Holly J. Gregory

The globalisation ofcorporate governance

2

Led by investor demand, the discussion as to what

constitutes effective corporate governance and why

it is important for individual companies on a

national and a global level continues to gather

momentum. In this two-part feature, Holly. J.

Gregory identifies the issues that in-house counsel

should be aware of when advising on cross-border

capital market access, M&A and JVs

This article first appeared in the September and October 2000 issues of Global Counsel and is reproduced with the permission

of the publishers.

Subscription inquiries 44 (0)20 7401 78 78 or www.lawdepartment.net/global

In mid-July of this year, over 350participants from more than 25countries convened in New York

City to explore their common inter-ests in corporate governance at thesixth annual meeting of theInternational Corporate GovernanceNetwork (ICGN) (see www.icgn.org).

The gathering brought togethersecurities regulators, representativesof securities dealer associations,stock exchanges, the OECD and theWorld Bank, prominent accountingand legal professionals, captains ofindustry, labour leaders, and, mostnotably, investors representingUS$10 trillion (EUR10.8 trillion) ininvestment capital. These remark-ably diverse participants all share theview that corporate governance iscritical to the global economic system(see box “Global Developments InCorporate Governance” on page 7).

Demand for investment capital isincreasing throughout both the devel-oped and developing world. At thesame time, governments and multilat-eral agencies are cutting back on aid.As barriers to the free flow of capitalfall, policy makers have come torecognise that the quality of corporategovernance is relevant to capital for-mation. They also realise that weakcorporate governance systems, com-bined with corruption and cronyism:

• Distort the efficient allocation ofresources.

• Undermine opportunities tocompete on a level playing field.

• Ultimately hinder investmentand economic development.

In a McKinsey survey issued inJune 2000, investors from all over theglobe indicated that they will pay largepremiums for companies with effec-

tive corporate governance (see box“The McKinsey Survey” and diagrams“Paying For Good Governance” and“Premiums Investors Would Pay”).

This finding is supported by arecent survey of investors in Europeand the US which found that approx-imately half of European investors,and 61% of US investors, havedecided not to invest in a company, orhave reduced their investment,because of poor governance practices(Russell Reynolds Associates, CorporateGovernance in the New Economy –2000 International Survey ofInstitutional Investors. Copies of thesurvey can be requested from www.russ-reyn.com) (see boxes “Importance OfFactors Influencing InvestmentDecisions” and “Evaluating CorporateGovernance” on pages 12 and 13).

In-house counsel, who frequentlyadvise both management and the

board of their companies, can play anactive part in encouraging companiesto adopt effective governance stan-dards. They are often called on toaddress legal issues related to thegovernance of the corporation, forexample:

• Companies seeking to exchangeequity for capital (whether issuingshares to the public or through aprivate placement) need guidanceon governance mechanisms favouredby the investing community (as wellas advice on relationships withshareholders). Given differencesin national legal systems and stockexchange listing requirements, thisneed is more acute where cross-border listings (and the expecta-tions of foreign investors) areinvolved.

• Lawyers advising on mergers andacquisitions and joint venturesneed a solid understanding of gov-ernance issues (as well as of the rel-evant laws, regulations, listingrules, norms of best practice andlocal governance cultures), as theparties contemplate the gover-nance structure of the emergingentity. Again, these issues aremore complex in cross-bordertransactions.

• Even on a national level, counselneed to understand governanceresponsibilities and best practicerecommendations and how theyimpact on the potential liability ofdirectors and officers. This is thecase both in countries where direc-tor and officer duties are heavilyregulated, and in countries such asthe US that rely heavily on privatelitigation to ensure corporate com-pliance with the law.

• In-house counsel can provide sig-nificant value when they advisecompanies and their subsidiarieson the implications of following, ordeparting from, recommended bestpractices. They are also likely to beinvolved in drafting the specificguidelines to be adopted by thecompany, and otherwise ensuringthat the existing governance docu-ments are in good shape.

To achieve these aims, particu-larly in a multi-jurisdictional context,

in-house counsel must have a clearunderstanding of the technical legalrules that apply, as well as a solidgrounding in governance best prac-tice and the context in which the cur-rent focus on governance arises.Specifically, in-house counsel shouldunderstand the following:

• What are the driving forces behindthe heightened interest in corporategovernance and how do those forcesimpact on the company? (see “TheDriving Forces” below).

• What exactly is corporate gover-nance and why is it important to thecompany? (see “What Exactly IsCorporate Governance?” below)

• What are the components of a suc-cessful approach to corporate gover-nance for multi-jurisdictional busi-nesses? (see “The Multi-jurisdictionalDimension” below)

The Dr iv ing For cesInterest in corporate governance

has exploded around the globe due toa host of factors:

• The spread of capitalism and pri-vatisation.

• The growth of corporations.

• Deregulation and globalisation.

• Shareholder activism.

• The Asian crisis.

Capitalism And PrivatisationMarket-based economic systems

(dominated by voluntary private sec-tor activity) have replaced commandand control-based economic systemsin the vast majority of nations. This ismost apparent in the countries thathave emerged from the former Sovietblock, but it is also happening(although less dramatically) in Chinaand elsewhere. In a related develop-ment, governments all over the worldare relinquishing to the private sectortheir ownership interests in firms.

Corporate GrowthPrivate sector activity organised

through the corporate form playedan ever-increasing role in nationaleconomies throughout the whole ofthe 20th century. Corporations haveproved to be most efficient organisersof economic activity. This efficiencyhas led to the growth of large multi-national companies, some of whichare perceived to have a global reachand economic and political power

3

The McKinsey SurveyIn a 1996 McKinsey survey of

US investors, two-thirds of thosesurveyed reported that they wouldpay more for a “well-governed”company (a company responsive toinvestors, with an independentboard), all other factors being equal(Robert F. Felton et al., “Putting aValue on Board Governance,” 4McKinsey Quarterly 170, 170-71, 174(1996)).

In June 2000, McKinsey repli-cated this survey in Asia, Europeand Latin America, and the sameresults hold. Over 200 institutionalinvestors in the US, Europe, Asiaand Latin America (representingUS $3.25 trillion (EUR3.5 trillion)in assets) were involved in the sur-vey (McKinsey Investor OpinionSurvey, June 2000).

The size of the premium investorsare willing to pay varies by country. Itis lowest in the US and the UK, higherin Asia (Indonesia, South Korea andJapan) and highest in Latin America(Venezuela and Colombia) (see boxes“Paying For Good Governance” and“Premiums Investors Would Pay” onpages 4 and 5) .

This suggests that the quality ofcorporate governance at the com-pany level is perceived as most valu-able in situations where both:

• Mandated disclosure and legalprotection for shareholders areweaker.

• Investors believe there is themost room for improvement.

See www.mckinsey.com/features/investor_opinion/index.html

4

that transcend the reach and powerof governments.

Deregulation And GlobalisationNew communication and distri-

bution technologies, and the removalof trade and investment barriers,have created truly global marketswith global competition for goods,services and capital, and even corpo-rate control (as shown by the recentboom in cross-border mergers andacquisitions). A whole new level ofeconomic interdependence is emerg-ing, as evidenced by the EU and theNorth American Free TradeAgreement (NAFTA). Deeper andbroader cross-border business rela-tionships between nations signal sig-nificant changes to all aspects of soci-ety, from culture to labour marketsand political focus.

Shareholder ActivismEquity financing, which has long

been important in the US and UK, isbecoming a more important sourceof investment capital in many

European and Asian nations. At thesame time, capital available forequity investment in corporations hasbecome concentrated in the hands ofsophisticated financial intermedi-aries such as pension funds andmutual funds. This trend was firstapparent in the US and the UK, butis spreading with the rise of privateinvestment vehicles around theglobe.

Some of the largest and mostactivist US institutional investors,such as the Teachers Insurance &Annuity Association-College Retire-ment Equities Fund (TIAA-CREF)and California Public Employees’Retirement System (CalPERS) regu-larly support governance initiatives inrelation to their international share-holdings. These investors, who viewthemselves as corporate “owners”,see a link between sound corporategovernance and lowered investmentrisk. They exercise their rights asinvestors to some degree on the basisof governance quality. TIAA-CREF,a private pension fund, is the largestpension fund (public or private) inthe US, with assets of more thanUS$300 billion (EUR324 billion)under investment. CalPERS is thelargest US public pension fund, withover US$170 billion (EUR183 bil-lion) in assets under investment.

The sheer size of assets in thecontrol of institutional investorsexerts pressure on corporations toconform to shareholders’ expecta-tions on governance (see box “TheAnglo-American Influence” on page 6).For example, a group of shareholdersin Vodafone Airtouch recentlyobjected to management’s proposalto pay a £10 million (EUR16.24 mil-lion; US$15 million) bonus (half incash and half in shares) to its chiefexecutive, Chris Gent, for achievingthe acquisition of Mannesmann, thefirst successful unsolicited offer for aGerman company (see www.lawde-partment.net/global “A charm offen-sive”, EC, 2000, V(5), 35). They wereled by the UK National Associationof Pension Funds, whose members

are reported to have more than £800billion (EUR1,300 billion; US$1,200billion) of assets. In an attempt toappease objecting investors, ChrisGent promised to spend half of hisbonus on Vodafone’s shares.

The Asian Crisis “Wake-up”The financial crisis that began in

East Asia, and rapidly spread toRussia, Brazil and other areas of theglobe, showed that systematic failureof investor protection mechanisms,combined with weak capital marketregulation, in systems that rely heavilyon “crony capitalism,” can lead tofailures of confidence that spreadfrom individual firms to entire coun-tries. Insufficient financial disclosureand capital market regulation, lack ofminority shareholder protection, andfailure of board and controllingshareholder accountability all sup-ported lending and investing practicesbased on relationships rather than ona prudent analysis of risk and reward(see Ira M. Millstein, “The Basics of aStable Global Economy,” The Journalof Commerce (30th November, 1998)).

In hindsight, the not-surprisingresult was that companies over-invested in non-productive and oftenspeculative activities. When capitalfled these economies in 1997 and1998, the G7, the World Bank andother multilateral agencies recognisedthat the efforts to strengthen theglobal financial architecture neededto include governance reform.

What Exact ly I s CorporateGovernance?

Economic theory holds that whena sole proprietor manages a firm,profits and value will tend to be max-imised because they are directlylinked to the owner-manager’s selfinterest (the value of the owner-man-ager’s investment and income). Butwhen firm ownership is separatedfrom control, the manager’s self inter-est may lead to the misuse of corpo-rate assets, for example through thepursuit of overly risky or imprudentprojects. Corporate financiers (whetherthey are individuals or pension funds,

Pay ing For GoodGovernanceAre investors willing to pay more for a companywith good board governance practices?

A clear majority say yes

Source: McKinsey & Company, Investor OpinionSurvey – June 2000

100%No

Yes

Latin America

Europe/US

Asia

17

83

19

81

11

89

mutual funds, banks and other finan-cial institutions, or even govern-ments) need assurances that theirinvestments will be protected frommisappropriation and used asintended for the agreed corporateobjective. These assurances are at theheart of what effective corporate gov-ernance is all about (see box “TheViews Of Leading Voices” on page 13).

Narrowly defined, corporate gov-ernance concerns the relationshipsbetween corporate managers, direc-tors and the providers of equity capi-

tal. It can also encompass the rela-tionship of the corporation to stake-holders and society. More broadlydefined, corporate governance canencompass the combination of laws,regulations, listing rules and volun-tary private sector practices thatenable the corporation to:

• Attract capital.

• Perform efficiently.

• Achieve the corporate objective.

• Meet both legal obligations andgeneral societal expectations.

All these factors underscore thereality that corporate managers,directors and investors (as well asthose advising them, such as lawyersand accountants) function within alarger business and legal environmentthat shapes behaviour (see box “TheCorporate Governance Environment”on page 6).

National differences exist as towhat constitutes the raison d’être ofcompanies (the corporate objective),and the answer to the question “Forwhom is the corporation governed?”will vary from country to country (see“National Differences” below). Butwhatever view prevails, effective gov-ernance ensures that boards andmanagers are held accountable forpursing the corporate objective, how-ever that objective is defined (see“The Importance Of CorporateGovernance” below).

