For example, given the way in which the funds my team manages at MFC Global are constructed, we consider it significant if we beat the stock market by 20 basis points or so on a particular day. In contrast, a 20-basis point swing for my small-cap counterpart is considered typical. But get a load of this: there was a day in July when we beat the stock market by well over 100 basis points – most likely my best day ever as a portfolio manager – and then, in the very same week, underperformed by well over 100 basis points on another day. Can you imagine having your best day ever and your worse day ever in the same week? The word volatile just doesn’t seem to capture the experience.

"Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all, accurately so they will be guided by its light." ~ Joseph Pulitzer

In the extremely hectic world of IR, we are often stretched too thin – consumed with day to day tasks and putting out fires – to even consider adding to our workload with board reporting. Some of us barely make it through year-end with all our faculties intact! But in our constantly evolving profession, it has never been more important to implement some form of report to the board from the IR perspective. New and changing regulations, the advent of additional investment vehicles, laws, and market events – all impact our companies and are growing concerns for our shareholders. And your board needs to hear what you know, since you are closest to shareholders and the Street.

Is your company frustrated with Canada’s current securities regulatory system? Would you prefer a simpler, faster and cheaper securities regulatory system for Canada – in place in just over one year? If so, you can look forward to Phase 2 of the passport system for securities regulation.

The Canadian Society of Corporate Secretaries invites you to attend its 9th Annual Corporate Governance Conference, September 9-12, 2007 at the Fairmont Le Manoir Richelieu in Charlevoix, Quebec.

The conference attracts over 200 senior level executives and professionals from leading corporations across Canada in the following areas:

• The corporate secretarial and governance function
• Corporate shareholder services
• Investor relations
• The corporate/legal counsel function
• Finance and compliance
• Corporate communications
• Companies providing services to the above, i.e., proxy solicitors, bank trust officers, legal counsel, financial printers and paralegals in private practice.

For more information and to register, visit www.cscs.org

Investors are soon to learn about the corner offices’ hidden perks. Ian Sax reports

Is the corporate governance pendulum swinging back? Well, not quite. While the pace of reform has inevitably slowed, corporate governance reform still has plenty of momentum left. One example: the SEC’s new proposal on executive compensation disclosure. Unveiled in a January speech by SEC chairman Christopher Cox, it’s the most sweeping overhaul of executive compensation disclosure rules in more than a decade.

Critics have been clamoring for more detailed disclosure, and Cox has called the existing rules ‘out of date’. Adding further impetus are the courtroom dramas playing out with overpaid executives center stage. Executive compensation has been at the forefront of many high-profile cases, most notably at the NYSE and Tyco International.

If adopted, the proposed rules would most likely go into effect for the 2007 proxy season. Among the proposals: refine existing tabular disclosure; expand perquisites to cover anything above $10,000; and provide improved narrative disclosure, known as the ‘compensation discussion and analysis’ – a management discussion and analysis (MD&A) for compensation. Disclosures would cover the CEO, the CFO and the three other highest-paid executive officers, as well as directors (see Highlights of the SEC proposal, below).

‘Up until now, the information provided has been on a high level in table format with lots of footnotes,’ explains Michael Sferratore, content specialist at Reuters. ‘Tables are easy to follow, but the footnotes vary and the level of disclosure is different from company to company. Overall, the proposal is another means of offering transparency to investors. We’ve seen such enhanced transparency in stock option expensing, and we may see it with the improved pension cost disclosure that the Financial Accounting Standards Board (FASB) is working on.’

Reuters already tracks executive compensation as part of its product offering, and Sferratore says the firm will adjust its collection process to take advantage of changes in disclosure. ‘Overall, pay should be tied to performance, and this makes that relationship easier to evaluate. Often we read about compensation after a scandal, so being proactive and illustrating to investors what the board has chosen for compensation is important.’

Immediate impact
The SEC issued an interpretive release on perks as part of the new proposal, and US companies are meant to start following it immediately. A few are even going ahead with some enhanced compensation disclosure in anticipation of next year’s new rules. But most are taking a wait-and-see approach while the SEC gathers comments on the proposal. ‘We’re waiting to find out what the final rule, if passed, looks like. We’re also on a March 31 fiscal year, so we put our proxy together after the peak season,’ says Charles Triano, VP of IR at Forest Laboratories.

While much of the focus has been on the content of the proposed new disclosure, there’s a great deal to be said for the way in which the SEC plans to change the form as well. As with other initiatives, this comes back to ‘simplification’ or a move toward plain English.

Addison, a New York-based design company that focuses on corporate literature, has been working to help companies simplify MD&As, particularly through the use of plain English, which the SEC has noted is lacking in many reports. ‘The SEC is not just suggesting a chart of top execs and what they’ve made in the last three years. They’re also saying they want what basically amounts to an MD&A on executive compensation. They want you to look back and say what the rationale was for the compensation and discuss stock options, for example,’ explains Elliott Saltzman, managing director of annual reports at Addison.

To fulfill the requirements of the rules, assuming the proposal is passed, companies will have to address the issue of ‘simplification’. Saltzman notes two parts to this process. ‘There’s the plain English aspect, and there’s the second half: the design and layout of the information,’ he says. ‘So we look at what appear to be the most important aspects of the information. Figures and dates can often be put into a chart – you may have a paragraph that really should just be a chart because it’s all numbers. It’s a good way to make disclosure clearer.’

Then what?
The big question for executives getting ready to bare all is what investors will do with the information. Some investors have never paid it much attention, but some do – a lot.

Christopher Wiles, senior director for large-cap core and growth equity management at Allegiant Funds, says he has always reviewed executive compensation as part of his analysis of companies. ‘It only becomes an issue relative to performance and ownership structure. You have guys who have founded firms who take little compensation given their stake in the company, and you have those who are underperforming making several million a year.’

Wiles says any additional disclosure is welcome, and the proposal would be an improvement. Executives will have to show perks, for example, which usually didn’t get shown before. ‘I’m not sure of how significant that will be, however, given that most abuses are in the dollar numbers. A corporate jet isn’t going to add much to that overall dollar value. An extra $2 mn in options – that’s another story.’

In the UK, executive compensation disclosure is already far ahead of the US. In fact, the SEC’s proposal doesn’t even call for the same level of detail on options grants as in the UK.

