Views on improving the integrity of global capital markets
03 October 2012

Corporate Governance Roundup: ACGA in Asia, Index in Brazil, Pay Legislation in France, Board Diversity in Europe

From corporate governance rankings in Asia and board diversity in Europe to peer-group compensation benchmarking in the U.S., it’s time to span the corporate governance globe to review important developments from the month of September.


Anyone serious about knowing all there is to know about corporate governance — I just assume that is everyone reading this blog – needs to know about the work done by the Asian Corporate Governance Association (ACGA). The ACGA in a non-profit organization focused on corporate governance in Asia, and it continues to be an excellent resource for research, advocacy, and education about the state of corporate governance in Asia.

I highly recommend taking a look at “CG Watch 2012,” ACGA’s sixth joint survey of corporate governance in Asia undertaken in collaboration with CLSA Asia-Pacific Markets. In summary, Singapore tops the survey again in corporate governance rankings, with Hong Kong close behind. Rising markets include Thailand, Malaysia, India, Korea, and the Philippines. Falling markets include Japan, Taiwan, China, and Indonesia.


For about a decade now, the Novo Mercado in Brazil has stood as a listing segment of Bovespa stock market for companies that commit themselves to a higher standard of corporate governance. In the past month, the Bovespa created the IGC-NM, a corporate governance stock index, to track firms listed on the Novo Mercado. Can a Novo Mercado ETF be far behind? Let’s hope so — an easy way to invest in companies with higher governance standards may just spur Novo Mercado type listing segments in other markets.


In an update to the now global “say-on-pay” wars, France’s new government is considering potentially sweeping reforms for all public companies — not just state controlled companies that were affected by previous rules. The recent consultation paper released by the Finance Ministry asked market participants (in French) to comment on questions focused on the approval and structure of executive pay. The consultation paper asks for comments on whether shareholders should have a binding or advisory vote on pay. The consultation asks whether some types of variable pay, such as stock options and restricted shares, should be banned. The introduction of deferral mechanisms and claw-back provisions is considered as well as a requirement for French issuers to allow employee representatives to serve on remuneration committees.


Indifference toward corporate governance issues seems to be the norm in India, according to a recent study of the voting habits of Indian mutual funds. The study found that many units of global firms, such as ING and JP Morgan, voted against less than 1% of 23,482 AGM resolutions in 2011–12 and abstained at a rate of 51%, according to a study by Indian proxy advisor InGovern.


Unfortunately, the Olympus corporate governance scandal did not change much in the Japanese governance landscape. The modest reform that would have required just one independent board member was scrapped, and companies will only be required to explain why they do not have an independent director. The number of Japanese issuers with an outside director has been rising, but 47% are still all insiders, according to ISS. There was a small victory for those hoping for justice in the Olympus scandal, as the company’s former chair Tsuyoshi Kikukawa and two other ex-executives pled guilty to covering up losses of US$1.7 billion.


The issue of board diversity, and more specifically women on boards, has gripped the European Commission and regulators in many European markets over the past year. A recent proposal by the European Commission would require 40% of non-executive directors to be women under a proposal from justice commissioner Vivian Redings. The draft rule lays out fines and bars on contracts for non-compliance. Under the draft rule, state-owned firms would face a 2018 deadline, and issuers would have until 2020. Only a few weeks later an effort led by the U.K. sent a letter to Redings voicing opposition to the quota. The opposing countries were careful to note that they were not against actions to increase women on boards but thought that the issue should be left to national governments and not legislated at the European level. Discussions and negotiations around a final law are ongoing, with a potential compromise being discussed that would allow individual markets to choose quotas if they wished without requiring such a standard at the EU level.


Peer group cherry picking has often been a complaint of investors who claim that companies and their compensation consultants manipulate a company’s peer group in order to ensure high pay for executives. A new study may give some credence to this argument. The study, from the University of Delaware, notes that peer-group benchmarking is a flawed way to set executive pay because there is no natural “market” for CEOs to jump from one company to the next, as expertise in one firm does not easily translate at another — as each company is a highly complex entity best understood and managed by insiders. CEOs, therefore, typically cannot get jobs at firms in different industries very easily. The study, done in conjunction with the Investor Responsibility Research Center (IRRC) Institute, argues that boards should instead use internal metrics such as revenue growth and cash flow. Expect peer group arguments to heat up next proxy season in the U.S.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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