National DifferencesDifferent governance systems

articulate the corporate objective indifferent ways, depending on whichof two primary concerns is taken asthe main focus:

• Societal expectations.

• Ownership rights.

Some nations focus on the needto satisfy societal expectations and, inparticular, the interests of employeesand other stakeholders (variouslydefined to include suppliers, credi-tors, tax authorities and the commu-nities in which corporations operate).This view predominates in continen-tal Europe (particularly Germany,France and The Netherlands) and incertain countries in Asia.

Other countries emphasise theprimacy of ownership and propertyrights, and focus the corporate objec-tive on returning a profit to share-holders over the long term. Underthis view, employees, suppliers andother creditors have contractualclaims on the company. As ownerswith property rights, shareholdershave a claim to whatever is left afterall contractual claimants have beenpaid. This “residual” right is given

5

Premiums Inves tor s Would PayInvestors’ willingness to pay a premium for a well-governed company by country.

Would be willing to pay a premium

Average premium

Source: McKinsey & Company, Investor Opinion Survey – June 2000

KoreaMexico

ThailandBrazil

TaiwanIndonesiaMalaysia

USUK

ArgentinaChile

JapanFranceSpain

SwedenSwitzerland

GermanyBelgium

The NetherlandsVenezuelaColombia

Italy

91%90%89%89%89%88%88%84%84%82%82%82%82%82%82%82%79%79%79%79%79%71%

KoreaMexico

ThailandBrazil

TaiwanIndonesiaMalaysia

USUK

ArgentinaChile

JapanFranceSpain

SwedenSwitzerland

GermanyBelgium

The NetherlandsVenezuelaColombia

Italy

24.2%21.5%25.7%22.9%20.2%27.1%24.9%18.3%17.9%21.2%20.8%20.2%19.8%19.2%18.2%18.0%20.2%19.6%18.5%27.6%27.2%22.0%

6

weight by companies focusing thecorporate objective on shareholdervalue. Associated with the US,Canada, the UK and Australia, thisview of the corporate governanceobjective is generally justified on thefollowing grounds:

• Accountability to shareholdersprovides a single measurable objec-tive that avoids the risk of diffusingthe accountability of managers anddirectors. If managers and direc-tors are accountable to a wholerange of stakeholders, almost anyaction can be justified as in theinterest of some group of stake-holders, and this gives managersand directors unfettered discretion.

• Focusing on long-term share-holder value encourages invest-ment capital to be put to the mostefficient economic used from amarket perspective and this shouldbenefit society broadly.

In advising clients on how to rec-oncile the two approaches, in-housecounsel should bear in mind that,although much ideological debatehas arisen about which of the twodescriptions of the corporate objec-tive should prevail, as a practical mat-ter the two concepts do not presentinherent conflicts (except whenposed in the extreme). Generally,viewed in the long term, stakeholderand shareholder interests are not

mutually exclusive. Corporations donot succeed by consistently neglect-ing the expectations of employees,customers, suppliers, creditors, andlocal communities, but neither docorporations attract necessary capitalfrom equity markets if they fail tomeet shareholders’ expectations of acompetitive return.

In the extreme situations in whichthe short-term interests of variousstakeholders collide, a clear under-standing of who legal duties are owed

to assists boards and managers to takenecessary, timely, but difficult actions.

The Importance Of CorporateGovernance

No matter what view of the cor-porate objective is taken, effectivegovernance ensures that boards andmanagers are accountable for pursu-ing it. The role of corporate gover-nance in making sure that board andmanagement are accountable is ofbroad importance to society for anumber of reasons. Effective corpo-rate governance:

• Promotes the efficient use ofresources both within the companyand the larger economy. Debt andequity capital should flow to thosecorporations capable of investing itin the most efficient manner for theproduction of goods and servicesmost in demand, and with the high-est rate of return. In this regard,effective governance should helpprotect and grow scarce resources,therefore helping to ensure thatsocietal needs are met. In addition,effective governance should makeit more likely that managers whodo not put scarce resources to effi-cient use, or who are incompetentor (at the extreme) corrupt, arereplaced.

• Assists companies (and econo-

The Corporate Governance Env i ronment

The Anglo-Amer i can In f luence

The financial power of US andUK institutional investors, andtheir growing interest in foreignequity, is apparent from a recentstudy by the Conference Board (anot-for-profit business researchorganisation) (Institutional Invest-ment Report: InternationalPatterns of Institutional Invest-ment (2000)) (www.conference-board.org)

According to the study:• Institutional investors hold

US$24 trillion (EUR26 tril-lion) in financial assets in theworld’s top five markets.

• Well over two-thirds (76%) ofthese assets are held by USand UK investors.

• The 25 largest US pensionfunds (who tend to be themore activist investors in theUS market) account for two-thirds of all foreign equityinvestment by US investors.

• The percentage of foreignequity held in the individualportfolios of these top 25 USpension funds is rising (from anaverage of 8% of the portfolio in1993 to a current average of18% of the individual portfolio).

The corporate governanceenvironment is shaped by stockexchange listing rules and a host oflaws and regulations concerning:

• Disclosure requirements andaccounting standards.

• The issue and sale of securities.

• Company formation.

• Shareholder rights and proxyvoting.

• Mergers and acquisitions.

• Fiduciary duties of directors,officers and controlling share-holders.

• Contract enforcement.

• Bankruptcy and creditors’rights.

• Labour relations.

• Financial sector practices.

• Tax and pension policy.

The corporate governanceenvironment is also defined by:

• The quality and availability ofjudicial and regulatory enforce-ment of these laws and regula-tions.

• A general understanding of cor-porate citizenship.

• Societal expectations about thecorporate objective.

• Competition in product, serviceand capital markets, as well as inthe markets for management,labour and corporate control.

Global Deve lopments In Corporate Governance

The following are examples ofrecent corporate governance devel-opments across the globe.

B r a z i lThe eighth largest economy in

the world is facing reforms of thelegal and regulatory frameworkdesigned to help Brazilian compa-nies tap into global capital. In par-ticular, legislation to reform theCorporation Law would strengthenprotection for minority sharehold-ers and reduce reliance on non-vot-ing preferred shares. It is expectedto be passed in some form by earlyautumn 2000.

Internal private sector pressurefor reform is expected to increasewith the creation of three invest-ment funds focused on corporategovernance activism under the man-agement of established fund man-agers (Dynamo, Fator/Sinergia andBradesco-Templeton).

E UThe adoption of a common

European currency, the freer flowof capital, goods, services and peo-ple across EU borders, andincreased merger activity amonglarge European companies (andEurope’s largest stock exchanges)have all created tremendous inter-est among European issuers andinvestors, member states and theCommission in:

• The shared aims, as well as thedifferences, in corporate gover-nance practice across Europe(reflected in corporate gover-nance codes).

• Any related barriers to thedevelopment of a single EUfinancial market.

Numerous corporate gover-nance codes have been adopted bydifferent groups in many of the 15member states, and other entities(such as the OECD, EASD andICGN) have also adopted codes thatmay relate to practice in memberstates. Prominent codes include thefollowing:

• Belgium (Cardon Report).

• France (Vienot I and II; Lévy-Lang Report).

• Germany (German PanelReport).

• Greece (Capital Market Commis-sion Report).

• Ireland (IAIM Guidelines).• Italy (Draghi Report).• The Netherlands (Peters Code).• Portugal (CMVM Recommend-

ations).• Spain (Report of the Special

Committee).• The UK (Cadbury Report,

Hampel Report, GreenburyReport, Combined Code).

F r a n c eA new report issued in 1999 by

the French business association,Medef (the second Vienot Report),recommends that boards of publiccompanies that have a single-tierboard structure should be allowedto separate the post of président duconseil d’administration into sepa-rate chairman and CEO positions(the report is available atwww.medef.fr). It also calls forexpanded disclosure to shareholdersas to:

• Executive remuneration policy.• Stock options schemes.• The total amount of directors’

remuneration.• Individual directors’ remunera-

tion for attendance at boardmeetings.

Another French business asso-ciation (Afep) also has recom-mended that listed companies vol-untarily disclose the compensationof directors.

A legislative initiative currentlyunder way would expand these rec-ommendations and take them for-ward. On 15th March, 2000, theCouncil of Ministers adopted draftlegislation that would enable bothlisted and unlisted companies toseparate the roles of chairman andCEO. The draft would also require

mies) in attracting lower-costinvestment capital by improvingboth domestic and internationalinvestor confidence that assets willbe used as agreed (whether thatinvestment is in the form of debt orequity). Although managers needto have latitude for discretionaryaction if they are to innovate anddrive the corporation to competesuccessfully, rules and proceduresare needed to protect capitalproviders, including:

- independent monitoring of man-agement;

- transparency as to corporate per-formance, ownership and con-trol;

- participation in certain funda-mental decisions by shareholders.

• Assists in making sure that thecompany is in compliance with thelaws, regulations and expectationsof society. Effective governanceinvolves the board of directorsensuring legal compliance andmaking judgments about activitiesthat, while technically lawful in thecountries in which the companyoperates, may raise political, socialor public relations concerns.

• Provides managers with over-sight of their use of corporateassets. Corporate governance maynot guarantee improved corporateperformance at the individual com-pany level, as there are too manyother factors that impact on per-formance. But it should make itmore likely for the company torespond rapidly to changes in busi-ness environment, crisis and theinevitable periods of decline. Itshould help guard against manage-rial complacency and keep man-agers focused on improving firmperformance, making sure thatthey are replaced when they fail todo so.

• Is closely related to efforts toreduce corruption in business deal-ings. Although it may not preventcorruption, effective governanceshould make it more difficult forcorrupt practices to develop andtake root, and more likely that cor-rupt practices are discovered early

continued on page 8continued on page 10

7

Global Deve lopments In Corporate Governance continued from page 7

8

listed companies to publish theremuneration of the 10 most highpaid corporate officers. This legisla-tive initiative faces significant oppo-sition from the business community.

G e r m a n yA package of tax reform meas-

ures pushed through parliament on14th July, 2000 by ChancellorGerhard Schröder will eliminate by2002 the current 50% capital gainstax imposed on corporate sales ofshares in other companies (seewww. lawdepar tment .ne t / g loba l“Business tax reform 2001”, EC,2000, V(4), 58). This will:

• Encourage the unwinding ofcross-shareholdings amongGerman companies.

• Open German companies to awider shareholder base, whichcould lead to an increase inmerger and acquisition activityas well as an increase in share-holder activism.

In December 1999, DeutscheBank’s mutual fund:

• Supported the ranking ofGerman companies on the qual-ity of disclosure, board gover-nance and shareholder rights.

• Released a study that finds apositive correlation between thesize of foreign ownership andthe quality of governance.

In January 2000, a panel of gov-ernance scholars, shareholderactivists and corporate executivesissued a set of corporate governanceguidelines referring to the OECDPrinciples and encouraging compa-nies to be more transparent on gov-ernance and compensation.

I t a l yIn the past decade, Italy has

undertaken significant reforms tosecurities laws and market regula-tions. In addition, a number of state-owned enterprises (including theItalian Stock Exchange (Borsa ItalianaSpA)) were privatised to reducebudget deficits and meet EuropeanMonetary Union requirements.

In 1998, the legislature approveda Decree based on the work of theDraghi Commission, with provisionsdesigned to:

• Discourage cross-ownership amongcompanies listed on the exchange.

• Permit shareholder agreements.

• Simplify rules for tender offers.

• Strengthen shareholder rights byenabling minority shareholdersto call a shareholders’ meeting.

• Enable shareholders to bringclaims on behalf of the company.

• Enable shareholders to appointa member of the board of statu-tory auditors.

In July 1999, the Borsa ItalianaSpA issued a set of non-mandatorygovernance guidelines for listedcompanies.