‘There has always been a good deal more attention paid to executive compensation by institutions here in the UK compared to the US,’ says Carol Inman, assistant company secretary at BG Group. Her company files a Form 20F (annual report for foreign issuers) with the SEC, and like other foreign issuers she’s keen to see the SEC’s final rule. But she doesn’t expect any major changes in BG Group’s disclosure considering the already strict UK requirements.

‘Our remuneration report is put together by the group company secretariat and human resources,’ Inman explains. ‘We publish it on our web site and try to use the same format each year. The report is about five to six pages on policy and also contains tables detailing remuneration and share interests for all directors.

Additionally, this year’s annual report will include disclosure of remuneration of key management personnel as a group, as required by international financial reporting standards.’

Aiming higher
The most significant difference between the SEC’s proposed rule and the current UK requirements is that UK investors get to vote on executive pay – and this is exactly what activists are pushing for in the US. ‘The voting component is the part that’s missing,’ says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees (Afscme), a union for government workers. ‘What the SEC is doing is necessary but not sufficient for shareholders. We want to see a mechanism not only for seeing what’s happening, but also for communicating back to boards.’

Indeed, Ferlauto says Afscme is already filing proxy proposals on this very issue. ‘We’re filing proposals on a company-specific basis that would establish that requirement. It’s the first time we’re doing it this year. As for the current SEC proposal, which we support, I would hope there’s enough shareholder momentum behind it to be passed as is without any watering down.’

Canada is another indicator of how the executive compensation debate could proceed in the US. IROs there have already been feeling the heat from activist investors seeking more executive compensation disclosure. ‘We have very detailed executive compensation disclosure, which we enhanced even further this year,’ says Nabanita Merchant, senior VP of IR at Royal Bank of Canada. ‘We added new charts on the compensation of the CEO and named executive officers to provide greater clarity. And we’ve made it even easier to reconcile between calendar year and fiscal year in terms of performance. Investors have been asking for this, so we’ve had some positive comments about the new disclosure from the buy side.’

At Sun Life Financial, the company’s new disclosure, which is in line with the SEC proposal, includes a total compensation table for the top executives that takes each component into account, including options as well as annual pension costs. The disclosure includes three years of history.

‘It’s what investors have been asking for,’ says Louise McLaren, VP of human resources at Sun Life. ‘Investors are looking at how they can relate compensation to performance. One of the things that is being discussed in Canada is coming up with a common measurement for compensation, a ratio that can be used across companies. We had a proposal from a shareholder to do this, and we worked with them to come up with the measure. We’ve put something in that equates the aggregate compensation of the top nine people with the net income of the company as a percentage, and we show it for the last five years. But investors won’t have a broader context unless other companies offer that measure, too. So we’re working with others to do that.’

by Ian Sax

Highlights of the SEC proposal

* A new compensation discussion and analysis to replace the compensation committee report.

* Executive compensation in three categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are the source of future gains; and retirement plans and other post-employment payments and benefits.

* A reorganized summary compensation table including a new column for total compensation and a dollar value for all stock-based awards, measured at grant-date fair value (computed according to FAS 123R).

* The threshold for any given perk would be reduced to $10,000. More importantly, guidance is provided to determine just what counts as a perk.

* Two supplemental tables would report grants of performance-based awards and grants of all other equity awards.

* Other developments: tables for outstanding equity interests, retirement plans, post-employment and so on; a director compensation table similar to the summary compensation table; and changes to the 8K disclosure requirements, including consolidation of all 8K disclosure regarding employment arrangements under a single item.

The Chinese government’s hand in business makes IR in China a complicated affair. Caroline Thomas reports

As Western companies, particularly internet firms, look to expand operations into China, the issue of government interference and control is something IROs need to understand.

On January 24, 2006, the Chinese government shut down Bing Dian (‘Freezing Point’), a publication renowned for covering topics such as corruption, Taiwan, censorship and nationalism in school history books – issues that are not up for public debate in China.

The next day, Google launched a Chinese version of its search engine (www.google.cn). This site is restricted by the Chinese government’s censorship rules so that any web pages deemed ‘inappropriate’ are blocked.

The internet sector is currently receiving the most attention in terms of government intervention. ‘Censorship is the issue du jour for business in China,’ says Cedric Chao, partner at law firm Morrison & Foerster. It was only in 1995 that the internet was made commercially available in China. Today there are more than 100 mn internet users in the country, which has become one of the fastestgrowing markets in the world.

For some, the embryonic stage of the internet industry – and of the Chinese market in general – is justification for companies to adapt their practices to suit China. Many foreignbased companies comment that investors have only recently grasped how important it is to make inroads there.

‘When we started in China in 1985, our presence there wasn’t on investors’ radars,’ says James Jarrett, VP of legal and government affairs for Intel. Jarrett was previously president of Intel China and, before that, VP of IR. ‘I was in the IR job until 1996 and I don’t recall a single question coming up about China during that time. I was always amazed at how little awareness there was among the investment community about what was happening in China.’

Jarrett says that the situation began to change in the late 1990s. ‘At this point you started to see more interest as financial analysts came to understand China was becoming a big player in the software world,’ he notes. But despite this increased interest, Jarrett claims there was still an information gap. ‘Analysts still had a lack of understanding about China’s potential. It’s only in the last six years that this has changed.’

Staying neutral
Google’s decision to go into China and follow the government’s rules created quite a stir. CEO Eric Schmidt’s defense was that Google had to follow each nation’s laws and customs, emphasizing the neutral status of the company.

This is the position also taken by Intel, whose semiconductors are used in the Chinese government’s computers. ‘We supply a chip that can be used for 100,000 different things,’ says Jarrett. ‘We’re a pretty neutral force. You buy the chip and you can program it to do a lot of different tasks, so it’s not something we can control. Our job is just to provide technology.’

Google includes a note at the bottom of censored searches informing the user that content has been blocked. The search engine is also choosing not to offer e-mail, blogging or social networking in China for fear that it will not be able to protect users’ privacy.

This is the situation in which Yahoo! found itself two years ago when it was asked by the Chinese government for information about journalist Shi Tao, who was accused of revealing state secrets via Yahoo! e-mail. Yahoo! provided the information and Shi Tao was sentenced last April to ten years in prison. The e-mails allegedly included information on the Chinese government’s guidelines for reporting on the 15th anniversary of the Tiananmen Square massacre.

