Views on improving the integrity of global capital markets
02 December 2014

Corp Gov Roundup: Risk, Compliance, Shareholder Value “Alignment Gap,” Proxy Access

It’s time to span the corporate governance globe to review important developments in November, among them alleged corruption, rules violations, updated Organisation for Economic Co-operation and Development (OECD) governance code, and proxy access.


The Brazilian Securities and Exchange Commission (CVM) recently proposed rules (in Portuguese) that would create a standardized electronic proxy-voting system to make it easier for foreign investors to vote their shares and participate in annual general meetings. Previously, voting at the annual meeting had to be done in person, either by an investor or his or her proxy.

The proposed rules are open to consultation until 19 December.

On 14 November, Brazilian police arrested 18 people in raids related to longstanding corruption allegations at Brazilian oil company Petrobras. Some of those arrested are current and former employees of the company. The allegations state that the company paid bribes to politicians. In response, the company created a new role, director for governance risk and compliance, whose job it will be to mitigate risks including corruption. According to the company, any matters related to governance, risk management, and compliance will now have to be approved by the new director before being submitted to the board.

More governance issues are awaiting the company because CVM is due to rule soon on investor complaints that the government broke market rules by voting in directors with government ties to the company’s board slots reserved by law for minority shareowners. These slots are reserved for minority shareowners in order to protect shareowner rights, as the Brazilian government owns a controlling stake in Petrobras of more than 60%.


Corporate governance practices in China were examined in a study published last month by Institutional Shareholder Services. The study explores investors’ participation in the corporate decision-making process in China by looking at investors’ voting practices at shareholder meetings and level of engagement with Chinese issuers. The study compares them with more mature markets: Hong Kong, France, the UK, and the US.

The paper also examines the results of a survey of global asset managers and asset owners to gain further insight into how global investors view corporate governance issues in China and engage with Chinese companies.

The key takeaways of the survey are summarized in the report:

  • Transparency and abusive related party transactions were cited as the top corporate governance concerns by overseas institutional investors.
  • The level of engagement between Chinese companies and foreign investors is low compared to US companies, and engagement is usually initiated by investors.
  • Philosophical, cultural, and language differences are significant barriers to constructive dialogue between Chinese issuers and investors.
  • Voter turnout at mainland listed Chinese companies is approximately 55 percent, the lowest among the markets studied.
  • Investors of mainland listed companies are more concerned with related party transactions and share issuances without preemptive rights than other common voting agendas and are more vocal about these issues through their votes.
  • Nearly 50 percent of all proposals at mainland listed companies are approved unanimously while such unanimous consent is much less frequent in other markets studied.
  • While shareholder proposals are not uncommon in China, nearly all are presented by controlling shareholders, and typically receive more than 95 percent support

European Union

In a speech in early November at a Eumedion corporate governance forum, Jeroen Hooijer, European Commission (EC) corporate governance head, stated that the EC wishes to speed up the introduction of a shareholder rights directive. The EC has tried to encourage more engagement through more active shareholding, and wants to give shareowners more power over compensation policy and related-party transactions.

To learn more about the shareholder rights directive and CFA Institute perspectives on the EC initiative, read our related policy brief.

Hong Kong

The decision by Alibaba to list in New York instead of Hong Kong due to the willingness of the New York Stock Exchange to allow the company to go public with dual-class shares has caused some consternation among governance professionals who watch Hong Kong, and the Hong Kong Stock Exchange (HKE) itself. In August of this year, the HKE issued a concept paper on weighted voting rights. The HKE asked for comments by the end of November.

The Asian Corporate Governance Association is one among many asking the HKE to keep the one-share, one-vote standard, stating that:

  • International investors do not favour the separation of economic interests and ownership rights.
  • International investors oppose weighted voting rights in Hong Kong.
  • Many business stakeholders also oppose weighted voting rights.
  • Hong Kong does not need flexible listing rules.

Longtime corporate governance advocate David Webb has started a petition urging the HKE to keep the one-share, one-vote standard it currently employs.

CFA Institute endorses a one-share, one-vote standard.


OECD is updating its corporate governance principles, and is seeking comments.  The principles were first published in 1999 and have since served as a template for corporate governance codes worldwide.

The principles address:

  • Ensuring the basis for an effective corporate governance framework
  • The rights and equitable treatment of shareholders and key ownership functions
  • Institutional investors, stock markets, and other intermediaries
  • The role of stakeholders in corporate governance
  • Disclosure and transparency
  • The responsibilities of the board

Comments are requested by 4 January 2015.


The Japanese Financial Services Agency has published the first draft of Japan’s corporate governance code put forth by its Council of Experts (in Japanese, English version not available yet). It calls for issuers to respect shareowner rights, especially those of foreign and minority owners, and to increase engagement outside the annual general meeting.

United Kingdom

A paper released by the Institute of Chartered Accountants of England and Wales in November calls for the creation of a “framework code” that would set governance principles for all actors in the corporate and financial ecosystem, including issuers, investors, bondholders, media, governments, regulators, and others. The paper follows in the wake of the proliferation of engagement codes in many areas over the past few years, though most such codes have traditionally focused on the behavior of issuers and, more recently, investor engagement.

United States

CFA Institute recently released a research report arguing that it is time for the SEC to take a look at proxy access again. Some investors aren’t waiting for the SEC to re-open the issue, however. The New York City’s comptroller, Scott Stringer, announced in November a campaign to seek proxy access by filing proposals at 75 issuers asking for the right to nominate directors on the corporate proxy for shareowners that hold a 3% stake for three years.

Engagement between shareowners and issuers has increased in recent years, benefiting both sides. There are, however, divergent views between shareowners and issuers on the value of such meetings. A recent survey of US directors revealed that 62% of directors say “it is not appropriate to engage directly with investors on any subject,” according to a PricewaterhouseCoopers (PwC) survey of 863 US directors released in October.

According to a new report by the Investor Responsibility Research Center, there is a significant misalignment between corporate economic performance, shareholder return, and executive compensation.

The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design, written by Organizational Capital Partners and commissioned by the Investor Responsibility Research Center Institute (IRRCi), finds that:

  • Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven.
  • Some 75% of companies have no balance sheet or capital efficiency metrics in their disclosed performance measurement and long-term incentive plan design.
  • Only 17% of companies specifically disclose return on invested capital or economic profit as a long-term performance measure for long-term executive compensation.
  • Some 47% of S&P 1500 companies over the last five years (2008–2012) did not generate a positive cumulative economic profit or return on invested capital greater than their cost of capital.
  • More than 85% of the S&P 1500 have no disclosed line of sight process metrics aligned to future value such as innovation and growth drivers.
  • Nearly 25% of companies have no long-term performance-based awards at all, relying instead on stock options and time-based restricted stock in their long-term compensation plans.

Photo credit: iStockphoto/YinYang

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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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