J a p a nOver the past two years, corpo-

rate governance changes havebecome visible in Japan:

• In July 1999, 37 companiesjoined with Sumitomo Bank andNissan when they sought share-holder approval to reduce thesize of their boards from 20-40directors to about 10. Thesecompanies were following theexamples set by Sony in 1997,when it became the firstJapanese company to reduce thesize of its board.

• In January 2000, Japan saw itsfirst home-grown hostile takeoverbid for a public company.Ultimately, Yoshiaki Murakamifailed in his bid to gain control ofShoei, an under-performing prop-erty developer, with nearly 66 bil-lion yen (US$609,249,515;EUR673,708,114) in reserve.

• In April 2000, the Japanese gov-ernment began a two-year pro-gramme to revamp and mod-ernise corporate governancestatutes. The main targets ofreform are laws affecting disclo-sure, the structure and duties ofboards, and shareholder rights.

• More companies are nominat-ing outsiders to their boards.Within the past year, Softbankand Orix have nominated non-executive outsiders.

• In June 2000, at their AGM,Sumitomo Bank revealed thecompensation packages of theirexecutives. This candour camein response to a dissident resolu-tion filed by a group of individ-ual investors, and marks the firsttime that a financial institutionin Japan has revealed informa-tion of this nature.

K o r e aKorea’s Commercial Code has

been amended three times in the pastfive years (in 1995, 1998, and 1999).Reforms include the following:

• A heightened fiduciary duty hasbeen imposed on directors. Inaddition, directors must reportany information that may dam-age the company to the com-pany’s statutory auditor.

• The minimum holding require-ments for shareholders havebeen lowered with respect toany of the following:

- gaining injunctive relief againstdirectors who have acted in con-travention of the articles ofincorporation;

- bringing a shareholder derivativeaction on behalf of the company;

- convening a special sharehold-ers meeting;

- compelling the production offinancial records.

• If provided for in the articles ofincorporation, shareholdersmay vote in writing without hav-ing to attend a shareholdersmeeting.

• Shareholders may requestcumulative voting for the pur-pose of electing directors, andcompanies must respect thisunless the articles of incorpora-tion explicitly forbid it.

In spring 2000, a shareholder-activist group, PSPD, pressed for

9

and achieved board changes atDacom, a large telecoms concern.The reforms included measures toensure that the chairman of theboard is a non-executive and at leasthalf of the board is independent. Afully independent audit committeewill monitor related party transac-tions to ensure they are done atarm’s length.

The Nether landsFor a European jurisdiction

often chosen by multinational com-panies as a location in which toestablish their holding companies,there have been remarkably fewdevelopments in the sphere of corpo-rate governance.

In 1997 the Peters Committee onCorporate Governance, establishedby the Association of SecuritiesIssuing Companies and theAmsterdam Stock ExchangeAssociation, issued a code of bestpractice recommendations for effec-tive corporate governance. Com-pliance with the Peters Code is whollyvoluntary (it is not mandated bystatute or encouraged throughmandatory disclosure).

After a survey of companiesconcluded that many of the PetersCode recommendations were notbeing followed, the ministers of eco-nomic affairs, social affairs andlabour and justice announced inMay 1999 a regulatory initiativeaimed at reforming certain gover-nance practices relating to trans-parency and accountability. Thereform effort, however, appears tohave stalled.

R u s s i aRussia has had to mould a free

market system from the ground up,and much of the efforts to date havefocused on putting into place a basicframework of laws and regulatorycapacity. Unfortunately, the broadperception is that protection ofminority shareholder rights continueto lag, although, in 1999, a FederalLaw on the Protection of Rights andLegitimate Interests of Investors inthe Securities Market was enacted.Foreign investors have attempted topress their rights, with little success to

date, although there have beenrumours that Putin has intervened onforeign investors’ behalf severaltimes.

In late June 2000, the Putin gov-ernment set out its economic pro-gramme, with some governance-related initiatives. The “Gref plan”includes proposals to:

• Improve the protection of prop-erty rights.

• Clamp down on interested partytransactions.

• Improve disclosure.

In an attempt to improve thecredibility of Russian companies andtheir securities, State Street Bank andGeorge Soros have helped to launchthe Vasiliev Institute for CorporateGovernance. The Institute intends toincrease the information available toforeign investors by rating Russianlisted companies based on the effec-tiveness of their corporate gover-nance. In addition, the Institute willlobby for more stringent investor pro-tection.

U KThe broad view of company law

initiated by the Department of Tradeand Industry has resulted in a consul-tative paper (published in March 2000by the Company Law Review SteeringGroup) proposing key governancereforms. Although there has beenmuch debate on whether or not amore stakeholder-focused modelwould be beneficial, the steeringgroup has recommended that a“shareholder-oriented, but inclusivelyframed, duty of loyalty” is most likelyto lead to “optimal conditions forcompanies to contribute to the overallhealth and competitiveness of theeconomy.”

The steering group consideredand rejected the adoption of thetwo-tier board structure common inmany EU countries, but recom-mends:

• Implementing direct legislationor rules to create clear monitor-ing obligations for non-execu-tive directors.

• Requiring an increase in theproportion of non-executivedirectors on boards.

• Changing the non-executivedirectors’ appointment methodto minimise the role which exec-utive directors play in appoint-ing non-executive directors.

• Tightening the definition ofdirector independence.

• Strengthening the independ-ence of the chairman.

In June 2000 the NationalAssociation of Pension Funds(NAPF) (see main text “ShareholderActivism”) published an extensive setof corporate governance standardsto serve as proxy voting guides formember funds. The NAPF’s stan-dards follow the Combined Code,but push for stronger requirementsin some areas, by recommending:

• Separation of the positions ofchairman of the board and CEO.

• A ten-part test to determineboard member independence.

• Avoiding re-pricing shareoptions in situations of under-performance.

• An annual shareholder vote onthe report of each company’sremuneration committee.

U SIn 1998, SEC concerns about

corporate financial reporting led theNew York Stock Exchange andNational Association of SecuritiesDealers to convene a private sectorBlue Ribbon Committee to recom-mend ways to improve audit com-mittee oversight of financial report-ing. The Committee’s Report,issued in February 1999, focused on:

• Strengthening the independ-ence and qualifications of auditcommittee members.

• Improving audit committeeeffectiveness.

• Improving the mechanisms for dis-cussion and accountability amongthe audit committee, the outsidedirectors and management.

After a period of public com-ment, the SEC approved relatedamendments to listing rules andSEC disclosure requirements,adopting the key recommendationsof the Committee. Both the NASDand the NYSE now require listed

Global Deve lopments In Corporate Governance continued from page 9

and eliminated. Effective gover-nance is a check on the power ofthe relatively few individuals withinthe corporation who control largeamounts of other people’s money(see www.lawdepartment.net/global“Steering clear of bribery”, EC, 2000,V(4), 37).

The Mul t i - jur i sd i c t ional D imens ionCorporate governance practices

vary across nations and individualcompanies. This variety reflects notonly distinct societal values, but also

different ownership structures, busi-ness circumstances and competitiveconditions. It also reflects differ-ences in the strength and enforceabil-ity of contracts, the political standingof shareholders and debt-holders,and the development, and enforce-ment capacity, of legal systems.

In developed countries, the dis-cussion on how to improve corporategovernance tends to assume that thefollowing are in place:

• Well-developed and well-regu-lated securities markets.

• Laws that recognise sharehold-ers as the legitimate owners of thecorporation and require the equi-table treatment of minority andforeign shareholders.

• Enforcement mechanismsthrough which these shareholderrights can be protected.

• Securities, corporate and bank-ruptcy laws that enable corporationsto transform (to merge, acquire,divest and downsize) and even to fail.

• Anti-corruption laws to preventbribery and protection against

10

companies to have wholly independ-ent audit committees with at leastthree members, each of whom arefinancially literate. At least onemember must have accounting orrelated financial sophistication orexpertise.

SEC registered companies mustinclude an audit committee report inthe annual proxy statement statingwhether the committee has:

• Reviewed and discussed theaudited financial statementswith management.

• Recommended to the boardthat the audited financial state-ments be included in the com-pany’s annual report.

• Discussed certain matters withthe independent auditors,including the auditors’ inde-pendence and the auditors’views on the quality of the com-pany’s financial reporting.

The audit committee chartermust be included as an appendix tothe company’s proxy statements atleast once every three years. Also,the proxy statement must disclosewhether the audit committee mem-bers meet the independence stan-dards provided in the applicable list-ing standard.

In the past two years, institutionalinvestors have focused their activismon the “dead hand” poison pill, an

anti-takeover mechanism that is ille-gal in Delaware but still used by com-panies incorporated in other jurisdic-tions. Dead hand poison pills providethat only directors who are in officefor a specified period of time before aproxy fight may redeem or amendshareholder rights plans. Investorsargue that dead hand pills serve onlyto entrench management. In themost recent proxy season, TIAA-CREF, the world’s largest pensionsystem, submitted resolutions to 17companies asking them to remove thedead hand provision from the poisonpills they use. Of these 17 companies,15 complied with TIAA-CREF’srequest, which led the pension systemto withdraw its resolutions.

Institutional investors are alsotargeting stock option schemes, outof concern for potential dilutiveeffect. Investors are particularlyconcerned about option repricing insituations where the company’sstock price has decreased. Stockoptions are generally intended to bea form of incentive-based pay.Lowering strike prices when stockperformance declines appears toreward executives for doing a poorjob. This issue has received consid-erable attention with respect to hightech and e-commerce companies.For example, Microsoft has assertedthat it must reprice options to keepits top employees from seeking more

lucrative option packages elsewhere.

Wor ld Bank/OECDRecognising that governance

reform requires a combination ofregulation and private sector initia-tive for implementation, the WorldBank and OECD have joinedtogether to sponsor a Private SectorAdvisory Group on CorporateGovernance and a Global CorporateGovernance Forum, in addition totheir separate activities related togovernance reform. A Charter andWorld Programme for the Forum wasformally approved by both the WorldBank and OECD in June 2000.

The goal is to:• Create a public-private partner-

ship to raise awareness of thevalue of corporate governanceimprovement.

• Involve the private sector in theimplementation of corporategovernance reform in emergingmarket nations.

The Private Sector AdvisoryGroup, comprised of prominentbusiness leaders from around theworld, has established anAudit/Accounting Task Force and anInvestor Responsibility Task Force,and has been involved in a series ofevents in Brazil to raise the aware-ness of the local private sector of theneed for reforms. A similar effort isplanned for Russia this autumn.

continued from page 7

continued on page 12

The OECD Pr inc ip le s

11

The OECD Principles:

• Reflect the broad consensusreached by the 29 OECD membernations with regard to fundamen-tal issues of corporate governance.

• Represent the first inter-govern-mental accord on the commonelements of effective corporategovernance.

• Provide significant room to takeinto account national differences,including differing legal and marketframeworks, traditions and cultures.

The OECD Principles build on thefour core standards set out in the MillsteinReport (see main text “The OECDPrinciples”): fairness, transparency,accountability and responsibility.

Fairness. The OECD Principlesexpand on the concept of fairness withtwo separate principles:

• The Corporate governance frame-work should protect shareholders’rights (OECD Principle I).

• The Corporate governance frame-work should ensure the equitabletreatment of all shareholders, includ-ing minority and foreign sharehold-ers. All shareholders should have theopportunity to obtain effective redressfor violation of their rights (OECDPrinciple II).

Principle I recognises that share-holders are property owners, and asowners of a legally recognised anddivisible share of a company, theyhave the right to hold or convey theirinterest in the company. Effectivecorporate governance depends onlaws, procedures and common prac-tices that protect this property rightand ensure secure methods of owner-ship, registration and free transferabil-ity of shares. The Principle also recog-nises that shareholders have certainparticipatory rights on key corporatedecisions, such as the election of direc-tors and the approval of major merg-ers or acquisitions. Governance issuesrelevant to these participatory rightsconcern voting procedures in theselection of directors, use of proxiesfor voting, and shareholders’ ability tomake proposals at shareholders meet-

ing and to call extraordinary share-holders meetings.