Leading the way
Chunming Zhao, a senior equity analyst covering technology and the Chinese internet at Susquehanna Financial Group, thinks Google’s China launch is a positive sign. ‘The censored Google.cn is a symbol,’ he explains. ‘It signifies that the Chinese market is important enough for Google to take this localized approach.’

Companies adapting – or compromising – their Western business practices is not something Zhao, as an analyst, worries about. ‘Many institutional investors have asked if I am worried or surprised about Google’s actions,’ he says. ‘My answer is no. Google had to adapt in order to operate in China and to show respect for the local environment; the last thing you want to do is annoy the Chinese government.’

Information flow
Government interference and ownership does, however, affect perceptions of Chinese issuers. ‘We can’t work with Chinese companies who cannot adapt to a formal approach to investor communications,’ says James Shapiro, senior managing director of Galileo Global Advisors. Shapiro notes a big difference between state-owned and private companies in that private companies are generally more transparent.

But if a state-owned company explains its business well, investors and analysts are less apprehensive, notes Shapiro. He highlights a case where a client was a well-known state-owned company that operates in the West. ‘It was always clear that the government directly owned a large majority of this publicly traded company,’ he says. ‘But people accepted that this is part of the nature of many large companies in China, and it wasn’t an issue because the company was run well.’

A further example of this is that of the so-called ‘red chip’ stocks listed in Hong Kong. Many of these businesses have Chinese state-owned enterprises as their parent companies but aren’t disregarded for their transparency or investor communications.

According to Chao, state ownership is not the issue. The real problem for investors and analysts looking at Chinese equities is transparency of ownership. ‘Sometimes I have had dealings with state-owned enterprises, and you do have to wonder how much control there is on the part of the government,’ he comments. ‘In some cases you’re not entirely sure who the owner is.’

This lack of transparency can complicate deals as well. According to Chao, when contracts are signed or deals are made with Chinese issuers, it sometimes turns out that the real owner of the company or assets is another party entirely. As a result, there are a number of investigative consulting firms springing up in China that look into the party with which their client is dealing, paying particular attention to any possible links with the government.

Fear of the unknown
According to Arvind Ganesan, director of the business and human rights program at Human Rights Watch, the opaque nature of some Chinese business practices constitutes a major risk for companies and their investors. ‘No one can be sure of the limits the Chinese government will go to, or what they will demand next,’ he says. ‘Companies may end up capitulating to arbitrary demands.’

The ‘unknown’ intentions of the Chinese government in terms of regulation may be the most challenging aspect for IROs working for companies doing business here. Shapiro agrees that the bigger issue for Western companies in China isn’t the difference in regulations between China and the West, but the uncertainty of how these regulations will impact companies.

‘The rules are in flux, and it’s hard to know exactly what they are,’ he says. ‘On top of this, you get mixed messages depending on who you ask about how flexible the rules are. It would definitely help if there was more transparency regarding the rules companies are subject to in China.’

Jie Chen, IR manager at Shanghaibased Focus Media, regularly fields questions from investors about regulatory issues. In particular, she’s often asked about the Chinese government’s involvement in company operations. In response to these concerns, Focus Media includes details about domestic Chinese regulations in its annual report.

The IR department at Chinese firm Baosteel Group tells a similar story. ‘Sometimes we do have international investors asking whether the government will interfere with the company’s daily operations,’ says an IR representative from the company. Baosteel’s IR team feels that solid communication and transparency about internal operations can overcome any investor worries. ‘Our sound corporate governance is one of the reasons why quite a number of institutional investors show strong interest and many have invested in the company,’ its IR representative says.

Linda Chien, IR manager at Chinese recruitment firm 51job, agrees: ‘Investors don’t ask if the government is involved in our operations, but they do ask how existing or new regulations may impact our business. This is the risk of doing business in China and most investors are aware of it.’

For Chien, any risks for Western issuers moving into China are far outweighed by the potential benefits. She cautions, however, that companies will have to go along with what the Chinese government decrees. ‘Companies will need to operate within the rules and regulations,’ she says. ‘I don’t think this dynamic is going to change any time soon.’

These Chinese IROs are keen to stress that what is more important than investor concerns is the changing nature of the Chinese market. Despite the controversy over Google’s entry into China, these IROs see clear signs that China is opening up to the West.

Professor Oded Shenkar, Ford Motor Company chair in global business management at the Fisher College of Business, Ohio State University, and author of The Chinese century, believes that while companies and investors should see changes in China as an indication of a more open society, they should also realize the limits to change there.

‘There will be changes, but China is never going to adopt a completely Western style of business and government,’ he says. ‘The sooner both sides accept and adapt to this, the smoother the progression will be.’ It seems this is the lesson for both sides: adapt as soon as possible to avoid any problems further down the line. With clear communication as the cornerstone, maybe perfect balance can be achieved.

by Caroline Thomas

Thanks to IR Magazine for allowing us to bring this article to you.

After decades of structural deficiencies and poor accountability, Latin America wants to wipe the slate clean. Adrian Holliday reports

Latin America still suffers debt defaults, endemic corruption and awful public and private governance. But, as snap judgments on Latin America go, does such a facile stereotype still hold true in 2005? Or are promises to tear out economic corruption from the roots – whether they come from Brazilian President Luiz Inacio Lula da Silva or Mexican President Vicente Fox – really translating into better Latin American business practice and IR?

Victor Bulmer-Thomas, director of Chatham House, an international analysis center based in London, says Latin American governance progress is now visible on several fronts. ‘On the plus side, you have a number of big companies with foreign participation, either with direct investment or minority shareholdings, which leads to better transparency and seats on the board,’ he points out. ‘At the top end of the scale, companies with ADR listings in New York have to do things properly. Most companies in Latin America, however, are not listed, tend to be family-managed, and are not run according to stock market requirements.’

Typically this means smaller companies have no real incentive to improve governance reporting. Most firms needing capital draw on their own resources or use personal contacts through the extended family network. ‘Very few actually go outside onto international markets,’ says Bulmer-Thomas. This is reflected in patchy stock market representation. There are only two major stock markets in the region, one in Mexico City, the other in São Paulo, and many companies that are listed aren’t actively traded, so liquidity is often poor.

Breakaway pack
For the larger companies that have to communicate with public investors, however, the picture is improving, according to Dean Newman, fund manager of Invesco Perpetual’s Latin American Fund. ‘In many ways, IR in Latin America is not that different,’ he says. ‘Generally, access to Latin companies in the UK is good: they travel and there’s a good array of conferences here and abroad.’

