Sound corporate governance is good for

shareholders and corporations alike, lowering the cost of capital,

reducing risk, and helping businesses prosper, especially in turnarounds.

And constructive engagement is far better than an adversarial relationship

between investors, corporations, and their boards.

Like a samba refrain, those themes sounded throughout

the 10th annual International Corporate Governance

Network conference, held July 7 through

9 at a hotel across from Rio de Janeiro's famed Ipanema Beach. ICGN

has a membership of institutional investors and others who manage

an estimated $10 trillion in assets.

"We don't want to damage companies. We want them to

grow...We believe that good corporate governance enables them to grow,"

Brian Baily, Treasurer of West Midlands Pension Fund in

the United Kingdom, commented in a panel discussion focusing on "Shareowner

Activism: Obstacles and Solutions."

Several other conference speakers, including corporate

chief executives, reiterated the value of corporate governance for

companies. One panel was devoted to CEO perspectives on corporate

governance success stories.

Overall, the conference offered familiar corporate governance

topics alongside explorations of the corporate governance implications

of family-owned businesses, state-owned businesses, and venture and

hedge funds.

Organizers said the conference was the largest ever,

with 579 registered participants, up from 420 at last year's

conference in Amsterdam. The increase appeared due primarily to the

large contingent of Brazilian participants.

Goobey

Summing up the conference at its conclusion, ICGN Chairman

Alastair Ross Goobey honed in on an observation made repeatedly by

speakers: corporate governance reduces the cost of capital. As the

latest example, a Brazilian panelist noted the substantial premium

that Natura Cosmeticos SA, Brazil's largest cosmetics

firm, earned by listing on the Novo Mercado of the Sao Paulo stock

exchange. The top tier on the exchange, the Novo Mercado demands the

most rigorous corporate governance standards.

Ross Goobey, the Chairman of Hermes Focus Asset

Management Ltd., noted that some speakers warned against

destroying entrepreneurial activity. Throughout the conference, several

corporate executives also stressed the importance of corporate governance

in strengthening business performance.

MCI: Corporate Governance as Business Driver

Capellas

Corporate governance stands "at the very heart

of [efforts] to rebuild trust," declared Michael Capellas, CEO

of MCI, who addressed the conference via video recording.

His keynote speech kicked off the session "Corporate Success

Stories: CEO Perspectives on Making Governance Work."

John Lukomnik, who served on the creditors' committee

of WorldCom and the search committee that selected

Capellas, related in live remarks that one superstar candidate was

rejected because of his views of corporate governance.

"Corporate governance? You mean a no-name non-executive

chair who will look over my shoulder while I run the company? I won't

have it," Lukomnik quoted the unnamed candidate as replying.

Lukomnik is managing partner of Sinclair Capital

LLC.

Capellas, in contrast, said in his interview that he

would use corporate governance as a model to rehabilitate the company.

Viewpoint: Nestle's CEO

Letmathe

In the live panel discussion that followed, Peter Brabeck-Letmathe,

Vice Chairman and CEO of Nestle Group, came across

as a tough-talking, no-nonsense executive who valued corporate governance

while voicing skepticism of fads (such as a now faded emphasis on

executive stock options to align executive incentives).

"Corporate governance is meant to foster business

prosperity and accountability," Brabeck-Letmathe told the participants.

But, he added, "The first part is not talked about today."

The Nestle executive listed three functions of corporate

governance:

To establish a framework for principles of running

the company

To set checks and balances--involving both

responsibilities and authority

To organize information flow and access for the

board and public shareholders

Asked what he thought of separating the positions of

chairman and CEO, Brabeck-Letmathe replied, "I have a strong

chair, and I am happy with it." He went on to stipulate four

principles for a good relationship with a separate chairman:

He understands the business

He will stay a reasonable period of time

He brings something to the party, and can represent

the company

There is a positive chemistry with the CEO

Stressing the need for corporations continually to

improve, Brabeck-Letmathe remarked, "You can't think with

good corporate governance it's over. You need to adapt constantly."

He noted that Nestle abandoned its dual class structure in favor of

one-share-one-vote in 1988.

But panel moderator Cheryl Hesse, Counsel of Capital

International Inc. and Capital Guardian Trust Co.,

observed that Nestle still imposes a three-percent voting cap. Brabeck-Letmathe

defended the restriction as needed to ward off potential raiders,but

added that individual institutional investors could ask for a waiver

from the cap.

ICN/Valeant Pharmaceuticals: Turnaround Case

Study by the CEO

O'Leary

Robert W. O'Leary, Chairman and CEO of Valeant

Pharmaceuticals International, gave a detailed overview of

his efforts to turn around the scandal-ridden company he took over

two years ago. The company, then known as ICN Pharmaceuticals,

was plagued with a litany of problems, ranging from insider trading

to sexual harassment charges to a misguided business focus. The deteriorating

conditions led to shareholder revolts in 2001 and 2002 and produced

78-percent support for a dissident board slate.