According to Principle II, thelegal framework should include lawsthat protect the rights of minorityshareholders against misappropriationof assets or self-dealing by controllingshareholders, managers or directors.Examples include:

• Rules that regulate transactionsby corporate insiders and imposefiduciary obligations on directors,managers and controlling share-holders.

• Mechanisms to enforce thoserules (for example, the ability ofshareholders to bring a claim onbehalf of the company in certaincircumstances).

Transparency. The corporate gover-nance framework should ensure thattimely and accurate disclosure is made onall material matters regarding the corpo-ration, including the financial situation,performance, ownership and governanceof the company (OECD Principle IV).

This Principle recognises thatinvestors and shareholders need infor-mation about the performance of thecompany (its financial and operatingresults), as well as information aboutcorporate objectives and material fore-seeable risk factors to monitor theirinvestment. Financial information pre-pared in accordance with high-qualitystandards of accounting and auditingshould be subject to an annual audit byan independent auditor. This providesan important check on the quality ofaccounting and reporting.

In practice, accounting standardscontinue to vary widely around theworld. Internationally prescribedaccounting standards that promoteuniform disclosure would enable com-parability, and assist investors andanalysts in comparing corporate per-formance and making decisions basedon the relative merits.

Information about the company’sgovernance, such as share ownershipand voting rights, the identity of boardmembers and key executives, and execu-tive compensation, is also important to

potential investors and shareholders anda critical component of transparency.

Accountability. The corporate gover-nance framework should ensure thestrategic guidance of the company, theeffective monitoring of management bythe board, and the board’s accountabil-ity to the company and the shareholders(OECD Principle V).

This Principle implies a legal dutyon the part of directors to the companyand its shareholders. As elected repre-sentatives of the shareholders, directorsare generally held to be in a fiduciaryrelationship to shareholders and to thecompany, and have duties of loyalty andcare which require that they avoid self-interest in their decisions and act dili-gently and on a fully-informed basis.Generally, each director is a fiduciaryfor the entire body of shareholders anddoes not report to a particular con-stituency. As the board is charged withmonitoring the professional managersto whom the discretionary operationalrole has been delegated, it must be suffi-ciently distinct from management to becapable of objectively evaluating them.

Responsibility. The corporate gover-nance framework should recognise therights of stakeholders as established bylaw and encourage active co-operationbetween corporations and stakeholdersin creating wealth, jobs, and the sustain-ability of financially sound enterprises(OECD Principle III).

This Principle recognises that cor-porations must abide by the laws andregulations of the countries in which theyoperate, but that every country mustdecide for itself the values it wishes toexpress in law and the corporate citizen-ship requirements it wishes to impose.As with good citizenship generally, how-ever, law and regulation impose onlyminimal expectations as to conduct.Outside of the law and regulations, cor-porations should be encouraged to actresponsibly and ethically, with specialconsideration of the interests of stake-holders and, in particular, employees.

The principles are available in fulltext at www.oecd.org/daf/governance/principles.htm.

fraud on investors.

• Sophisticated courts and regula-tors.

• An experienced accounting andauditing sector.

• Significant corporate disclosurerequirements.

In addition, developed countriesare also more likely to have well-developed private sector institutions,such as:

• Organisations of institutionalinvestors.

• Professional associations ofdirectors, corporate secretaries andmanagers.

• Rating agencies, security ana-lysts and a sophisticated financialpress.

Conversely, many developingand emerging market nations havenot yet fully developed the legal andregulatory systems, enforcementcapacities and private sector institu-tions required to support effectivecorporate governance. Therefore,corporate governance reform effortsin these countries tend to focus onthe fundamental framework. Reformneeds vary, but often include:

• Stock exchange development.

• The creation of systems for regis-tering share ownership.

• The enactment of laws for basicminority shareholder protectionfrom potential self-dealing by cor-porate insiders and controllingshareholders.

• The education and empower-ment of a financial press.

• The improvement of audit andaccounting standards.

• A change in culture and lawsagainst bribery and corruption asaccepted ways of doing business.

In addition to differences in thedevelopment of legal and regulatorysystems and private institutionalcapacity, nations differ widely in thecultural values that mould the devel-opment of their financial infrastruc-

12

Impor tance Of Fac tors In f luenc ing Inves tment Dec i s ions(Ranked according to aggregate response)

The percentages reflect the proportion of the total number of institutional investors surveyed who indicated that each ofthese factors was important to them.

Source: McKinsey & Company, Investor Opinion Survey – June 2000

Continental Europe

Financial performance

Stock performance

Disclosure practices

Board of directors

Adoption of GAAP or IAS

Corporate governance practices

Board independence

UKUS

Continental EuropeUKUS

Continental EuropeUKUS

Continental EuropeUKUS

Continental EuropeUKUS

Continental EuropeUKUS

Continental EuropeUKUS

89%93%90%

73%58%72%

59%56%70%

51%70%42%

44%26%69%

49%40%53%

45%49%43%

Extremely important Very important

Rank Continental Europe UK US1 Financial performance Financial performance Financial performance2 Stock performance Quality of board of directors Stock performance3 Disclosure practices Stock performance Disclosure practices4 Quality of board of directors Disclosure practices Adoption of accounting

standards/principles5 Quality of corporate governance Board independence Quality of corporate governance6 Board independence Quality of corporate governance Board independence7 Adoption of accounting Adoption of accounting Quality of board of directors

standards/principles standards/principles

continued from page 10

13

ture and corporate governance. Inpractice, international agreement ona single model of corporate gover-nance or a single set of detailed gov-ernance rules is both unlikely andunnecessary. Even among fairly sim-ilar systems, like the US and the UK,fundamental distinctions remain thatare unlikely to be resolved. One ofthe most obvious distinctions, forexample, is how business managersare kept in check. In the UK (likeother European nations), regulationplays an important part in theprocess. In the US (uniquely), regu-lation focuses primarily on disclosureobligations and significant reliance isplaced on shareholder derivative liti-gation (claims brought on behalf ofthe company) and class actions asenforcement mechanisms.

However, the reality of thedemands of global capital marketshas led to some international consen-sus on the basics of effective corpo-rate governance.

The OECD PrinciplesIn April 1998, an influential

report (known as the Millstein

Report) prepared by the BusinessSector Advisory Group on CorporateGovernance (chaired by Ira M.Millstein) detailed the common prin-ciples of corporate governance from

a private sector viewpoint (BusinessSector Advisory Group, Report to theOECD on Corporate Governance:Improving Competitiveness and Accessto Capital in Global Markets dated20th April, 1998. Copies of the reportcan be requested from www.oecd.org).

The Millstein Report focused on“what is necessary by way of gover-nance to attract capital.” Accordingto the Millstein Report, governmentintervention in the area of corporategovernance is likely to be most effec-tive in attracting capital if it focuseson four core standards:

• Fairness, achieved by ensuringboth:

- the protection of shareholderrights (including the rights of minor-ity and foreign shareholders);

- the enforceability of contractswith resource providers.

• Transparency, accomplished byrequiring timely disclosure ofadequate, clear and comparableinformation concerning corpo-rate financial performance, cor-porate governance and corporateownership.

• Accountability, involving the clar-ification of governance roles andresponsibilities, and supporting

The V iews Of Leading Vo i ces

On The Impor tance Of Corporate Governance:“The governance of the corporation is now as important in the world economyas the government of countries.”

James D. Wolfensohn, “A Battle for Corporate Honesty,” The Economist: The World in1999, page 38.

On The Role Of Government In Corporate Governance:“Like a powerful river, the market economy is widening and breaking downbarriers. Governments’ role is to accommodate – not block the flow – and yetkeep it sufficiently under control so that it doesn’t overflow its banks anddrown us with undesirable side effects.”

Ira M. Millstein, Honorary Chairman’s Opening Remarks, ICGN Annual Meeting (13th July, 2000).

On The Economic Theory Of Governance:“[B]eing managers of other people’s money than their own, it cannot well beexpected that they should watch over it with the same anxious vigilance withwhich the partners in a private co-partner frequently watch over their own...Negligence and profusion, therefore, must always prevail more or less in themanagement of the affairs of [a joint stock] company””

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations 264-65(Edwin Cannan, Ed., University of Chicago Press 1976) (1776).

Evaluat ing Corporate Governance(Percent saying yes)

The Russell Reynolds survey points out that despite the importance investors place on corporate governance practices in theirinvestment decision making (and the positive reception they give to companies whose boards adopt corporate governanceguidelines), few say their organisations use formal guidelines to help them evaluate the corporate governance practices ofthe companies in which they invest.

Source: Russell Reynolds Associates, Corporate Governance in the New Economy – 2000 International Survey ofInstitutional Investors

Has poor governance caused you to reduce or divest your holding in a company?

Continental EuropeUKUS

53%48%61%

Do you or your corporation have formal guidelines or metrics for evaluating your governance practice?

Continental EuropeUKUS

21%38%16%

14

voluntary efforts to make surethat managerial and shareholderinterests are aligned (and moni-tored by the board of directors).

• Responsibility, achieved byensuring corporate compliancewith the other laws and regula-tions that reflect the respectivesociety’s values.

Underlying the Millstein Reportis the notion that corporate gover-nance depends on the private sectorfor implementation. While govern-ment provides the structure for gov-ernance, corporate governance hap-pens inside the corporation, anddepends on investors, the board andmanagement.

When the Business SectorAdvisory Group issued its Report toOECD Ministers at the height of theAsian crisis, it recommended that theOECD promote and further articu-late the four core standards set out inthe Millstein Report. The OECDconvened an Ad-Hoc Task Force onCorporate Governance consisting ofrepresentatives from the 29 OECDmember nations, interested interna-tional organisations, labour represen-tatives and business representatives.The Task Force had direct input fromnon-OECD nations, as well asbroader public comment through itswebsite. In April 1999, it built on thefour core standards and expandedthem into five broad and non-bindingprinciples (the OECD Principles)(see box “The OECD Principles” onpage 11).

The ICGN (see above) ratifiedthe OECD Principles shortly afterthey were issued and expanded onthem from a more detailed investorviewpoint (the document is availablein full text at www.icgn. org/ docu-ments/globalcorpgov.htm). In February2000, Euroshareholders (formerlyknown as Groupement desActionnaires Européens (GAE)), anorganisation of shareholder associa-tions from eight European countries,adopted a set of governance princi-ples based on both the OECDPrinciples and the ICGN guidelines(the Euroshareholders’ Corporate

Governance Guidelines 2000, avail-able in full text at www.dcgn.dk). TheEuroshareholders guidelines areinteresting in that diverse sharehold-ers all agreed that the corporateobjective is to maximise long-termshareholder value (notwithstandingthe continental tradition of empha-sising employee interests).

Governance Guide l ines And Codes OfBes t Prac t i ce

In addition to the emergence ofthe OECD Principles, the pastdecade has seen a proliferation ofcorporate governance guidelines andcodes of best practice prepared by awide range of national governmentcommittees (listing bodies, associa-tions of investors and individual com-panies as industry models).

In-house counsel can play a vitalrole in:

• Distilling the principles in thesedocuments and advising officersand directors on the similaritiesand differences that may impact onimportant cross-border deals, suchas mergers and acquisitions andjoint ventures.

• Assisting boards to adapt rele-

vant principles into individual com-pany guidelines, suitable for thecompany’s or group’s specific oper-ations and circumstances.

The significance of these codes,and the management of issues such asthe corporate objective, boardresponsibilities, board composition,board committees, corporate deci-sion making and disclosure are allexplored in the second part of thisarticle.

In-house counsel play an importantrole in advising both managementand the board of their companies

on issues related to effective gover-nance standards, for example when:

• Advising on governance struc-tures required by law, regulation orlisting requirements.

• Advising on approaches mostlikely to satisfy institutionalinvestors or otherwise meet spe-cific company needs, including theneed to attract equity investment.

• Drafting new governance guide-lines or a code for use by their com-pany or group.