The quality of roadshows organized by brokers, however, is often imprecise. ‘Many are so desperate to take companies on roadshows,’ Newman continues. ‘Companies really need to have a very clear view on why they should use a certain broker over another. If they’re using the right broker, it can really benefit the company.’

But even if you don’t buy or own, says Newman, seeing Latin American companies regularly – roughly every nine months – means you can build a picture and ‘see how the strategy evolves and how straight they are. Some can see the way the world is going, and they’re saying, Let’s be exemplars, understanding and talking shareholder value.’

Where Latin America can be markedly different from other markets is the troubled issue of company ownership and control, warns Dr Mark Mobius of Franklin Templeton Investments. ‘There can be a tendency for companies to be controlled by a small number of shares and these are the issues [their] IR people tend to skirt around, or provide excuses about,’ he says. Voting issues, especially minority rights, remain a problem some Latin American governments seem reluctant to rectify, ‘or may even aid and abet,’ according to Mobius. ‘Brazil is the biggest offender.’

Voting rights are critical because some Latin American companies still issue preference shares, which carry no voting rights, rather than ordinary shares. This means the real control can remain with family members of a company, even if they personally hold little stock.

Nevertheless, Jules Mort, fund manger of Threadneedle’s Latin America Growth Fund, says Latin American governance is a much improved beast, compared with the past. Look no further than Brazil’s Novo Mercado, Mort adds, a secondary stock exchange where companies must adopt western-style governance standards to be listed. ‘I won’t meet a new firm that is not preparing to list on the Novo Mercado,’ he states.

Mort says most companies on Brazil’s Novo Mercado now also offer 100 percent tag-along rights to shareholders, allowing them to receive the same price for their stock in any merger or takeover that a controlling shareholder would receive. This hasn’t always been the case. Two years ago the brewer Ambev was taken over by Interbrew, which bought controlling shares in the Brazilian company. ‘It was an unfavorable transaction for minority shareholders,’ recalls Mort. ‘Interbrew used Ambev’s non-voting shares to buy some Interbrew assets at what we considered to be a very high multiple, which meant the controlling shareholders benefited disproportionately.’

On the broader IRO front, however, Mort is optimistic. ‘Typically, Latin American IROs are well prepared, know their companies well, and understand the concerns foreign investors have,’ he says. ‘They tend to be well educated and fluent in English, often with MBA backgrounds. Compared with some Asian companies, they’re often a lot more sophisticated.’

The positive IR news flow continues from Dariusz Sliwinski, a global emerging markets fund manager from Martin Currie Investment Management in Edinburgh. ‘Yes, there are [Latin American IR] bad guys who give information only when you request it, and it can be pretty convoluted,’ he says. ‘But it is much better than you would expect from some of the ownership structures. You can always call them. Even state-controlled disclosure is fantastic and timely, and some companies will tell you more than you need to know.’

Governance cracks
That seems to depend on who you talk to, however. Karina Litvack, head of governance and socially responsible investment (SRI) at Foreign & Colonial Asset Management, says some Brazilian companies can still be conveniently hazy about board directors, not even bothering to supply their names, let alone biographies.

‘In effect, we can be asked to rubber-stamp the board when it is supposed to be protecting our interests – that is a governance red flag to us,’ Litvack says. ‘We also have concerns about the effectiveness of audit committees. It’s quite common to see related-party transactions, so you have to have a strong independent audit committee to make sure any transactions are being done at arm’s length in Mexico and Brazil.’

While Brazilian companies are required to have audit committees to list, the terms set in law are too weak, adds Litvak. ‘In Brazil you can get a carve-up situation with just three members on an audit committee, the first being voted in by the controlling shareholder, the second by preferred minority shareholders, and the third named by a combination of the two,’ she explains. ‘In principle, though, the audit committee should be 100 percent independent.’

Other cracks relate to the Latin American region still being very dependent on the health of the US economy, points out Ryan Hughes, investment manager at Chartwell Investment Management. ‘What we’ve been seeing is American companies that might have outsourced to the Far East now outsourcing to Latin America in the same way much of Europe outsources to eastern Europe,’ he says. ‘But this shift is also a weakness: when the US economy does poorly, much of the South American region also starts to underperform. It’s very North America-focused.’

This is true for near neighbor Mexico, but some say it’s not quite the same for Brazil, substantially further south, which is modestly increasing its exports and upping infrastructure investment under left-of-center President Lula da Silva.

Bulmer-Thomas says the region, be it Mexico, Brazil or Chile, is increasingly seeing improved political leadership, especially when it comes to tackling corruption, a common Latin American investor complaint. ‘The whole issue of corruption, both public and private, is now taken far more seriously than in the past and has also become an electoral issue,’ he notes. ‘Behavior that in the past might have been laughed off or ignored is much less tolerated, and that means businessmen with political ambitions are avoiding political scandals. The climate has changed dramatically.’

Great news, to be sure, but Mobius, an adroit veteran hooter a few hard bursts, just in case of complacency. ‘If you look back, Venezuela had great prospects; Argentina also,’ he points out. ‘Brazil has shown signs of reform and Mexico is also gradually improving. But it’s still a very mixed picture.’

Are investors ignoring Latin America at their peril? China and India have been the two countries on most people’s lips when discussing emerging markets in the last two years. But have investors missed out by ignoring Latin America? Hilary Cook of Barclays Stockbrokers remains cautious, but acknowledges there are opportunities to be had.

‘Most people, when they talk about emerging markets, tend to say you need a good slug in India, China or both,’ she says. ‘We concentrate on Asia so much that [South America] doesn’t feature. But [Latin Americans] do seem to have stopped being basket cases and are addressing reform issues.’

This is reflected in fund performance over the last year. Foreign & Colonial’s Latin American Investment Trust is up a huge 74.3 percent, with Scottish Widows’ Latin American Fund not far behind at 55.2 percent.

Investment bank Morgan Stanley supports a continuing strong Latin American investment story, fueled by possible interest rate falls and congenial valuations. ‘By the final quarter of 2005 there will be a broad consensus on local interest rates falling,’ predicts Morgan Stanley analyst Mario Epelbaum.

