Corporate Governance Roundup: Asia Tackles Enforcement, Australia’s “Two-Strikes” Rule Gains Force, Russia Forms “New Market”

From developing enforcement standards in Asia and companies receiving their “second strike” in Australia to the launch of Global Index Group corporate governance indices in the U.S., it’s time to span the corporate governance globe to review important developments from the month of November.

Asia

At a meeting co-hosted by the Financial Services Agency and the Tokyo Stock Exchange in partnership with the Japanese government in October, the Asian Roundtable endorsed Reform Priorities in Asia: Taking Corporate Governance to a Higher Level, a paper from its 2011 meeting. At the meeting, countries shared their practical experiences concerning concentrated ownership structure of companies in the region. Discussions focused on areas of enforcement, abusive related-party transactions, minority shareholder rights, and performance of boards of directors.

The meeting also launched a task force on enforcement. The task force, made up of regulators, exchanges, and policy makers, is charged with producing a best-practice guide based on a survey of 14 Asian markets. Its purview includes recommendations on enforcement standards for the region. Keep an eye out for task force recommendations in the coming year.

Australia

Well it was bound to happen. As proxy season began in Australia, a handful of companies have received their “second strike” under Australia’s executive pay law.

In the wake of these developments, some issuers are claiming that the “two-strikes” vote does not always relate to compensation. Thus far, four companies — MZI Resources, Ask Funding , Penrice Soda, and Globe International — have received a second strike.

First, let’s review Australia’s “two-strikes” rule. Under the rule, if 25% of shareholders vote against a company’s remuneration report at two consecutive annual general meetings, the entire board may have to stand for re-election within three months. Key management personnel, and parties related to them, are not permitted to vote in the original vote on executive pay but may vote concerning board elections. Therefore, it is possible that shareowners may “spill” a board with a second-strike vote only to have that board reappointed by insiders.

In the first year (2011) under the two-strikes rule, approximately 9% of ASX 200 companies received their first strike, meaning that each of these companies will be especially careful to avoid a second strike.

Two of the companies that received a second strike had most of their shareholders vote for a board spill, forcing them to hold an extraordinary general meeting (EGM) within 90 days. At Globe International, management owns 68% of the company’s stock, so while executives could not participate in the vote on their own remuneration due to the conflict of interest, they did vote to keep themselves on the board, thus rendering the two-strikes vote sound and fury signifying nothing but investor discontent.

Australian proxy season isn’t over, so there may be more news on this front before the end of the year.

Russia

Recently, the Moscow Stock Exchange mentioned in a larger presentation (see pages 10–11) that it is planning to create a segment of the stock market for companies with higher corporate governance standards. The market would be called Novy Rynok, or “new market” in Russian. This may sound familiar to those who follow the corporate governance world, as the Brazilian “new market” (or Novo Mercado) has been going strong for about a decade and, to great reviews, serving as a safe haven for investors who understand that stronger corporate governance can mean healthier and less volatile returns.

The reasoning behind such a “new market” is simple. Investors will seek a safe haven of well governed companies when investing in markets where investors are offered a lower standard of shareowner rights or legal protections than they enjoy in their own markets. The Novo Mercado in Brazil has been a great success because both international and Brazilian investors can gain comfort from the higher corporate governance standards offered them from companies in Brazil’s new market.

We are still awaiting more information on the Novy Rynok. Expect a more detailed blog post on this issue in the coming month(s) as more information comes in. Our friends in Russia have informed us that they would like to hear from our members, so stay tuned for a way to make your voice heard on Russian corporate governance. There will also likely be a public comment period on the topic sometime in the first half of 2013.

United Kingdom

Feeling nostalgic about corporate governance days gone by? Me neither.

But you can check out a recent collection of essays on the 20th anniversary of the U.K. Cadbury Report, which can legitimately be called the grandfather of many of the global corporate governance codes you see today.

The paper offers insights from luminaries in the corporate governance world, and it offers some perspective on just how far the corporate governance world has come in the past 20 years.

United States

In the past month, the Global Index Group (GIG) launched indices focused on corporate governance. The indices are not investible at this point, so we will have to keep an eye on this in the future to see whether such indices lead to the development of governance-specific funds and ETFs. (FTSE and ISS partnered years ago to produce their own governance index.)

GIG put together both “low governance” and “high governance” indices based on corporate governance ratings from Governancemetrics International. Each index contains companies perceived to have either “high governance risk” (the low governance index) or “low governance risk” (high governance index). Theoretically, an investor who believes that governance drives returns could buy the high governance index and short the low governance index (or vice versa if they believe low governance companies will outperform).

At this time the indices only track U.S. companies. But with data going back more than five years and many of the high governance indices outperforming (check out the online PDFs to get more data on the indices), and the low governance indices underperforming, look for more investible ways to play governance in the future.

Grain of salt time. Yes, these indices have recently been created and look back over five years but have not been, and are not yet, investible. But while we lack a longer timeframe for comparison, I also know that people have been saying for years that investing in well governed companies, and not investing in poorly governed companies, is a winning strategy.

So I’ll stay tuned and will be very interested to see whether and when such indices lead to investible products.

Photo credit: ©iStockphoto.com/YinYang