• Ensuring that existing gover-

Governance Framework

Laws

Regulations

Listing rules

Invest

or exp

ectati

ons

Governance guidelines

and best practices

CounselBoard ofdirectors

Individualcompany

governancestructures

and practice

At the individual company level, governance is most likely to provide value when the board itself has studied the governance

needs of the company and adopted the governance structure andpractices that best fit company requirements. In-house counsel has a

key role in assisting the board to avoid a box-ticking approach, byadvising it on the governance framework in which the company

operates and the structures and practices that can be adopted voluntarily and adapted to address company needs.

nance documents are in goodshape and reflect current practice.

Effective corporate governanceis not formulaic and must begrounded on every company’s uniquecircumstances. Nonetheless, whether

in a national or multi-jurisdictionalcontext, advising on governancerequires a clear understanding of thefundamental issues:

• What are the driving forcesbehind the growing interest in cor-

porate governance and how dothose forces impact on the com-pany?

• Why is the quality of corporategovernance important to the com-pany?

• What is the emerging consensuson basic principles of effective gov-ernance (for example, as expressedinn the OECD Principles)?

These issues were addressed indetail in the first part of this article(see also www.lawdepartment.net/globalGC “The globalisation of corporategovernance”, GC, V(7), 52).

The past decade has seen a pro-liferation of corporate governanceguidelines and codes of best practicedesigned to improve the quality ofcorporate governance, including, atthe multinational level, the OECDPrinciples (see box “CorporateGovernance Guidelines And Codes OfBest Practice”). An understanding ofthem, and of the broader trends theyexpress, will assist in-house counselin advising managers and boards toadopt governance practices that arerelevant to their company’s orgroup’s needs (see box “GovernanceFramework”). This requires anunderstanding of the particular cir-cumstances facing the company orgroup, as well as:

• The context in which the gover-nance guidelines and codes of bestpractice are issued and the degreeto which they apply to the company.

• The practical measures the com-pany should consider adopting inrelation to the corporate objective,board responsibilities, board com-position, board committees anddisclosure.

The Or ig in Of Governance CodesCorporate governance guidelines

and codes of best practice arise in thecontext of differing national frame-works of law, regulation and stockexchange listing rules, and differingsocietal values, and there is no singleagreed system of good governance(see box “The Corporate Governance

Corpora te Obje c t i vesThe following are examples of

how different codes of best practiceor guidelines articulate the corpo-rate objective:

• The General Motors Board ofDirectors represents the owners’interest in perpetuating a suc-cessful business, including opti-mising long-term financialreturns. . . . In addition . . . theBoard has responsibility to GM’scustomers, employees, suppliersand the communities where itoperates – all of whom are essen-tial to a successful business(General Motors Board ofDirectors Corporate GovernanceGuidelines on SignificantCorporate Governance Issues,Introduction).

• The mission of the board ofdirectors is to maximise share-holder value (Brazilian Instituteof Corporate Governance Code ofBest Practices at 1).

• [D]irectors should at all times beconcerned solely to promote theinterests of the company, . . .[which] may be understood asthe overriding claim of the com-pany considered as a separateeconomic agent, pursuing itsown objectives which are distinctfrom those of shareholders,employees, creditors includingthe internal revenue authorities,suppliers and customers. Itnonetheless represents the com-mon interest of all these persons,which is for the company toremain in business and prosper(Vienot Report I (France) at 5).

• The Board of Directors repre-sents the shareholders of theSociety, and it has a duty to act inthe interests of the shareholders(Charter of a ShareholdingSociety (Kyrgyz Republic) 17.1).

• There are no conceivable cir-cumstances which can justify anyrelaxation of the principle thatthe management should be fullyaccountable to the providers ofrisk capital (The Peters Code(The Netherlands), Recommend-ation 5.1).

• The board of directors . . . is theprimary overseer of the com-pany, monitoring managementto ensure that it continuallyendeavors to maximise long-term corporate value for theshareholders, and is alwaysaccountable for its actions to allstakeholders, in particular theshareholders (Japan CorporateGovernance Forum Principles,Ch. 1.3).

• [The Committee] recommend[s]establishing, as the ultimate cor-porate goal . . . the maximisationof corporate value or, to use anexpression that has taken root inthe market, the creation of share-holder value (The Governance ofSpanish Companies, II.1.3).

• The single overriding objectiveshared by all listed companies,whatever their size or type ofbusiness, is the preservation andthe greatest practicable enhance-ment over time of their share-holders’ investment (HampelReport (UK), Guideline 1.6).

• Directors must act with enter-prise and always strive to increaseshareholders’ value while havingregard for the interests of allstakeholders (King Report (SouthAfrica) Ch. 5:27.7).

15

Environment” in Part 1 of this article,at www.lawdepartment.net/global GC“The globalisation of corporate gover-nance”, GC, V(7), 52).

Although boards of directorsconstitute an important internalmechanism for holding managementaccountable for the use of companyassets, effective corporate gover-nance is dependent on the market forcorporate control (takeover activity),securities regulation, company law,accounting, and auditing standards,bankruptcy laws, and judicialenforcement. Therefore, in order tocompare one country’s governancepractices with another’s, counselneed to understand not only the rec-ommended best practice reflected inguidelines and codes, but also theunderlying legal, enforcement andlisting framework.

Types Of CodeSome governance codes are

linked to listing or legally mandateddisclosure requirements. Others arepurely voluntary in nature, but maybe designed to help forestall furthergovernment or listing body regula-tion. In the developing nations, gov-ernance codes are more likely toaddress basic principles of corporategovernance that tend to be moreestablished in developed countriesthrough company law and securitiesregulation, such as:

• The equitable treatment ofshareholders.

• The need for reliable and timelydisclosure of information concern-ing corporate performance andownership.

• The holding of annual generalmeetings of shareholders.

However, in both developed anddeveloping nations, codes focus onboards of directors (whether single-tier boards or, in two-tier systems,supervisory boards) and attempt todescribe ways in which boards canprovide guidance and oversight tomanagement, and accountability to

shareholders and society at large.The modern trend of developing

corporate governance guidelines andcodes of best practice began in theearly 1990s in the UK, the US andCanada in response to:

• Problems in the corporate per-formance of leading companies.

• The perceived lack of effectiveboard oversight that contributed tothose performance problems.

• Pressure for change from institu-tional investors.

The Cadbury Report in the UK,the General Motors Board ofDirectors Guidelines (the GMGuidelines) in the US, and the DeyReport in Canada have each provedinfluential sources for other guide-line and code efforts.

Governance guidelines andcodes have issued from stockexchanges, corporations, institutional

investors, and associations of direc-tors and corporate managers, as wellas individuals companies (as in thecase of the GM Guidelines).Compliance with these governancerecommendations is generally notmandated by law, although the codeslinked to stock exchanges may have acoercive effect. For example, listedcompanies on the London andToronto Stock Exchanges need notfollow the recommendations of,respectively, the Cadbury Report(which influenced and has beensuperseded by the Combined Code,but still remains highly influentialaround the world, and especially inCommonwealth countries (seew w w. l a w d e p a r t m e n t . n e t / g l o b a l“Corporate governance after Turnbull:Is your company under control?”,PLC, 1999, X(10), 43) or the DeyReport, but they must disclosewhether they follow the recommen-

16

CHECKLIST: Board Respons ib i l i t ie s

The commentary accompany-ing the OECD Principles (see box“The OECD Principles” in Part 1 ofthis article, www.lawdepartment.net/global GC “The globalisation of cor-porate governance”, GC, V(7), 52)provides that the board should fulfilcertain key functions, including:

" Reviewing and guiding corpo-rate strategy, major plans ofaction, risk policy, annual budg-ets and business plans; settingperformance objectives; moni-toring implementation and cor-porate performance, and over-seeing major capital expendi-tures, acquisitions and divesti-tures.

" Selecting, compensating, moni-toring and, when necessary,replacing key executives andoverseeing succession planning.

" Reviewing key executive andboard remuneration, and ensur-ing a formal and transparentboard nomination process.

" Monitoring and managingpotential conflicts of interest ofmanagement, board membersand shareholders, including mis-use of corporate assets and abusein related party transactions.

" Ensuring the integrity of the cor-poration’s accounting and finan-cial reporting systems, includingthe independent audit, and thatappropriate systems of controlare in place (in particular, sys-tems for monitoring risk, finan-cial control and compliance withthe law).

" Monitoring the effectiveness ofthe governance practices underwhich it operates and makingchanges as needed.

" Overseeing the processing dis-closure and communications.

Source: OECD Principle V (Com-mentary D)

17

dations in those documents and mustprovide an explanation concerningdivergent practices. These disclosurerequirements exert a significant pres-sure for compliance.

In contrast, the guidelines issuedby associations of directors, corpo-rate managers and individual compa-nies tend to be wholly voluntary. Forexample, the GM Board Guidelinessimply reflect an individual board’sefforts to improve its own governancecapacity. Even wholly voluntaryguidelines can have wide influence,however. In the case of the GMGuidelines in the US, institutionalinvestors encouraged other compa-

nies to adopt similar guidelines.In developing nations, both vol-

untary guidelines and more coercivecodes of best practice have beenissued as well. For example, both theCode of Best Practices issued by theBrazilian Institute of CorporateDirectors and the Code of CorporateGovernance issued by the CorporateGovernance Committee of theMexican Business Co-ordinatingCounsel are wholly voluntary andprovide companies with a frameworkthey can aspire to. They are notlinked to any listing requirements.

Similarly, the Confederation ofIndian Industry Code and the Stock

Exchange of Thailand Code aredesigned to build awareness withinthe corporate sector of governancebest practice, but are not, at present,linked to stock exchange listingrequirements. Conversely, Malaysia’sCode on Corporate Governance, theCode of Best Practice issued by theHong Kong Stock Exchange andSouth Africa’s King CommissionReport on Corporate Governance,are all based on some form of manda-tory disclosure concerning compli-ance with their recommendations(and are in some cases linked to stockexchange listing requirements).

Independent Board Leadersh ip

Many guidelines and codes seekto institute independent leadershipby recommending a clear division ofresponsibilities between Chairmanand CEO. In this way, while theCEO can have a significant presenceon the board, the non-executivedirectors will also have a formalindependent leader to look to forauthority on the board.

Documents that place lessemphasis on the need for a majorityof independent directors seem toplace more emphasis on the needfor separating the role of Chairmanand CEO. For example, the IndianConfederation Report expresslyrelates the two concepts. It recom-mends that if the Chairman andCEO (or managing director) are thesame person, a greater percentageof non-executive directors is neces-sary (Recommendation 2). TheMalaysian Report on CorporateGovernance similarly emphasisesthat where the roles are combined,there should be a strong independ-ent element on the board (BestPractice AA.II). This is in accordwith the Cadbury Report (see maintext “Types Of Code”), which statesthat, where the Chairman is also theCEO, it is essential that thereshould be a strong and independentelement on the board (Section 1.2).

The following extracts show thedifferent ways in which independentboard leadership is defined in vari-ous codes:

• The Board should be free tomake this choice any way thatseems best for the Company at agiven point in time. Therefore,the Board does not have a policy,one way or the other, on whetheror not the role of the ChiefExecutive and Chairman shouldbe separate and, if it is to be sep-arate, whether the Chairmanshould be selected from the non-employee Directors or be anemployee (General Motors BoardGuidelines (US), Guideline 4).

• Where the chairman is also thechief executive, it is essential thatthere should be a strong andindependent element on theboard whose authority isacknowledged. . . . The Commis-sion recommends that thereshould be a clear division ofresponsibilities at the head of acompany which will ensure a bal-ance of power and authority(Cardon Report (Belgium),Recommendation 1 & 1.3).

• [C]onsidering that holding both[Chairman and CEO] positions isthe most widespread practice inSpain and in surrounding coun-tries, the Committee recognises

that at present it is not proper tooffer a general guideline.Nevertheless, the concern ofmaintaining optimal conditionsfor the proper fulfilment of thegeneral function of supervisionleads us to recommend that somecautionary measures be adoptedwhenever one individual is tohold the two positions. It is aquestion of creating counter-weights allowing the Board ofDirectors to operate independ-ently from the management teamand to keep its power to controlit (The Governance of SpanishCompanies, II.3.2).