But, despite Mexico’s strong recent performance, Epelbaum says it’s no longer quite the deal it was. ‘At a forward consensus P/E of 12.1, Mexico’s valuation is approaching levels in which the market historically faces resistance,’ he notes. ‘Mexico trades at a 17 percent discount to the S&P, [but] when adjusted for sector weightings that discount shrinks to 7 percent – no longer a bargain.’

Others aren’t as generally bullish for the region. The Brazilian real and Mexican peso are considered overvalued by some, and could weaken further. Presidential elections are due in Brazil, Mexico, Chile and Colombia, and no market likes political uncertainty, especially when it hails from Latin America.

by Adrian Holliday

Thanks to IR Magazine for allowing us to bring this article to you.

Adrienne Baker and Dea Katel look back at the year in governance and ahead to 2006

‘If you build it, they will come’ should be the mantra for companies weighing the pros and cons of governance changes and their impact on shareholder interest. Even if management and IR are rarely asked about governance in meetings with investors, it is an increasingly important part of the decision-making process for fund managers and analysts. And with institutions under more pressure to uphold their fiduciary duty by voting and/or disclosing their proxy votes, it’s important for IR to be aware of shareholder sentiment on governance issues.

Majority voting made the most news in 2005, with several US companies voluntarily adopting it for director elections and others facing shareholder proposals on the issue. Increasing activism by hedge funds also topped the global governance agenda in 2005. Looking ahead, experts expect continuing interest from investors on issues such as executive pay, majority voting and minority shareholder rights, particularly among UK and US funds. Vote with your hands In Asia, with more institutions taking an active interest in voting, companies will start coming under more pressure to provide AGM information in a timely and clear manner. ‘Some fund managers are putting pressure on companies to deliver shareholder meeting notices earlier and give more detail,’ notes Jamie Allen, secretary general of the Hong Kong-based Asian Corporate Governance Association (Acga). He says investors want AGM notices and information circulars 28 days before a meeting. ‘Some companies in Hong Kong are doing this but the rules are weak in many markets,’ he adds.

As the AGM is fairly generic and routine for many issuers, a longer notification period shouldn’t prove a challenge, but it involves shaking up management’s current mindset, notes Allen.

The other issue attached to AGM notification is voting by poll as opposed to a show of hands. ‘It’s 19th century company law,’ Allen observes. ‘It’s so patently unfair to the bigger shareholders because it allows companies to stack the meeting with employee shareholders. Some companies in Korea vote by hand clap – the chairman says, If you agree, clap your hands.’

In the wake of changes in the UK and the US, there is pressure from Asian regulators for institutional proxy voting transparency. Voting is gradually increasing at Asian AGMs and investors are pouring more money into corporate governance research. In Thailand and Korea, asset managers now have to disclose their voting policy so it’s likely other market regulators will develop similar requirements.

On the warpath
The tide is turning for corporate governance in Europe. ‘Investors are moving away from a box-ticking approach to governance and using activism as a tool to force companies to change,’ explains Erik Bomans, managing partner at Brussels-based governance consulting firm Deminor.

One reason UK institutions in particular are more interested in governance is that they’re under pressure to disclose how they vote their proxies. In April Cadbury Schweppes chairman John Sunderland rallied the UK financial community toward greater institutional transparency on shareholdings and voting decisions at the annual Investor Relations Society (IRS) conference. Seven months later the UK’s Department of Trade and Industry (DTI) proposed new legislation requiring funds to disclose their votes.

Among other EU states, the focus is still on encouraging institutions to actually vote their proxies. ‘In Italy, Spain and other EU countries, voting by institutions remains the exception, but countries are trying to solve this problem,’ notes Bomans.

For now, most activist campaigns targeting European companies are being led by UK and US-based investors, particularly hedge funds, which stepped up engagement in 2005.

In March UK hedge fund TCI and Atticus Capital, a fund with operations in both the US and the UK, along with several other investors managed to block a proposal by Deutsche Börse to acquire the London Stock Exchange (LSE). They also succeeded in unseating the exchange’s CEO, Werner Seifert. In mid-August a group of US-based hedge funds orchestrated the takeover of Medidep, a French operator of retirement homes. The group found a buyer for the firm after unseating a board member at the annual meeting.

Sometimes hedge funds are simply the public face for an agenda shared by a larger group of mainstream institutions trying to instigate change. This is one reason why companies need to take their messages seriously. ‘I hope management will listen to their arguments,’ comments Bomans.

Another hot-button governance issue for companies across the EU is minority shareholder rights. In mid-October EU internal market commissioner Charlie McCreevy pushed for one share, one vote across all EU countries in an interview with the Financial Times. ‘There is a lot of work to be done on this and minority shareholders will become more active where companies are trying to protect themselves,’ says Bomans.

Currently only 65 percent of companies in the FTSE Eurofirst 300 comply with this standard, according to a study by the Association of British Insurers (ABI). Among the big names not abiding by the standard are British Airways, Carrefour and Volkswagen.

‘Investors need to be able to rely on one set of rules and exercise their rights [globally],’ notes Charles Demoulin, senior manager at Deminor. ‘But you are also facing a new form of protectionism by governments in France, Italy and Germany.’ In Germany, for instance, support is building to reward investors who vote their proxies with higher dividends.

As investors continue on the governance warpath, IR needs to be aware that limiting access to management is the worst possible tactic when dealing with activists. ‘All companies should make it a lot easier for investors to be better informed, attend the AGM and file a proposal,’ concludes Demoulin. A tree grows in America The two biggest governance headlines in the US for 2005 were majority voting and hedge fund activism. Nell Minow, editor of the Corporate Library and prominent governance pundit, is confident majority voting is here to stay. ‘I’d never seen a shareholder initiative gain such widespread support in such a short time – and it will continue to escalate,’ she predicts.

Majority voting, under which a director nominee needs a majority of votes cast to be elected or reappointed, is standard practice in many European countries, including France and the UK. Minow sees it as an extraordinary achievement that a number of top companies have adopted majority voting since the notion was mooted in the US: Best Buy and US Bancorp are already using it, while others including ChevronTexaco, Intel, JPMorgan Chase and Time Warner have been testing the system in a majority voting work group.

The rule is supported by Calpers, the International Corporate Governance Network (ICGN), Institutional Shareholder Services (ISS), the Council of Institutional Investors (CII), and the United Brotherhood of Carpenters and Joiners of America.

