Governance: It’s a Regional Thing

Different economic traditions and varying stages of corporate-governance development often lead institutional investors to different conclusions, says a new study.

“Corporate governance” means many things to many institutional investors, often depending on where in the world they operate, according to a new report by Institutional Shareholder Services.

For example, 34 percent of U.S. institutional investors say “enhanced returns” are the most significant advantage of good corporate governance, about on par with the global average of 37 percent. In China, however, only 7 percent of institutional investors agree; in Japan, the figure is a whopping 80 percent.

The 2006 ISS Global Institutional Investor Study gathered responses from 320 institutional investors in 18 countries, which the proxy-advisory firm grouped into seven regions: the United States, China, Japan, Canada, Australia-New Zealand, the United Kingdom, and continental Europe. The ISS found that different economic traditions and varying stages of corporate-governance development often lead investors to different conclusions.

In China, continental Europe, and Japan, for example, investors believe that corporate governance will become more important during the next three years, while investors in the United States and Canada expect little change. According to the study, the differing views can be explained in part by those regions’ differing sources of capital. In North America, where institutional investors have a long history of providing equity capital, markets have already developed a robust corporate-governance system; in the Far East and Europe, governance has more room to grow. Germany, notes the study, is characterized by strong corporate ties to banks, and much capital has been provided through loans; China’s government controls the economy and directs both development and investment.

In countries where institutional investors are firmly entrenched as a source of capital, shareholders are certain to be vocal, affirms the study. Investors from the United Kingdom, Japan, and Canada are the most likely to not only vote their proxies but also engage companies in debates about changing their behavior. Compared with a global average of 79 percent, in those countries more than 90 percent of investors say they engage companies directly or through a third party.

The United Kingdom’s tradition of engagement is the strongest worldwide, possibly because its government actively encourages investors and corporations to agree on governance best practices as an alternative to legislation. Whether “for” or “against,” U.K. investors weigh in more often than other investors; 81 percent voice opinions about mergers and acquisitions (compared with a global average of 31 percent), and 26 percent nominate or recommend director candidates (compared with a global average of 18 percent).

Other findings of the study:

• 25 percent of Chinese institutional investors contact companies simply to obtain basic financial information; worldwide, that figure is just 4 percent.

• Pension funds based in Canada and the Australia-New Zealand markets usually lend their weight to “collective engagements” in which trade associations and proxy-service firms endeavor to both minimize costs and pool their efforts to rework corporate behavior.

• 32 percent of Japanese investors cited antitakeover devices as the most important governance issue of the next three years; globally, only 2 percent of respondents said this would be the number-one issue. Japan’s tradition of friendly shareholders is vanishing, notes ISS, and last year lawmakers legalized the use of poison pills as a merger defense.

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