• There are two key tasks at thetop of every public company –the running of the board and theexecutive responsibility for therunning of the company’s busi-ness. There should be a cleardivision of responsibilities at thehead of the company which willensure a balance of power andauthority, such that no one indi-vidual has unfettered powers ofdecision. . . . A decision to com-bine the posts of chairman andchief executive officer in one per-son should be publicly justified(The Combined Code (UK),Principle A.2 & Provision A.2.1).

ConvergenceInternational agreement on a

single model of corporate gover-nance or a single set of detailed gov-ernance rules is both unlikely andunnecessary. The influence of inter-national capital markets will lead tosome convergence of governancepractices. This simply reflects themarket reality that “[a]s regulatorybarriers between national economiesfall and global competition for capitalincreases, investment capital will fol-low the path to those corporationsthat have adopted efficient gover-nance standards, which includeacceptable accounting and disclosurestandards, satisfactory investor pro-tections and board practices designedto provide independent, accountableoversight of managers” (Report to theOECD by the Business Sector AdvisoryGroup on Corporate Governance).

This convergence is evident inthe growing consensus in both devel-oped and developing nations thatboard structure and practice is key toproviding corporate accountability(of the management to the board andthe board to the shareholders) in thegovernance paradigm

Practical measuresKey elements of governance

guidelines and codes of best practiceinclude:

• The corporate objective.

• Board responsibilities.

• Board composition.

• Board committees.

• Disclosure issues.

In-house counsel should con-sider to what extent these issuesshould be addressed by the code orguidelines of their company. It may

be that the laws and regulations ofthe country under whose law thecompany is organised and the juris-dictions in which its shares are tradedalready deal with some of these issues(for example the responsibilities ofdirectors) in detail. If so, the docu-ment can focus on other aspects ofcorporate governance.

Also, as cross border investmentincreases, and investors around theglobe focus on effective governancemechanisms to ensure their interestsare protected, in-house counsel willbe asked to advise boards and man-agers on how the expectations of for-eign investors can best be met.Knowledge of the guidelines and bestpractices in the investors’ own homemarket, and how they differ from thecompany’s practices, can provideinsights into the foreign investor’sexpectations and areas of concern.

18

Impor tant Board TasksInvestors agree on the important board tasks*(average response)

* The list of board tasks was predefined. Investors were asked to rank their importance.

Source: McKinsey & Company, Investor Opinion Survey – June 2000

0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5

Notimportant

Very important

4.5 4.5

4.5

4.6

4.5

4.5 4.4 4.4

4.44.3

4.3 4.3

4.24.1

4.1

4.0

4.0

n/a

Monitor and evaluate long-term strategy

Latin America Europe/US Asia

Monitor and evaluate corporate performance

Evaluate senior management performance

Maintain legal and ethical practices

Manage CEO succession

Communicate with shareholders

Communicate with other stakeholders

Determine executive compensation plan

Establish independent corporate leadership

Evaluate management development processes

Evaulate performance of the board

n/a

3.9

3.9

3.9

3.9

3.9

3.7

3.7

3.6

3.6

3.5

3.4

3.3

3.3

3.1

Notimportant

Very important

Notimportant

Very important

19

This will prove valuable when share-holder initiatives arise.

The Corporate ObjectiveVariations in societal values lead

different nations to view the corporateobjective or “mission” in differentways (see box “Corporate Object-ives”). Expectations of how the cor-poration should prioritise the interestsof shareholders and stakeholders suchas employees, creditors and other con-stituents take two primary forms (see“National Differences” in Part 1 of thisarticle, www.lawdepartment.net/global“The globalisation of corporate gover-nance”, GC, V(7), 52).

In the Anglo-Saxon nations(Australia, Canada, the UK and theUS), where maximising the value ofthe owners’ investment is consideredthe principal objective, governanceguidelines and codes tend to empha-sise the duty of the board to repre-sent shareholders’ interests and max-imise shareholder value. Amongdeveloping nations, the BrazilianInstitute of Corporate GovernanceCode, the Confederation of IndianIndustry Code, the Kyrgyz RepublicCharter of a Shareholding Society,the Malaysian Report on CorporateGovernance and the Korean StockExchange Code of Best Practice, allexpressly recognise that the board’smission is to protect and enhance theshareholders’ investment in the cor-

The Audi t Commit teeAudit committees attract spe-

cial attention in guidelines and bestpractice codes because of the roleof disclosure and legal compliancein protecting shareholder interestsand promoting investor confidence.Certain countries specifically rec-ommend the size of an audit com-mittee. In India, the minimum sizerecommended is three members, asit is in Malaysia and the UK (and,through stock exchange listingrules, the US). Also, South Africaand India both emphasise the extratime requirements demanded ofaudit committee members and (asin the UK and US) the importanceof written terms of reference forthe committee. Malaysia alsorefers to the need for written termsof reference for audit and otterboard committees.

The following are examples ofhow audit committees are dealtwith in governance codes andguidelines:

• Special emphasis has beenplaced on the need for all listedcompany boards to establishaudit committees to ensure theeffective and efficient controland review of a company’sadministration, internal auditprocedures, the preparation offinancial statements and general

disclosure of material informa-tion to investors and sharehold-ers (President’s Message, StockExchange of Thailand Code andGuidelines, pp. iv-v).

• [There should be] a mechanismthat lends support to the Boardin verifying compliance of theaudit function, assuring thatinternal and external audits areperformed with the highestobjectivity possible and thefinancial information is useful,trustworthy and accurate.(Mexico Code of CorporateGovernance, Recommendationat 12-13).

• [Independent directors . . .should account for at least one-third of the audit committee. . . .(Vienot II (France) at 15).

• The board should establish anaudit committee of at least threedirectories, all non-executive,with written terms of referencewhich deal clearly with itsauthority and duties. The mem-bers of the committee, a major-ity of whom should be inde-pendent non-executive direc-tors, should be named in thereport and accounts (TheCombined Code (UK), ProvisionD.3.1).

Nominat ing Di re c tor sThe process by which directors

are nominated has gained attentionin many guidelines and codes as akey element of ensuring that man-agement does not dominate theboard through that process. The fol-lowing are examples of wordingused:

• Boards should establish a whollyindependent “nominating” . . .committee. . . . Creating an inde-pendent and inclusive process for

nominating directors will ensureboard accountability to sharehold-ers and reinforce perceptions offairness and trust between andamong management and boardmembers (Report of the NationalAssociation of Corporate DirectorsBlue Ribbon Commission on Direc-tor Professionalism (US) at 3-4).

• Unless the board is small, a nom-ination committee should beestablished to make recommen-

dations to the board on all newboard appointments (The Com-bined Code (UK), A.5.1).

• [T]he adoption of a formal proce-dure for appointments to theboard, with a nomination com-mittee making recommendationsto the full board, should be recog-nised as good practice (TheMalaysian Corporate GovernanceReport, Explanatory Note 4).

continued on page 23

Corporate Governance Guide l ines And Codes Of Bes t Prac t i ce

20

Numerous private sector andgovernment-related organisations,institutional investors and stockmarkets have, in the past decade,become active in driving corporategovernance reforms. One of theirmost influential efforts has been toissue guidelines (also called princi-ples, policies, recommendations orcodes or best practice). Adapted totheir respective cultures and busi-ness structures, these guidelines andcodes generally promote practicesdesigned to enhance accountabilityto shareholders, improve boardindependence, and foster corporateresponsibility.

The following is a partial listingof corporate governance guidelinesand codes of best practice:

In te rna t iona l

• European Association of SecuritiesDealers (EASD), Corporate Gover-nance: Principles and Recom-mendations (12th April, 2000).<www.easd.com/recommenda-tions>

• Euroshareholders, Euroshare-holders Corporate GovernanceGuidelines 2000 (February 2000).<sss.dcgn.dk/publications/2000>*

• European Association of SecuritiesDealers Automated Quotations(EASDAQ), EASDAQ Rule Book(3d ed., January 2000). <www.eas-daq.be/services/rule.htm>

• Commonwealth Association forCorporate Governance (CACG),CACG Guidelines: Principles forCorporate Governance in theCommonwealth (November1999). <www.cbc.co>

• International Corporate Gover-nance Network (ICGN), State-ment on Global Corporate Gover-nance Principles (July 1999).<www.icgn.org>

• Organisation for Economic Coop-eration and Development (OECD)Ad Hoc Task Force on CorporateGovernance, OECD Principles ofCorporate Governance (April

1999). <www.oecd.org/daf/gover-nance/principles.htm>

• ICGN, Global Share VotingPrinciples (July 1998). <www.icgn.org>*

• OECD Business Sector AdvisoryGroup on Corporate Gover-nance, Corporate Governance:Improving Competitiveness andAccess to Capital in GlobalMarkets, Report to the OECD(Millstein Report) (April 1998).<www.oecd.org>

• European Bank for Reconstruc-tion and Development (EBRD),Sound Business Standards andCorporate Practices: A Set ofGuidelines (September 1997).<www.ebrd.com>

• Centre for European PolicyStudies (CEPS), CorporateGovernance in Europe –Recommendations (June 1995).<www.ecgn.org>

Aus t ra l ia

• Investment & Financial ServicesAssociation (IFSA) (formerlyAustralian Investment ManagersAssociation (AIMA), CorporateGovernance: A Guide for Invest-ment Managers and Corporations(3d ed., July 1999) <www.ifsa.com.au>*

• Working Group representingAustralian Institute of CompanyDirectors, Australian Society ofCertified Practising Accountants,Business Council of Australia,Law Council of Australia, TheInstitute of Chartered Account-ants in Australia & the SecuritiesInstitute of Australia, CorporatePractises and Conduct (BoschReport) (3d ed., 1995).<www.ecgn.org>

B e l g i u m

• Federation of Belgian Companies,Corporate Governance Principles(1998). <www.ecgn.org.>

• Brussels Stock Exchange, Reportof the Belgian Commission onCorporate Governance (CardonReport) (1998). <www.ecgn.org.>

B r a z i l

• Instituto Brasileiro de Gover-nança Corporativa (IBGC), for-merly Instituto Brasileiro deConselheiros Administraçao(IBCA), Code of Best Practice ofCorporate Governance (May1999). <www.ibgc.org.br>

• Top Management Summit, Itú,Brazil, Brazilian Code of BestPractices (Preliminary Proposal,April 1997; IBCA translation,September 1997). <ibgc@am-cham.com.br>

C a n a d a

• Pension Investment Associationof Canada (PIAC), CorporateGovernance Standards (Sep-tember 1993; revised March1997, updated June 1998).<www.piacweb.org>*

• Toronto Stock Exchange Com-mission on Corporate Disclosure,Responsible Corporate Disclosure:A Search for Balance (March1997). <marketdata@tse.com>

• Toronto Stock Exchange Com-mittee on Corporate Governancein Canada, “Where Were TheDirectors?”: Guidelines ForImproved Corporate Governance inCanada (Dey Report) (December1994). <ww.ecgn.org>

F r a n c e

• Conseil National du PatronatFrançais (CNPF) and Associ-ation Française des EntreprisesPrivées (AFEP), Report of theCommittee on Corporate Gover-nance (Vienot II) (July 1999).<www.ecgn.org>

• Association Française de laGestion Financière – Associationdes Sociétés et Fonds Françaisd’Investissement (AFG-ASFFI),Recommendations on CorporateGovernance (Hellebuyck Com-mission Recommendations) (June1998) (English translation byAFG-ASFFI). <www.afg.asffi.com>*

• Stock Exchange OperationsCommission, Regulation No. 98-

21

01 – 98-10 (March 1999). <publi-cations@cob.fr>

• CNPF & AFEP, The Boards ofDirectors of Listed Companies inFrance (Vienot I) (July 1995).<www.ecgn.org>

• CNPF & AFEP, Stock Options:Mode d’Emploi pour lesEnterprises (Lévy-Lang Report)(1995).

G e r m a n y

• Beriner Initiativkreis, GermanCode of Corporate Governance(GCCG) (6th June, 2000).<kr.wendland@matrix-gmbh.de>English translation imminent.

