India – The Economic Times

MSCI, a global provider of research-based indexes and analytics, has raised concerns over corporate governance structure and role of independent director in Indian companies, especially the family run ones. In its first ever corporate governance report of any country, MSCI said that governance risks vary widely in India depending on the nature of the company’s ownership and the design of capital structure along with the impact on shareholders’ voting rights. Concentrated ownership dominates in India with 82.7% of MSCI ACWI (all country world index) constituents include a shareholder or shareholder group who control 30% or more of the voting rights. In case of family run companies, the separation of ownership and management remain a key challenge in majority of companies including some of India’s top ones. Family firms represent 49.3% of Indian MSCI ACWI constituents.

Source: MSCI report points out weak corporate governance practices in India – The Economic Times

Investors fight RBS snub to shareholder committee move

About 160 individual investors are pushing RBS to form a shareholders’ committee, which would allow retail investors to have a formal say on RBS proposals, such as executive pay, company strategy and director appointments.

The shareholders say this would improve corporate governance at the state-backed bank, which nearly collapsed in 2008 and was bailed out by the UK government.

Last month, however, RBS told investors it had sought legal advice on the resolution and would not put it before its annual general meeting. This week, RBS declined to show its legal advice to the 160 shareholders, arguing that it is legally privileged and can remain confidential.

Source: Investors fight RBS snub to shareholder committee move

Corporate governance in Japan now | Ethical Boardroom

Nicholas Benes writes about significant steps forward in Japanese corporate governance:

The good news is that Japan’s corporate governance code set a base that can be improved upon and has given a firm foothold to the aspirational concept of ‘best practices’ in Japan.This by itself is historic, especially when you consider that some of the practices were totally new here. For instance, after I proposed the concept to the Financial Services Agency, a Japanese word had to be invented for ‘lead independent director’. Similarly, at the time, few here would have understood what was meant by ‘executive sessions’ or ‘board evaluation’.

Today, Japan has made significant progress:About 80 per cent of companies listed on the first level of the Tokyo Stock Exchange (TSE1) now have two or more independent directors (INEDs) on their boards, according to ascertainable criteria for ‘independence’. This is almost four times the percentage recorded only two years ago. At almost 23 per cent of TSE1-listed firms, INEDs make up one-third or more of the board.

Approximately 40 per cent of TSE1 companies now have a voluntary ‘nominations committee’ of some form, a level which is eight times as high as it was 2014. Voluntary compensation committees are also increasing in number.

About one-fourth of TSE-1 companies claim to fully comply with the code and 90 per cent have implemented at least 90 per cent of its 73 provisions. There is now vastly more disclosed information about actual governance practices and policies at each company. This is because the code not only requires ‘comply or explain’ statements, but also (irrespective of that) disclosure about each company’s policy on 11 different topics. Even when such disclosure is shoddy, at least one can confirm that those companies lack rigor and substance. Investors now have so much to shoot darts at that my organisation has constructed a special search engine.About 40 per cent of TSE1 companies have some form of voluntary ‘corporate governance guidelines’, although that is not required by the code. Even if many of them need more detail, this self-disciplining concept has taken hold. (I proposed it to Japan’s Financial Services Agency for the code, but to no avail; but the Board Director Training Institute  gave several free seminars explaining why ‘policies’ have to actually exist in order to be ‘disclosed’.)

Most Japanese companies are more open to engagement by investors than before, a trend that is supported by the stewardship code. The ecosystem is improving.

He cautions, however:

The reforms were put in place so fast that companies need more time to understand what the principles of the code require in terms of detailed practices and mindset. At the same time, investors also need to learn how to leverage the code’s principles, by considering with experts how its principles can be reflected in granular procedures in the context of Japanese law and telling companies exactly what they expect. There’s actually a lot to mine in the code.

Source: Corporate governance in Japan now | Ethical Boardroom

Anthony Carey Calls for a UK Governance Commission Update

In a letter to the FT, Mazar Board Practice head Anthony Carey calls for an update to the now quarter-century-old Corporate Governance Commission best practices.

The research by academics at Lancaster University (“ ‘Negligible’ link between CEO pay and investor value boosts case for shake-up”, December 28) raises challenging questions, for instance on how to set the criteria for executive bonuses. But it would be best for any review to look at corporate governance in its broader context.

It will be a quarter of a century next year since the publication of the Cadbury report and the development of the UK’s first corporate governance code. Progress has been made on a number of areas since then, but it would be timely for a corporate governance commission to be set up to look at reforms needed to enable companies to achieve long-term sustainable success that benefits all their direct stakeholders and wider society. The commission would build on the work of the parliamentary inquiry under way and the recent green paper on corporate governance reform, and should be made up of representatives of all key stakeholders — independent and executive directors, other employees, investors, consumers and civil society.It would have a full agenda: the merits of companies having an inspiring purpose and clearly articulated values; board composition; setting the right “tone from the top”; engagement with, and the fair treatment of, stakeholders including setting remuneration across the business; ensuring investors have due regard to the interests of the ultimate beneficiaries of the shares they hold; the promotion of innovation and building the societal licence to operate.

Remuneration has dominated the dialogue in the UK between boards and investors for the past 20 years since the publication of the Greenbury report. For the next two decades it will be in the interests of business and the society of which it is an integral part for the discussions to range more widely and more deeply.

Source: A corporate governance commission is required

Hermes on CEO Pay: Should be Simple, Aligned, Accountable

Remuneration Principles: Clarifying Expectations is a new report from Hermes about CEO Pay.

They note that CEO pay is uniquely disconnected from the principles and structure of every other kind of compensation and offer guidelines for investor priorities in reviewing pay proposals.

Given the deep concerns of stakeholders over executive pay in many
jurisdictions, it is in the interests of companies and investors to resolve the
tensions. To do so requires all parties to engage constructively and be willing
to make demonstrable change. To date, public policy has put responsibility
firmly on investors to regulate and control executive remuneration and this
looks set to continue, following proposals to introduce a binding say-on-pay
for annual pay awards. We, within the investment management industry,
therefore must recognise our responsibility to engage with companies
effectively as interested owners and, where necessary, use our shareholder
rights collectively and consistently.

Our Remuneration Principles

1 Shareholding: Executive management should make a material long-term investment in the company’s shares

2 Alignment: Pay should be aligned to long-term success and the desired corporate culture

3 Simplicity: Pay schemes should be clear and understandable for both investors and executives

4 Accountability: Remuneration committees should use discretion to ensure that awards properly reflect business performance

5 Stewardship: Companies and investors should regularly discuss strategy, long-term performance and the link to executive remuneration