Hedge fund activism was on the rise in the US in 2005, though big changes are likely in the coming year. Minow foresees more regulation: ‘A lot of people have taken advantage of the [hedge fund] loophole a lot more than was originally intended and there is so much money at risk there. There is no reason why they should be exempt from the rules that apply to other people.’

In 2006, says Minow, North American governance will ‘continue to be all about the board. The corporate governance effectiveness of a company is as important an aspect of investment risk assessment as the bond rating or earnings per share.’ No muss, no fuss Latin America is taking a more sanguine approach to governance. With little fuss, ADR issuers have risen to the challenge of Sarbanes-Oxley and other new US rules, not to mention strict Sox-like rules in their domestic markets.

‘Latin American companies are following the same kind of obligatory system as the US and continental Europe,’ says Jaime de Piniés, senior managing director and chief economist at the Global Consulting Group (GCG). He lists eight companies paving the way in governance in Latin America: Banco Santander-Chile, Buenaventura Corporación Geo, CTC, Petrobras, Telemig Celular, Votorantim and Walmart de Mexico.

A significant development in 2005 was the May launch of the Latin American Corporate Governance Roundtable’s Companies Circle, organized by the OECD and the International Finance Corporation (IFC). It consists of seven companies that have pledged to set an example with rigorous corporate governance standards.

In 2006 watch out for Latin America tightening the time frame for quarterly reporting, bringing it more in line with US standards. ‘As you raise the standards of corporate governance around the world, you establish higher goalposts everywhere,’ says de Piniés. ‘And it’s not just the regulatory environment. Companies are watching what their competitors are doing.’

In de Piniés’ eyes, the premium paid for companies with good governance will be an incentive for others to follow best practice. To date, Latin America has made progress in transparency in accounting. Where it has lagged is on complex corporate governance issues.

Thanks to IR Magazine for allowing us to bring this article to you.

That’s what US fund managers looking at Chinese equities are doing. Adrian Holliday reports

Some US fund managers say China is taking a shrewd approach by opening its capital markets while maintaining control over ownership of domestic equities. For example, some Chinese companies like the idea of western-style governance but don’t like the West controlling or owning too much stock. ‘They’re very happy for the West to introduce best practice standards, but they’re not happy selling the actual ownership of the industry,’ explains fund manager Mark Edwards from Hong Kong-based T Rowe Price. ‘And they don’t want lots of hot foreign flows they can’t control.’

The need to maintain control isn’t surprising from a country still in the grip of the Communist Party, and now the world’s most dynamic economy. The Chinese government continues to stifle freedom of information and maintain caps on foreign investment in domestic equities. As such, investing in China is still risky with IR a precarious exercise for some issuers.

‘The new regime has taken a big step back in the media sectors,’ says Edwards. ‘They don’t want bad news blasted around by media companies. The previous bunch was happy even to wear Stetson hats at Bush’s ranch, but the new gang is quite different.’

China’s ‘new gang’ is headed by President Hu Jintao, elected by the National People’s Congress in 2003, succeeding his predecessor Jiang Zemin. Jintao, a former engineer – also said to be a mean table tennis player – is thought to be cautious in style. Not an out-and-out reformer, he nevertheless cracked the whip on pro-independence reforms in Tibet in the 1980s. But the Chinese premier is pragmatic enough to allow a trickle of investment from international investors through China’s qualified foreign institutional investor (QFII) scheme, allowing non-Chinese investors to trade restricted amounts of yuan-denominated shares, which was not possible until late 2002.

Tight controls
But what is it about Chinese IR that continues to make some US fund managers circumspect, especially given the relentless hype surrounding Chinese economic growth? Dr Matthew Wu, a fund manager at Rockville, Maryland-based Rydex Investments who grew up in Asia and studied at Shanghai’s Fudan University, says he understands IR’s challenge here. ‘

They’re not used to dealing with being asked questions unexpectedly, especially on ownership structures,’ Wu explains. ‘A lot of companies are family or government-owned. They’re not used to talking to the buy side, even if they were to buy all publicly floated shares. But as a fund manger I need to ask Chinese IR about background information. How do I understand your country? How can I quantify the information given in my investment model? This demands that IROs be more knowledgeable about their own country and industry. Very often we ask them something and they can’t answer. They say, This is Hong Kong (or China), and we do things differently. That’s not enough! I need to know the difference between your structures and ours so I can understand my model.’ Wu adds that much of Chinese corporate culture remains rooted in relationships based on personal contact rather than signed contracts. ‘When UK or US people sign a contract with the Chinese, they think everything is guaranteed, but all contracts can be revised,’ he says. ‘If you have a long-term relationship, however, they are more likely to honor those bonds.’

The flip side
Wu’s take on Chinese IR is challenged by Edmund Harriss, fund manager of Milwaukee-based Guinness Atkinson’s $113 mn China & Hong Kong Fund. ‘Money doesn’t have any culture and you can lose it just as quickly in the East as in the West,’ Harriss says. ‘You have to use a standard approach to investing in Chinese equities, not put them in some special place in the investment pantheon. That’s what eleven years of experience has taught me.’

Harriss uses several criteria to assess Chinese equities. Quality is key, as are good cash flow-based returns. ‘We’re seeking information we can use in conjunction with discounted cash flow and earnings momentum,’ he says. ‘Can returns be sustained? What is happening to the cost of materials, transport and energy? Does the company have the ability to generate surprises with new product development?’

Harriss adds that Asian governance is generally improving but progress in this area is now showing some signs of fatigue. ‘The push to improve governance has weakened as Asia has emerged from crisis,’ he notes. ‘Minority shareholders are still often ignored by management – although regulation is proving more supportive so management doesn’t always get its own way.’

Ideally, fund managers want Chinese IROs to be as specific as possible with their answers, avoiding platitudes. ‘Good IROs understand their business and understand what investors are trying to get hold of, and why,’ says Harriss. ‘Too often IROs hide behind ‘competitive reasons’ for non-disclosure. We want to know what the main revenue drivers are, such as price and volume. We want to get a handle on the breakdown of cost of goods. We want an idea of expansion plans, number of production lines and capacity, and we want a view on timing.’

Harriss acknowledges that IROs can’t always provide this information. ‘But questions and answers have to lead us toward these specific issues, otherwise discussion is meaningless,’ he adds.

Edwards notes that state-owned enterprises struggle with determining what information investors need from IR. ‘They’re still learning from a position where they have a lot of data, but they’re not sure sometimes which data people are interested in,’ he says. ‘They’re not being deliberately unhelpful. But they’re still going from a non-profit making organization to something far more focused and getting a return on that investment.’

