Global Corporate Governance Report
EU Amends the Shareholders’ Rights Directive
EU Directive 2017/828 has now been published in the Official Journal and became effective in mid-June 2017, amending the Shareholders’ Rights Directive (SRD).
- 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 must publicly 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.
40% of Top Managers Surveyed Said Their Organizations Did Not Meet Corporate Governance Standards
A new international corporate governance survey of 314 practitioners included 250 directors and senior managers from Australia, India, Norway, Spain, South Africa, and the United Kingdom.1
A few highlights: Fewer than 24% found the current proliferation of corporate governance codes helpful. The overwhelming majority of respondents (96.7%) said that corporate governance was primarily an organizational issue, not a financial one. Yet 66.7% said that risk management was mostly about financial risk, suggesting that they did not see a connection between corporate governance and risk management. Only 60% said that their organizations had high standards of good governance, making it clear that there is a long road ahead.
Japanese Firms Pioneer Posting of AGM Agendas Online
Japanese firms are required by law to make the agendas for their annual meetings available two weeks ahead of time. Now they are beginning to release the topics and agendas online, before they send them out by mail to investors. The development comes in response to growing calls from international investors. Some of the key firms that have decided to release online notices in advance this year include Yakult Honsha, a Japanese drinks maker, along with Meitec, a major staffing business.
NOTE: In Forbes, John Vail writes about the link between corporate governance improvements and profitability in Japan:
The fact remains that partly due to the encouragement of the Abe administration, Japanese corporations are continuing their structural shift towards higher profitability. Abenomics is “icing on the cake” of the “Show Me the Money” corporate governance improvement that I have long-highlighted on Japan.
Suncor Impresses Investors by Cutting Back on Its Core Business
What should a company do when its business is not sustainable due to changing consumer priorities, the likelihood of government restrictions, or just the fact that it is based on a non-renewable resource? The Wall Street Journal writes:2
One of the best-performing oil companies in the past year is gaining favor with investors in part by embracing an unusual strategy: promising not to reinvest in its core business “in the foreseeable future.”
The company is Suncor Energy, Canada’s largest oil producer, and the core business is the country’s controversial oil sands.
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After years of spending to ramp up new projects, the company is about to take a pause in the oil sands, where operators must use steam or expensive equipment to transform the tar-like crude into a substance suitable for refining.
Instead, Suncor plans to give investors much of the excess cash it will generate in the coming years. . . . Suncor may generate [$US15 billion (CAD $19.5bn)] in free cash flow over the next three years, according to Goldman Sachs.
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Suncor is a top pick among energy analysts at Goldman Sachs Group Inc. and is recommended as a “buy” by 81% of analysts, more than any other big oil producer. Including reinvested dividends, the company’s U.S. shares returned 18% to shareholders from June of last year to May 31. That’s better than every other major North American oil company.
Norges Fund Pushes Back on Non-Voting Shares
Norwayʼs $960 billion sovereign wealth fund believes that equity indexes should not include companies that aren't subject to shareholder control. Bloomberg notes, “The move opens a new front in the fundʼs efforts to use its considerable – and growing – clout to force companies to improve their ESG act.”3 Concerns raised by the recent IPO of Snap, with non-voting stock, have brought more attention to the issue – isn’t non-voting stock just a bond without the benefit of a guaranteed return? Norges has proposed scaling index weighting based on voting rights.
NOTE: As of this writing, SNAP has sunk to $13.81 from a high of $27.09 immediately following the public offering.
Japanese Pension Fund Invests in ESG
Japan’s $1.2 trillion Government Pension Investment Fund has moved about 3% of its passive domestic equity investments, or around one trillion Japanese yen ($8.8 billion), into index funds tracking three socially responsible benchmarks: gender diversity, ESG, and the FTSE Blossom Japan index – Japanese firms that perform well on a more general social-responsibility agenda.4
The U.K. Follows the U.S. in Allowing Virtual AGMs
Despite shareholder concerns, 177 U.S. companies have had online or telephonic annual meetings, and now U.K. companies are moving toward that as well. The Wall Street Journal reports:5
At least a dozen companies in the U.K. have amended their bylaws this year to allow for AGMs to be held electronically in the future, whereby shareholders could follow the board’s annual presentation on their computers and lodge questions online or, in some cases, over a live phone call. Only one company – luxury goods Jimmy Choo PLC – has so far held virtual-only meetings in the U.K., with the first in 2016 and then again this year.
Pension Funds Push for Governance Improvements in Latin America
Ethical Boardroom reports that it has been the practice of Latin American companies, which are usually controlled by a majority shareholder, that “misbehaviour and expropriatory attempts by a [controlling shareholder] will be harder to discipline. Even in the unlikely scenario of legal sanctions, they will usually be mild and take a very long time to be settled in courts.”6 However, an “extremely significant change in the region was initiated by the pension system reform promoted in Chile in 1981 and later extended to other countries in the region,” the publication notes. “Today, through private pension administrators, called the AFPs, ninety million people are shareholders and creditors of the companies in the region. Their individual savings, amounting to approximately five hundred billion dollars, tilt the debt and equity markets. Their vote is a massive political power affecting the press, regulators and legislatures in significant ways. In fact, it is more and more common that they succeed in blocking questionable transactions that would have passed just a few years ago.”