• Grundsatzkommission CorporateGovernance (GCP – GermanPanel on Corporate Gover-nance), Corporate GovernanceRules for German QuotedCompanies (January 2000).<www.corgov.de> English trans-lation by GCP.*

• Deutsche Schutzvereinigung fürWertpapierbesitz e.V. (DSW),DSW Guidelines (June 1998).<www.ecgn.org> English transla-tion by DSW.*

• Deutsche Bundestag, Gestez zurKontroll und Tranzparenz imUnternehmensbereich (Law onControl and Transparency in theCorporate Sector) (KonTraG)(March 1998).

G r e e c e

• Capital Market Commission’sCommittee on Corporate Gover-nance in Greece, Principles onCorporate Governance in Greece:Recommendations for its Com-petitive Transformation (October1999).<www.ecgn.org>

Hong Kong

• The Stock Exchange of Hong Kong,Code of Best Practice (December1989; revised June 1996, February1999). <www.worldbank.org>

• Hong Kong Society of Account-ants, New Corporate GovernanceGuide on Formation of AuditCommittees (January 1998).

<www.hksa.org.hk>

• The Stock Exchange of HongKong, Guide for Directors ofListed Companies (July 1995).

I n d i a

• Securities & Exchange Board ofIndia (SEBI) Committee on Cor-porate Governance (Kumar Man-galam Committee), Draft Reporton Corporate Governance (Sep-tember 1999). <www.sebi.gov.in>

• Confederation of IndianIndustry, Desirable CorporateGovernance – A Code (April1998). <ciigen.cii@axcess.net.in>

I r e l a n d

• Irish Association of InvestmentManagers (IAIM), CorporateGovernance, Share Option andOther Incentive SchemeGuidelines (March 1999).<iaim@indigo.ie>*

• IAIM, Corporate Governance andIncentivisation Guidelines (Octo-ber 1998 update of 1993-1994texts). <iaim.ie>*

• IAIM, Statement of Best Practiceon the Role and Responsibilities ofDirectors of Public Limited Com-panies (1992). <iaim@indigo.ie>

I t a l y

• Comitato per la CorporateGovernance delle SocietàQuotate (Committee for theCorporate Governance of ListedCompanies), Report & Code ofConduct (Preda Report)(October 1999). <www.bor-saitalia.it>

• Ministry of the Italian Treasury,Report of the Draghi Committee(Audizione Parlamentare, Prof.Mario Draghi, DirettoreGenerale del Tesoro) (December1997). <www.ecgn.org>

J a p a n

• Kosei Nenkin Kikin Rengokai(Pension Fund Corporate Gover-nance Research Committee),Action Guidelines for ExercisingVoting Rights (June 1998).

• Corporate Governance Forum ofJapan, Corporate GovernancePrinciples – A Japanese View(May 1998).

• Japan Federation of EconomicOrganisations (Keidanren),Urgent RecommendationsConcerning Corporate Governance(Provisional Draft, September 1997).<www.ecgn.org>

K e n y a

• The Private Sector Initiative forCorporate Governance, Principlesfor Corporate Governance inKenya and a Sample Code of BestPractice for CorporateGovernance (November 1999).

Kyrgyz Repub l i c

• Prime Minister’s Office of theKyrgyz Republic, Department ofEconomic Sectors Development,Model Charter of a ShareholdingSociety of Open Type (July 1997).<www.cdc.kg/eng/doc_2.html>

• Working Group on CorporateGovernance, Handbook on BestPractice – Corporate Governancein the Kyrgyz Republic (Draft,June 1997).<www.cdc.kg/eng/doc_3.html>

Malay s ia

• JPK Working Group 1 On Cor-porate Governance in Malaysia,Report on Corporate Governancein Malaysia (20th March, 2000).<www.sc.com.my/html/publica-tions/inhouse>

• High Level Finance Committeeon Corporate Governance, Reporton Corporate Governance (March1999). <www.sc.com.my/html/publications/fr_public.html>

M e x i c o

• El Consejo Coordinador Empre-sarial (CCE) y la ComisiónNacional Bancaria y de Valores(CNBV), Código de MejoresPrácticas (June 1999). Englishtranslation by CCE/CNVB, Codeof Corporate Governance (July1999) (and further revised byWeil, Gotshal & Manges LLP).

22

Corporate Governance Guide l ines And Codes Of Bes t Prac t i ce

<www.ecgn.org>

The Nether lands

• Committee on Corporate Gover-nance, Corporate Governance inthe Netherlands – Forty Recom-mendations (Peters Code) (June1997). <www.ecgn.org>

• Vereniging van Effectenbezitters(VEB), Ten Recommendations onCorporate Governance in theNetherlands (1997).

Por tuga l

• Commissäo do Mercado deValores Mobiliários (SecuritiesMarket Commission), Recom-mendations on Corporate Gov-ernance (November 1999).<www.cmvm.pt>

R o m a n i a

• International Centre for Entre-preneurial Studies (BucharestUniversity) & Strategic Allianceof Business Associations, Cor-porate Governance Code: Cor-porate Governance Initiative andEconomic Democracy in Romania(draft of 24th March, 2000).

S ingapore

• Stock Exchange of Singapore,Amendments to Listing Manualand Best Practices Guide (May1998). <www.ses.com>

South A f r i ca

• The Institute of Directors inSouthern Africa, The King Reporton Corporate Governance (KingReport) (November 1994).<www.ecgn.org>

South Korea

• Committee on Corporate Gover-nance (sponsored by the KoreaStock Exchange et al.), Code ofBest Practice for CorporateGovernance (September 1999).<www.ecgn.org>

S p a i n

• Comisión Especial para elEstudio de un Código Etico delos Consejos de Administración

de las Sociedades, El gobierno delas sociedades cotizadas(February 1998). <www.ecgn.org>English translation by InstitutoUniversitario EuroforumEscorial, The Governance ofSpanish Companies (February1 9 9 8 ) .<instuniv@euroforum.es>

• El Círculo de Empresarios, Unapropuesta de normas para unmejor funcionamiento de losConsejos de Administración(October 1996). <www.ecgn.org>

Sr i Lanka

• The Institute of CharteredAccountants of Sri Lanka, Codeof Best Practice: Report of theCommittee to Make Recommen-dations on Matters Relating toFinancial Aspects of CorporateGovernance (12th December,1997). <icaweb@lanka.net>

S w e d e n

• Swedish ShareholdersAssociation, CorporateGovernance Policy (January2000). <www.ecgn.org>

• The Swedish Academy of Direc-tors, Western Region, Introduc-tion to a Swedish Code of “GoodBoardroom Practice” (March 1994).<bandreaz@vast.styrakad.se>

Tha i land

• The Stock Exchange of Thailand(SET), The Roles, Duties andResponsibilities of the Directors ofListed Companies (December1997; revised October 1998).<webmaster@set.or.th>

U K

• Institute of Chartered Accoun-tants in England and Wales,Internal Control: Guidance forDirectors on the Combined Code(Turnbull Report) (September1999). <www.ecgn.org>

• Law Commission and The Scot-tish Law Commission, CompanyDirectors: Regulation Conflicts ofInterests and Formulating aStatement of Duties (September

1999). <www.lawcom.gov.uk/library/lc261>

• Pensions Investment ResearchConsultants (PIRC), PIRCShareholder Voting Guidelines(1993; revised 1996, 1999).<info@pirc.co.uk>*

• National Association of PensionFunds, (NAPF), CorporateGovernance Pocket Manual(1999). <www.napf.co.uk>*

• Hermes Investment Manage-ment Ltd., International Cor-porate Governance Principles(13th December, 1999).<www.hermes.co.uk>

• Hermes Investment Manage-ment Ltd., Statement on Cor-porate Governance and VotingPolicy and Code of Conduct (July1998). <www.hermes.co.uk>*

• London Stock Exchange Com-mittee on Corporate Gover-nance, The Combined Code:Principles of Good Governanceand Code of Best Practice (June1998). <www.ecgn.org>

• Committee on Corporate Gover-nance (sponsored by the LondonStock Exchange and others),Final Report (Hampel Report)(January 1998). <www.ecgn.org>

• Study Group on Directors’Remuneration, Final Report(Greenbury Report) (July 1995).<www.ecgn.org>

• Institute of Directors, Good Prac-tice for Directors – Standards forthe Board (1995).

• The City Group for SmallerCompanies, The CISCO Guide:The Financial Aspects of Cor-porate Governance: Guidance forSmaller Companies (1994).

• Institute of Chartered Secre-taries and Administrators, GoodBoardroom Practice: A Code forDirectors and Company Secre-taries (1993). <www. thecorpo-ratelibrary.com/docs/index.html>

• Report of the Committee on theFinancial Aspects of CorporateGovernance (Cadbury Report)

23

(December 1992). <www.ecgn.org>

• Institutional Shareholders’ Com-mittee, The Role and Duties ofDirectors: A Statement of BestPractice (April 1991).*

U S

• General Motors Board of Direc-tors, GM Board of DirectorsCorporate Governance Guidelineson Significant Corporate Gover-nance Issues (January 1994,revised August 1995, June 1997,March 1999, June 2000).<www.gm.com/company/investors/stockholders/guidelines.html>

• Council of Institutional Investors(CII), Core Policies, GeneralPrinciples, Positions &Explanatory Notes (31st March,1998; revised 29th March, 1999,27th March, 2000).<www.cii.org/corp_governance.htm>*

• Teachers Insurance and AnnuityAssociation – College Retire-ment Equities Fund (TIAA-CREF), TIAA-CREF PolicyStatement on Corporate Gover-nance (October 1997, revisedMarch 2000). <www.tiaa-cref.org/governance>*

• Blue Ribbon Commission onImproving the Effectiveness ofCorporate Audit Committees,

Report and Recommendations(1999) (sponsored by New YorkStock Exchange & NationalAssociation of Securities Dealers).<www.nyse.com> or <www.nasd.com>

• California Public Employees’Retirement System (CalPERS),Global Corporate Governance Prin-ciples and Country Principals for:UK; France; Germany; Japan (1999).<www.calpers-governance.org>*

• CalPERS, Domestic Proxy VotingGuidelines and International ProxyVoting Guidelines (February 1999).<www.calpers-governance.org>*

• CalPERS, Corporate GovernanceCore Principles and Guidelines:The United States (April 1998).<www.calpers-governance.org>*

• The Business Roundtable(BRT), Statement on CorporateGovernance (September 1997).<www.brtable.org/issue.cfm>

• American Federation of Laborand Congress of Industrial Orga-nizations (AFL-CIO), Investingin Our Future: AFL-CIO ProxyVoting Guidelines (1997). <eking@aflcio.org>*

• American Society of CorporateSecretaries, Suggested Guidelinesfor Public Disclosure and Dealingwith the Investment Community

(1997). <www.ascs.org/ascstitles.html>

• National Association of Cor-porate Directors (NACD), Reportof the NACD Blue Ribbon Com-mission on Director Profession-alism (November 1996).<www.nacdonline.org>

• NACD, Report of the NACD BlueRibbon Commission on Perform-ance Evaluation of Chief Exec-utive Officers, Board andDirectors (1994). <www.nacdon-line.org>

• American Bar Association, Sec-tion of Business Law, CorporateDirectors’ Guidebook (1978;revised 1994). <abanet.org/aba-pubs/business.html>

• American Law Institute (ALI),Principles of Corporate Gover-nance: Analysis & Recommend-ations (1992). <ali.org/index.htm>

• BRT, Statement on CorporateGovernance and American Com-petitiveness (1990).

* Drafted from the viewpoint of theinstitutional investor.

Detailed comparisons of these guide-lines and codes are available from theauthor (at 212-310-8038). They arealso available at <www.corporate-gov.com> in mid-October, 2000.

poration. In other countries (forexample, France, Japan and SouthAfrica) more emphasis is placed on abroader range of stakeholders.