Edwards notes that younger Chinese entrepreneurs sometimes appear savvier at IR. ‘Some of the younger people are very aggressive,’ he says. ‘That means examining the prospectus is important, as is using good advisers. You need a ‘big four’ accountant that has lots of people digging away. If a Chinese firm is reversing into a Hong Kong-listed shell company, for example, the safeguards are not as good in terms of prospectus requirements.’

Less attractive, too, is the certainty that China’s ruling Communist Party will continue to play an active role in the vetting of appointments at red chip, state-owned companies. This means CEOs and top executives must also be adept politicians.

A mixed bag
Yet, over the long term, there’s no doubt the China dream offers staggering opportunities, even if some of the gains have already been realized. Stephen Dowd, head of non-US equities at Chicago-based Northern Trust Global Investments, has shifted some of his cash out of China to Japan for the time being, where he is betting on the rude health of the Nikkei.

Dowd’s experience of Chinese IR is that he must insist on frankness, especially in an environment where the economy is running hot. ‘Chinese IR is OK but it needs to be a lot better,’ he says. ‘I saw a Chinese IRO recently and she could talk only about the last quarter’s numbers. She couldn’t answer anything about the strategy of the company, or its ideas. Nothing. The depressing thing about this is that companies now are benefiting from a rising business cycle, but not necessarily from their own position in it.’

Several Chinese companies are planning to list on the NYSE in the next year. However, Richard D’Amato, a key member of the US-China Economic and Security Review Commission, recently warned that fundamental lack of transparency remains a worry, as does the amount of bad debt some Chinese banks planning to list might be carrying. D’Amato claims investing in some Chinese companies could lead to a dot.com-style crash.

Overall, IR gets mixed reviews in China. The Chinese old-school oligarchy-based style of business may be holding back IR’s development for many large issuers. Edwards says the exchanges in Shanghai and Hong Kong are working hard to effect change and progress in IR. ‘But too many IROs over-egg the story,’ he cautions. ‘It’s when you go through difficult times that you really build relationships with investors. And it’s at that point that both parties learn what works, and what doesn’t. That hasn’t happened yet.’

by Adrian Holliday

Thanks to IR Magazine for allowing us to bring this article to you.

Lee Kha Loon says investors should welcome Singapore’s revised governance code

In July, Singapore’s Ministry of Finance published a revised version of the Code of Corporate Governance, which is effective from January 1, 2007. The code was first issued in 2001, and was due for a revision to bring it into line with changing market conditions and global best practices. The new code moves corporate procedures forward by promoting international best practices and enhancing investor protection.

In particular, there are three main areas that will improve best practice among Singaporean issuers. Firstly, there are new clauses in the code to promote better communications between companies and shareholders. Companies are encouraged to amend their articles of association to avoid imposing proxy limit and absentia voting methods, and to produce meeting minutes and post them online as well as avoid or explain the ‘bundling’ of board resolutions. Fund managers who hold shares in omnibus accounts managed by share custodians can now attend AGMs in Singapore and express their views and exercise their rights on behalf of investors.

Secondly, the code now encourages whistle-blowing by way of empowering the audit committee to set up procedures for staff to report on financial irregularities and follow through with independent investigations.

Thirdly, new clauses are in place to emphasize the importance of measuring board performance over the long term. One suggestion is to compare stock price performance against the Singapore Straits Times Index and a benchmark index of industry peers’ performances over a five-year period.

One of the more common problems for Singaporean companies is finding the right composition of independent directors; the current requirement is one third. However, for a board with ten directors, three independent directors might be too few to sit on multiple sub-committees and attend regular board meetings. At the same time, a number of domestic issuers are family-owned and might not have the ability to fully comply with this and other parts of the code.

The code further calls for the appointment of a lead independent director if the chairman and CEO is the same person. This is another welcome move that gives more authority to the role of independent directors. The Monetary Authority of Singapore has responded by requiring the chairman and CEO of banks and life insurance companies to be separate.

Although the code remains non-mandatory, Singapore Exchange listing rules require listed companies to describe in their annual reports their corporate governance practices with specific reference to the principles of the code, disclosing any deviation from it. So while compliance will remain voluntary, this is still a positive move for the market because the new principles will raise awareness of the value of good corporate governance practices.

Corporate governance and shareholder communications are not rocket science – but they are costly. Still, companies that enhance these practices often see a positive impact on shareholder value, which helps cover the time and cost associated with these efforts.

Lee Kha Loon is head of the Asia-Pacific office of the CFA Centre for Financial Market Integrity.,
,br> Thanks to IR Magazine for allowing us to bring this article to you.

The pace of governance regulation slowed down considerably in 2006. In light of the frenetic pace of change in the prior two years, this was welcome news for many issuers. Among the most significant developments was the decision of the Canadian Securities Administrators in March 2006 not to adopt a Canadian version of the much criticized SOX 404. The widely held view that the benefits derived from SOX 404 have not been commensurate with costs of compliance contributed to the decision of the CSA to proceed with Proposed Multilateral Instrument 52-111 in March 2006. Some form of reporting on internal controls is expected to be introduced in the future and, in the meantime, the requirement that the CEO/CFO certificate speak to the design of the internal controls remains in place. The CSA Staff Notice 52-316 addresses certain questions on this provision.

“The Halloween massacre” is how Anne-Marie Buchmuller describes the day Finance Minister Jim Flaherty changed the tax rules governing income trusts. The head of IR for Calgary-based Sound Energy Trust had only been on the job for two weeks when the Minister dropped his tax bombshell and sent the market into a tailspin. The surprise announcement translated into a $20 billion drop in the S&P/TSX composite index on November 1 with sharp losses for the trust sector, which has yet to recover.

“We have had many calls from investors, mostly retail, who are very upset – they lost a lot of money,” reports Buchmuller. “Shock and outrage is the best to describe how our investor base has reacted,” adds David Carey, Senior Vice President, Capital Markets for ARC Energy Trust. “We lost 25% overnight and are still down 20% a month later. A lot of people were caught unaware; our phone lines lit up and email system overflowed with questions from unitholders.”

There has been much progress made in the corporate governance arena, except in one aspect: executive compensation disclosure. There is much work that remains to be done until investors can describe executive compensation programs with only a crayon (to borrow and modify Peter Lynch’s description of what stocks to buy – only buy those you can describe with a crayon).

