Corporate-Governance Concerns Are Spreading, and Companies
Should Take Heed
By Allan Murray
The Wall Street Journal
Wednesday, April 12, 2006
For many executives, "corporate governance" is a nuisance --
or worse. It diminishes their power while increasing that
of board members, shareholders and various outsiders who
want a say in company affairs. Their quiet hope:
Governance is a fad that will soon pass.
They shouldn't hold their breath.
A study of more than 300 institutional investors around the
globe, to be released next week, finds corporate-governance
concerns are still very much on the rise. A surprising 63%
of those surveyed believe corporate governance will be even
more important to their firms over the next three years than
it has been over the past three years.
The study was conducted by Institutional Shareholder
Services, an advisory service for big investors, and it
included pension funds, mutual funds, hedge funds and other
large money managers in North America, Europe and Asia.
The upshot: Institutional-investor activism is not just
alive and well, but growing and spreading. For companies
based in the U.S., Canada and continental Europe, that's
likely to mean a continued pounding on the hot-button issue
of executive pay. For those in China and Britain, it will
mean more focus on the independence and structure of
boards. And for those in Japan, it will mean pressure to
stop antitakeover measures.
Jeffrey Skilling's testimony in Houston this week is an
unpleasant reminder of where this all started. Though the
former Enron president declared he is "absolutely innocent,"
the chiefs of every other company in the world are living
with the profound changes that Skilling & Co. wrought. It
was the scandals at Enron and elsewhere that forced
regulators, investors and many of the rest of us to conclude
that perhaps giving chief executives unfettered power over
giant corporations wasn't such a great idea.
If the scandals provided the spark, institutional investors
are providing the tinder that keeps these fires burning.
The ISS study shows the flame is spreading from the large
public pension funds -- like California Public Employees'
Retirement System, or Calpers -- which were the first to
adopt activist tactics, to hedge funds and even once-dormant
mutual funds. While the mutual funds are still reluctant to
be considered "activists," 79% of those responding said
corporate governance has become more important to their
firms over the past three years, and 72% said it will become
more important still in the next three years.
"We take this stuff extremely seriously," a portfolio
manager at one U.S. mutual fund told ISS. "You don't want
to be in The Wall Street Journal saying you voted for a
management team that turned out to be a bunch of clowns."
Is all this attention to corporate governance good for
business? Many corporate executives I talk with worry about
the creation of a culture of compliance in their companies.
Too much executive time and attention, they fear, is spent
on defensive matters like governance, accounting and
complying with regulations, leaving too little time and
attention on the company's growth.
But big investors clearly believe attention to governance
increases the value of their investments. Fifty-nine
percent said monitoring corporate governance of companies
they invest in enhances investor returns.
One clear message of the ISS study is that corporate
governance means different things to different people.
Chinese investors give the strongest endorsement to
corporate governance, with 90% of them saying it was either
"important" or "very important" to their firms. But those
investors are concerned with achieving basic levels of board
accountability and transparency in Chinese companies already
common elsewhere. Japanese investors put primary emphasis
on eliminating poison pills and other measures designed to
prevent takeovers, which can boost shareholder returns.
As a result, devising a simple formula for better governance
-- and measuring the returns from better governance -- isn't
easy. One British manager of a quantitative hedge fund told
ISS that no one has been able to show him how integrating
corporate governance into his strategy "can create alpha" --
But Dennis Johnson, a senior portfolio manager at Calpers,
says his firm has invested $4 billion with activist managers
who focus on different corporate-governance measures in
different markets with great success. "It's one of the
best-performing strategies in all of equity investing for
Calpers," he says.
If the ISS study is to be believed, the Calpers view is
becoming the majority view. For better or worse,
institutional investors have decided they have an even
bigger role to play in running large corporations. And the
companies they invest in had better get used to it.
Write to Alan Murray at
Business, published Wednesdays, examines the
intersection of business, public policy and economics. Alan
shares reader reactions in the
Talking Business column on Saturdays.
Alan is an assistant managing editor at The Wall Street
Journal and a regular contributor to CNBC. A graduate of the
University of North Carolina, he joined the Journal in 1983;
he served for nearly a decade as the Journal's Washington
bureau chief before joining CNBC in 2002. He holds a
master's degree in economics from the London School of
Economics. Alan is the author of "The Wealth of Choices: How
the New Economy Puts Power in Your Hands and Money in Your
Pocket." He is also a regular panelist on Public
Broadcasting Service's "Washington Week in Review."
Write to him at