Overall, most governance guide-lines and codes recognise that share-holder expectations need to be met toattract long-term, stable and low-costcapital. Likewise, there appears to begrowing sensitivity to the need toaddress stakeholder interests in orderto maximise shareholder value overthe long term. For instance, the GMGuidelines (see “Types Of Code”above) provide that “the board’sresponsibilities to shareholders aswell as customers, employees, suppli-ers and the communities in which thecorporation operates are all founded

on the successful perpetuation of thebusiness”. In other words, theGeneral Motors board views share-holder and stakeholder interests inthe success of the corporation asbeing compatible in the long run.

Board ResponsibilitiesMost governance guidelines and

codes of best practice assert that theboard (whether it has a single or two-tier system) assumes responsibilityfor the stewardship of the corpora-tion and that board responsibilitiesare separate and distinct from man-agement responsibilities (see boxes“Checklist: “Board Responsibilities”and “Important Board Tasks”).

However, the guidelines andcodes differ in the level of detail with

which they explain the board’s role.For example, Canada’s Dey Report,France’s Vienot Report, Malaysia’sReport on Corporate Governance,Mexico’s Code of CorporateGovernance, South Africa’s KingReport and the Korean StockExchange Code all specify the follow-ing as distinct board functions:

• Strategic planning.

• Risk identification and manage-ment.

• Selection, oversight and com-pensation for senior management.While some documents expresslyrefer to both the selection andreplacement of senior managers(usually the CEO), other docu-

continued from page 19

continued on page 25

24

Independent D i re c tor sIn the US, UK, Canada and

Australia, best practice recommen-dations and certain listing require-ments tend to suggest that boards ofpublicly traded corporations shouldinclude at least some independentdirectors. This viewpoint is the fur-thest developed in the US, wherebest practice documents call for a“substantial” majority of the boardto comprise independent directors(and listing requirements specifythat audit committees must consistof independent directors).

Elsewhere, best practice recom-mendations are somewhat less strin-gent and seek to have a balance ofexecutives and non-executives, withthe non-executives including sometruly independent directors.Although “non-management” or“non-executive” directors may bemore likely to be objective thanmembers of management, many codedocuments recognise that a non-management director may not betruly “independent” if he or she hassignificant financial or personal tiesto management. A general consen-sus is developing throughout a num-ber of countries that public companyboards should include at least somenon-executive members who lack sig-nificant family and business relation-ships with management.

Definitions of “independence”vary. For example, according to theBrazilian Institute of CorporateGovernance, a director is independ-ent if he or she:

• Has no link to the companybesides board membership andshare ownership and receives nocompensation from the companyother than director remunerationor shareholder dividends.

• Has never been an employee ofthe company (or of an affiliatesubsidiary).

• Provides no services or productsto the company (and is notemployed by a firm providingmajor services or products).

• Is not a close relative of any offi-cer, manager or controllingshareholder.

In comparison, the UK CadburyCode (see main text “Types Of Code”)simply refers to directors who (apartfrom their fees and shareholdings)are independent from managementand free from any business or otherrelationship that could materiallyinterfere with the exercise of inde-pendent judgment. Many of the bestpractice documents, such as theCadbury Report and the US NationalAssociation of Corporate DirectorsReport on Director Professionalism,view the ultimate determination ofjust what constitutes “independence”to be an issue for the board itself todetermine. However, the New YorkStock Exchange and the NationalAssociation of Securities Dealers inthe US now provide guidance in theirlisting rules as to what does not con-stitute independence for the purposesof audit committee membership.

The following statements illus-trate how governance codes andguidelines across the globe deal withthe issue of independence:

• The board should be able toexercise objective judgment oncorporate affairs independent, inparticular, from management....Boards should consider assign-ing a sufficient number of non-executive board members capa-ble of exercising independentjudgment to tasks where there isa potential for conflict of interest(OECD Principle V (CommentaryE & E.1)).

• [I]ndependent directors . . . shouldaccount for at least one-third ofthe . . . Board of Directors. . . .(Vienot II (France) at 15).

• The board of directors of everycorporation should be consti-tuted with a majority of individu-als who qualify as unrelateddirectors (Dey Report (Canada)Guideline 2).

• The board shall include outsidedirectors capable of performing

their duties independently frommanagement, controlling share-holders and the corporation(Korean Stock Exchange Code ofBest Practice at II.2.2).

• The majority of the board mem-bers should be independent (Bra-zilian Institute of Corporate Gov-ernance Code of Best Practice at 3).

• A number of non-executivedirectors should be independentof the executive managementand the dominant shareholdersand free from any business orother relationship with the com-pany which could interfere withtheir independent judgment,apart from their remunerationand shareholdings in the com-pany. The number of independ-ent directors should be sufficientfor their views to carry significantweight in the board’s decisions(Cardon Report (Belgium)Recommendation 2.2).

• No board should have less thantwo non-executive directors ofsufficient calibre that their viewswill carry significant weight inboard decisions (The King Report(South Africa) 2.2).

• [I]t is recommended that Indepen-dent Directors represent at least20% of the total number of Boardmembers (Mexico Code of CorporateGovernance, Principle at 6).

• Every listed company should haveindependent directors, i.e., direc-tors that are not officers of thecompany; who are neither relatedto its officers nor represent con-centrated or family holdings of itsshares; who, in the view of thecompany’s board of directors,represent the interests of publicshareholders, and are free of anyrelationship that would interferewith the exercise of independentjudgment (Malaysian Report onCorporate Governance, ExplanatoryNote 4.23).

• Independent [directors are] non-exemptive directors who have nodirect interests in the company(Corporate Governance ForumPrinciples (Japan), Principle 5A).

25

ments are silent as to replacement.This should not be read to meanthat the board lacks the power toreplace the CEO. Frequently thatpower is expressed in law or isimplicit.

• Succession planning.

• Communication with share-holders.

• Integrity of financial controls.

• General legal compliance.

The Kyrgyz Republic Chartersets out a detailed list of mattersrequiring board approval. Other gov-ernance guidelines and codes of bestpractice are far less specific. Forexample, the Hong Kong StockExchange Code simply refers todirectors’ obligations to ensure com-pliance with listing rules as well aswith the “declaration and undertak-ing” that directors are required toexecute and lodge with the stockexchange. The different approachesamong codes on this point reflectvariations in the degree to whichcompany law or listing standardsspecify board responsibilities, asmuch as any significant substantivedifferences.

Board CompositionMost governance guidelines and

codes of best practice address topicsrelated to board composition (see box“Improving Board Performance”)including:

• Directors’ qualifications andmembership criteria. The quality,

experience and independence of aboard’s membership directly affectboard performance. Board mem-bership criteria are described byvarious guidelines and codes withdifferent levels of detail, but tendto highlight issues such as experi-ence, personal characteristic(including independence), corecompetencies and availability.

• The director nominationprocess. Guidelines and codestend to emphasise a formal andtransparent process for appointingnew directors. The use of nominat-ing committees is a favoured in theUS and the UK as a means ofreducing the CEO’s influence inchoosing the board that is chargedwith monitoring his or her per-formance. At the same time, how-

• Persons who do not qualify as“outside directors” are: control-ling shareholders, a spouse orfamily member of a director whois not an outsider; current orrecent officers and employees ofthe corporation, its affiliates, orof corporations that have“important business relations”with the corporation; and per-sons who serve as outside direc-

tors on three or more listed com-panies (Article 48-5 Korean StockExchange Listing Regulation).

• Independence is more likely tobe assured when the director:

- is not a substantial share-holder of the company;

- has not been employed in anyexecutive capacity by the com-pany within the last few years;

- is not retained as a profes-sional adviser by the company(either personally or throughtheir firm);

- is not a significant supplier toor customer of the company;

- has no significant contractualrelationship with the com-pany other than as a director(Bosch Report (Australian),Guideline 1.1).

Improv ing Board Per formanceInvestors agree on how to improve board performance*

* The list of practices was predefined. Investors were asked to rank their impact on board performance.

Source: McKinsey & Company, Investor Opinion Survey – June 2000

-1 1 2 3 4 5

Negativeimpact

Negligibleimpact

4.5

4.5

4.3

4.3

4.3

4.2

4.1

Majority of independent outside directors

Latin America Europe/US

Formal CEO evaluation by the board

Separate CEO from chairman position

Formal annual evaluation of board

Formal annual evaluation of directors

Higher proportion of outside director compensation paid in stock/options

Have a 'lead' director

Greater use of board committees

Outside directors' meeting with large investors

n/a

n/a

3.8

3.8

2.9

3.7

3.6

3.3

3.3

3.2

3.2

Moderateimpact

Highimpact

continued from page 23

ever, it is generally agreed that theboard as a whole has the ultimateresponsibility of nominating direc-tors (this is advocated by theMalaysia Corporate GovernanceReport (see box “NominatingDirectors”).

• Having non-executive or inde-pendent directors. Most gover-nance guidelines and codes of bestpractice agree that some degree ofdirector independence (or the abil-ity to exercise objective judgmentof management’s performance) isimportant to a board’s ability tooversee management performance(see box “Independent Directors”).

• Independent board leadership.Independent board leadership isthought by some to encourage thenon-executive directors’ ability towork together to provide true over-sight of management (see box“Independent Board Leadership”).The National Association ofCorporate Directors in the US hasstated, for instance, that the pro-pose of creating an independentleader is not to add another layerof power, but to ensure organisa-tion of, and accountability for, thethoughtful execution of certaincritical independent functions.Those functions include evaluatingthe CEO, chairing sessions of thenon-executive directors, setting theboard agenda and leading theboard in responding to crisis.

• The level of information pro-vided to directors. The effective-ness of directors, especially non-executive directors, depends uponthe quality of information that ismade available to them.

Board CommitteesBoard committees provide a use-

ful structure for performing detailedwork. It is fairly well accepted thatmany functions should be delegated,whether for study and recommenda-tion to the full board, or delegated

outright to board committees. Forexample, an audit committed, a remu-neration committee and a nominatingcommittee are either mandated orrecommended in Australia, Belgium,France, Japan, The Netherlands,Sweden, the UK and the US.

While composition of these com-mittees varies, it is generally recog-nised that non-executive directorshave a special role when manage-ment has a potential interest in theissue under discussion.

Typically:

• An audit committee supervises acompany’s internal audit proceduresand interacts with the external audi-tor to ensure full compliance withfinancial disclosure and other legal,regulatory and listing requirements(see box “The Audit Committee”).

• An executive remuneration com-mittee recommends the appropri-ate compensation package for theexecutive directors and seniormanagers of the company.

• A nomination committee conductsa systematic search for appropriatelyqualified non-executive directors (seebox “Nominating Directors”).

DisclosureDisclosure is an issue that is

highly regulated under the securitieslaws of many countries. However, inmany instances, companies may vol-untarily disclose beyond what is man-dated by law.

Most countries generally agreeon the need for directors to disclose

to shareholders (whether in an annualreport or in another document) theirown interests, as well as the financialperformance of the company.Generally, this is required by law, reg-ulation, or listing requirements, butsome guidelines and best practicedocuments also address the issue.

Similarly, even though directorsare usually subject to legal require-ments concerning the accuracy of dis-closed information, a number ofcodes from both developed anddeveloping nations describe theboard’s responsibility to disclose,before the annual general meeting ofshareholders accurate informationabout:

• The financial performance ofthe company.

• Agenda items.

Many codes also itemise theissues reserved for shareholder deci-sion at the annual meeting of share-holders.

Generally, guidelines and codes ofbest practice place heavy emphasis onthe financial reporting obligations ofthe board, as well as board oversight ofthe audit function. Again, this isbecause these are key to investor con-fidence and the integrity of markets.While some guidelines and codes spec-ify the key points that the directorsmust comment on, others do not gointo this level of detail. However,because securities laws often heavilyregulate disclosure, the distinction isnot necessarily substantive.

26

Holly J. Gregory is a partner in the New York office of Weil,Gotshal & Manges LLP, where she specialises in corporategovernance as a field of legal practice. Ms. Gregory servedas a member of the Secretariat for the OECD BusinessSector Advisory Group on Corporate Governance, and is amember of the nominating committee of the InternationalCorporate Governance Network