Views on improving the integrity of global capital markets
27 February 2013

Corporate Governance Roundup: Governance in Emerging Markets, Hong Kong Suspension, U.S. Performance Measures

From updates to the German Corporate Governance Code and the suspension of a corporate governance database in Hong Kong to board independence at Italian issuers and guidance on executive pay in the U.K., it’s time to span the corporate governance globe to review important developments from the month of February.


A new academic paper came out in February that puts numbers behind the notion that high-quality corporate governance standards can differentiate companies — especially in emerging markets.  Firms, Countries, and Quality of Corporate Governance in Developing Countries seeks to answer the question of whether weak and/or incomplete public institutions in emerging economies dictate the governance quality of local firms, and if individual firms can stand out and separate themselves from their competitors based on their own governance policies.

Of course I encourage you to edify yourself by reading the entire paper, but here is the short answer according to the study’s authors:

Across two main data sets, in emerging economies, we find that firm characteristics explain 37.3-50.3% of the corporate governance ratings’ variance, and country characteristics explain roughly 11-28.5% of the variance. In developed economies, a different pattern is found. Observable and unobservable firm characteristics explain only 15.3-19.1% of governance ratings variance in developed economies while country characteristics explain 45.9-57.3%. Therefore, in emerging economies, firm variables explain roughly the same amount and often more of the governance variance than do country variables. In developed economies, in contrast, country variables explain significantly more of the corporate governance ratings than do firm variables.

This confirms a supposition behind efforts to offer a higher standard of corporate governance that has been going strong in Brazil for over a decade and is now in its nascent stages in Russia. Savvy investors have known for years that investing in only the well-governed companies in emerging markets could be a key to investing outperformance.  Will this drive better governance across emerging markets over time? Only time will tell.


The German Corporate Governance Code Commission is taking comments from interested parties on a slight revamp of the German Corporate Governance Code. Highlights include a call for issuers to cap total executive remuneration and for firms to report pay using a standard table “to improve comparability over time and with other companies, both for the supervisory board and for the general public.” Comments are requested by 15 March.

Hong Kong

It could be a sad time for investors seeking certain corporate governance information about Hong Kong companies. Corporate governance activist David Webb started his corporate governance-focused “Webb-site” in 1998 as a platform to promote better corporate governance. The site is free to anyone interested and is a terrific source of corporate governance happenings in Hong Kong. Unfortunately, Webb has suspended publication of a database of information about corporate directors of Hong Kong and Chinese companies after Hong Kong’s Privacy Commissioner for Personal Data (PCPD) opened an inquiry into the database.

The PCPD appears to have a problem with the publishing of Honk Kong ID numbers for a number of individuals in the database. Webb said the inquiry is a threat to freedom of information because his database is simply taken from public sources, and any information published on his Webb-site is public information that by definition has already been published in another location.

Here’s hoping that this gets remedied soon, as the director directory provided by Webb is a helpful governance resource for those looking to untangle the sometimes labyrinthine relations between directors and the boards on which they serve.


A recent report by Italian governance firm Frontis Governance  investigates the factors that can impede board independence at Italian issuers. The main issues that Fortis sees as impediments to board independence: excessive tenure within the board, excessive remuneration, excessive memberships at related companies. Fortis finds it troubling that 12 companies do not disclose any information about their auditors’ biographies on their websites, while a large majority of others disclose only partial information about their auditor.


When the largest sovereign wealth fund in the world talks, issuers and investors listen.

Norway’s $715 billion sovereign wealth fund (NBIM) recently published a friendly “Corporate Governance Discussion Note” detailing the corporate governance practices it seeks from the companies in which it invests.

NBIM focuses on board accountability and equal treatment of shareholders, focusing on academic literature that supports NBIM’s approach to corporate governance. This literature review identifies correlation of certain governance factors with measures of company performance.

NBIM questions the basis for blind faith in the efficacy of corporate governance codes given the lack of academic evidence that such codes drive higher standards and higher returns, stating instead that such principles should be seen as best practices and that considered deviation must be expected and welcomed.

The note also tackles the issue of how investors can be effective owners within today’s investment culture.

NBIM states that the goal of this effort is to set out priorities for corporate governance as a means to foster dialogue and mutual understanding, and not as a strict code of best practice.

This paper should be required reading for all those serious about corporate governance, as NBIM has been a leader in the corporate governance world for years and will continue to be so.


The National Association on Pension Funds (NAPF) and Hermes Equity Ownership Services, along with BT Pension Scheme, RPMI Railpen, and USS Investment Management, has published a discussion document setting out guidance on executive remuneration.

The report sets out four principles to encourage companies to change their executive compensation reward structures as a binding vote on remuneration policy looms next year.

The objective of the report is to discuss the four principles with remuneration committee chairs and shareowner representatives over the coming months to refine this document so that it offers an authoritative guide to companies’ pay practices and how shareholders should assess them.

The four principles are:

1. Management should make a material long-term investment in shares of the businesses they manage.

2. Pay should be aligned to long-term success and the desired corporate culture throughout the organization.

3. Pay schemes should be simple, understandable for both investors and executives, and ensure that rewards reflect long-term return to shareholders.

4. Remuneration committees should fully explain and justify how their decisions operate to deliver long-term business success.


A recent study, Performance Metrics and Their Link to Value, provided by our friends at the Florida State Board of Administration (SBA) set out to answer this question: “How effective are the individual performance objectives embedded within virtually all compensation structures, and how closely are they tied to the company’s stock price?”

The study’s researchers found that about half of all U.S. industries could use some improvement in their performance measures. According to the report, some companies are not using the metrics that are most strongly correlated to value or, when the overall correlations of financial metrics to shareowner value are poor, they are not sufficiently using TSR (total shareholder return) as a measure of performance.

I recommend you read the report, but here are some top takeaways highlighted by the SBA:

1. Companies should undertake their own analysis to determine which measures of performance have the most influence on shareowner value.

    Various measurement definitions (for example, approaches to depreciation, capital expenditures, asset definitions, and other items) could make a significant difference to shareowner value and should be given careful consideration.

2. Companies should identify two or three key metrics that appropriately balance growth and returns and demonstrate a proven link to value.

    If overall correlations to value are poor for existing long-term incentive plans, a board should change the metrics.

3. Investors are likely to increase engagement activities around executive compensation in general, and specifically on performance metrics.

    In communicating with investors, companies should present compelling evidence as to how various measures of performance will lead to enhanced shareowner value.

This week, the Conference Board, NASDAQ OMX, and NYSE Euronext also released the 2013 Director Compensation and Board Practices report.  Based on a survey of public companies registered with the SEC, the report is designed as a benchmarking tool with more than 150 corporate governance data points analyzed by company size (measurable by revenue and asset value) and 20 industrial sectors.

Key takeaways, according to a news release issue by the Conference Board:

  • Directors are best compensated in the energy industry, but company size can make a huge difference. Computer services companies are the most generous with full-value share awards, but equity-based compensation is widely used across industries and irrespective of company size.
  • Stock options are not as favored as they once were, except by the smallest companies. This increases skepticism on the effectiveness of stock options and stock appreciation rights as long-term incentives have led to their decline, especially in the last few years.
  • Additional cash retainers for board chairmen are seldom offered by larger companies, which are more likely to reward lead directors.
  • A corporate program financing the matching of personal charitable contributions is the most common among the director perquisites reported by companies.
  • Directors of large company boards take corporate aircrafts to board meetings, unless it is a financial institution.

Photo credit: ©

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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