The renamed Valeant launched a comprehensive set of

governance initiatives, including a board restructure and appointment

of a lead director, to restore independent oversight. The new board

also took the unusual step of filing suit against former board members

to recover money connected to the IPO of the company's former

research unit. At the same time, the new leadership executed a new

business strategy to focus on 10 key markets.

"Corporate governance led to a business turnaround,"

O'Leary concluded. A veteran who has led turnarounds as chief

executive at six companies, he added, "Valeant has shown me

the seminal role of corporate governance in emphasizing values."

Boardroom Superheroes and the Challenge of Independent

Directors

Elson

The conference's final panel was titled "Boardroom

Superheroes? The Challenge of Independent Directors." Despite

being the last panel on a Friday afternoon, it proved to be one of

the most attentively followed.

Moderator Charles Elson, who heads the Center

for Corporate Governance at the University of Delaware, opened

the discussion by remarking, "The core of the U.S. corporate

governance movement is independent directors," which in turn

leads to objective monitoring of management.

James E. Heard, vice chairman of Institutional

Shareholder Services, acknowledged several board superheroes,

including Elson himself as well as others such as Ralph Whitworth.

But Heard went on to ask how independence can be institutionalized.

He suggested four ways:

By defining independence

Through an independent selection process undertaken

exclusively by independent directors, not the CEO

Through board leadership. A range of companies,

from Tyco and WorldCom to the New York Stock Exchange and Disney,

had dominant CEOs and a lack of countervailing directors who were

truly independent, Heard commented.

By giving both the board and shareholders the means

to remove board directors. Hence the importance of the shareholder

access proposal in the United States.

Elson challenged the group to come up with a one-minute

definition of director independence. Their responses:

Phil Armstrong, managing director of ENF

Corporate Governance Services and principal convener and

main editor of the 2002 King Report on Corporate Governance

for South Africa: Look at objective criteria for outside directors,

and consider qualitative factors, including commitment, time, and

skills

Richard Zisswiller, counselor and president of the

International Committee of the French Institute of Directors

and director delegated for France of Conference Board Europe:

"No relationship with the company that can compromise his judgment."

Heard: Insist on no meaningful financial, personal,

or familial ties to the CEO, and focus on how directors behave.

Do they have courage, knowledge, and willingness to work hard?

Paulo Vasconcellos, a partner in Brazilian consulting

firm ProxyCon, a director at four companies, and

head of the Research Center of the Brazilian Corporate Governance

Institute: "In the end, what really counts is attitude."

Elson asked whether a single director's influence

can affect the entire board, like a drop of ink spreading across a

sheet of paper.

Based on his personal experience, Armstrong said that

a single director can matter, in part because he or she can threaten

to go public if differences cannot be worked out. Heard suggested

that there was safety in numbers, with two or three directors preferable

to a single one, who could become isolated.

Vasconcellos recounted mixed personal experiences. In

one case, his efforts helped a company reach Level II, which represents

at intermediate stage in corporate governance qualifications on the

Bovespa stock exchange. But in another case, the board chose a CEO

who Vasconcellos had opposed.

Elson argued that a single director can introduce a

different point of view. "Most folks are usually decent and

will listen," he observed. He went on to note that a dissenting

vote by a board member can be particularly potent in the U.S. legal

system.

One member of the audience asked about the influence

of stock ownership of directors. Elson stressed the need to be "independent

of management, not independent of shareholders. So the greater the

shareholding, the better."

Heard observed that concentrated ownership, for the

most part, was not a major issue in the United States, though it did

arise in some circumstances. Elson added that directors in the United

States have a fiduciary duty to represent all shareholders, not just

a particular group of them.

But Vasconcellos emphasized the "need for independence

from a controlling shareholder in Brazil." His remark brought the

closing panel back to the theme of the conference's first panel: "Is

There a Corporate Governance Revolution in Latin America?"

A Corporate Governance Revolution in Latin America?

Mesquita

Speakers on the opening panel spoke of evolutionary

but substantive change in Latin America. Marcelo Mesquita, executive

director of UBS Investment Bank in Brazil, pointed to three of the

most significant changes: the launching of Brazil's Novo Mercado,

the country's adoption of Corporate Governance Best Practices,

and the impact of privatization.

Renato Grandmont, head of Global Corporate Governance

Research at Deutsche Bank, cited two key items on the unfinished agenda

of reform in Latin America: the need to shift from pension savings

to private savings to equity, and the need to develop courts with

securities expertise.

The panelists agreed that governments in Latin America

have come to recognize that macro stability must be followed by micro

reforms to improve corporate governance.

This report was originally published in the July 16, 2004 edition of The Friday Report. © 2004 Institutional Shareholder Services. Reprinted with permission.

This article solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.