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.
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