NEW YORK -- UK companies continue to lead the way in terms of best practices in corporate governance and Canadian firms are a close second, according to recent ratings from New York-based Governance Metrics International (GMI).

Twice a year GMI looks at the corporate governance practices of 3,200 companies worldwide and rates them on scale from one to ten. As was seen in March, which is the last time GMI did this study, UK companies hold the top position with an overall governance average of 7.33. Similarly, Canadian firms continue to rank second with an average score of 7.31 and US companies come in third with a score of 7.

Notably, GMI's rankings suggest a link between good practices in corporate governance and shareholder returns. It finds that top-rated companies outperformed the S&P500 index by 15.19 percent in terms of total shareholder returns over a five-year period ending September 1, 2005.

The agency also compares the performance of US companies that received top grades (nine or above) to poor performing companies (three and below) in four out of the six studies they have conducted over the last three years. GMI discovers that firms that are consistent low scorers had an average shareholder return of 8.7 percent whereas well-governed companies achieved an average return of 15.9 percent over three years. During the same time period, the S&P500 had an average return of 11.9 percent.

Gavin Anderson, GMI's CEO, explains that companies with poor governance scores were more likely to have restated earnings and been subject to accounting investigations by regulators. 'These firms reported more related-party transactions involving senior officers and directors,' he says. 'They were more likely to have multiple classes of voting stock and their boards had fewer independent directors than companies with consistently good ratings.'

As part of this research, GMI also looks at the governance practices of controlled companies, which are identified as firms where a single entity holds at least 50 percent of the voting power. For this section, GMI analyzes 390 controlled firms including 152 from North America, 156 European companies and 82 headquartered in the Asia-Pacific region. It finds that, as a group, controlled companies achieve an average rating of five, significantly lower then the average score of widely held firms (6.5).

GMI also shows that controlled companies with the poorest results are mostly located in Asia and Europe. Out of the controlled firms achieving a rating of four or lower, 65.4 percent were from Europe, 25.6 percent from Asia Pacific, and 9 percent from North America. The most common governance issue for controlled firms is lack of independent directors on the board.

Some controlled companies strive to attain best practices in corporate governance, GMI finds. Examples from its rankings include Talbots (8.5), UnionBanCal (8.5), Genworth Financial (8), Interactive Data (8), Kraft Foods (8) and Telstra (8.5).

IROs should take note of findings linking best governance practices to shareholder returns, says Anderson. 'It is clear that there is some correlation between governance and performance and while corporate governance screening is not number one, and should not be the most important aspect of investment research, it is nonetheless an area that should be looked at as part of the overall research process,' he concludes.

SYDNEY -- In an unprecedented move, the Australian Securities and Investments Commission (Asic) has announced it is investigating Australia's largest company, the national telecommunications carrier Telstra, for alleged breaches of continuous disclosure.

The announcement has shocked the Australian market, which is still reeling from a comment by one of the company's top executives, Phil Burgess, that he 'wouldn't recommend them [Telstra shares] to my mother.'

In a statement released to the market yesterday, Asic said it was 'investigating Telstra's compliance with its continuous disclosure obligations following its announcement to the market yesterday signalling an earnings downgrade.'

Asic also confirmed it is working with the Australian Stock Exchange in relation to this matter. The alleged breach being investigated by Asic concerns a briefing document Telstra released to its major shareholder, the Australian government, before the wider announcement of its earnings downgrade to the market.

Leaked extracts of the document appeared in newspapers before Telstra issued its downgrade last week, prompting the investigation. However, it is likely to be some months before Asic releases findings from its investigation.

Under new powers it was awarded on January 1 this year Asic can now issue fines to companies in breach of continuous disclosure laws.

SINGAPORE -- Shaken by recent scandals, Singapore's business community sees a need for higher standards of corporate governance here. That's the central message from a survey of senior executives at Singapore's listed companies.

KUALA LUMPUR -- It's been less than a month since the government released guidelines demanding strong performance and good corporate governance from local firms, but foreign investors are already impatient for results.

As the proxy season dust settles, John Wilcox is zeroing in on the governance issues he thinks companies need to work on. One month into his new role as senior vice president and head of corporate governance at TIAA-Cref, he’s charged with setting the pension heavyweight’s governance agenda. Wilcox spent almost three decades at proxy adviser Georgeson Shareholder Communications and is well known in the IR world for his governance expertise.

IR magazine recently sat down with Wilcox to get his inside view on majority voting, institutional transparency and life inside one of the most influential pension funds.

How are you settling into your new role at TIAA-Cref?

During the past five years, after Georgeson merged with Shareholder Communications, I increasingly devoted my time to the International Corporate Governance Network (ICGN), which drew me closer to the institutional investment community. In a sense, I had been moving in the direction of this job without realizing it. I am happy here and it has been a very natural transition.

At Georgeson, you were an advocate for shareholder transparency. Have your feelings changed about institutional disclosure now?

I have not had any discussion with investment management people here about disclosure. We file 13Fs like everybody else and we do the disclosure required by law.

I have never advocated disclosure of trading information. What I have advocated is the disclosure of ownership information at the time of record dates and that there be disclosure of more ownership information than is currently made available.

Our securities laws are schizophrenic on this point in that they impose very comprehensive disclosure requirements on issuers and, at the same time, they deprive issuers of essential information about the people to whom they owe this disclosure information – that makes no sense. In the way our proxy system now operates, all shareholders, whether they want privacy or not, pay the cost of privacy. My view is those shareholders who want to use privacy should pay for it themselves.

What were the most controversial issues over the course of this proxy season?

The majority vote resolutions were very hot and I don’t know what the voting results are yet but I think they are going to make a big splash. With respect to stock plans, I think that is another big issue. It’s always hard to compile information on that but I think shareholders are exercising a tighter rein on issuance of shares for equity compensation plans.

Clearly this has become another form of the engagement model of governance – we kind of backed our way into it. We are looking at our 2006 campaign: TIAA-Cref does not generally throw out a whole lot of shareholder resolutions but we’re certainly going to continue our campaigns with respect to executive compensation. The use of withhold campaigns really changed the way shareholders think about the power of the vote.

What are your thoughts on majority voting as an alternative to the SEC’s controversial shareholder access rule?

Well, it’s not an alternative to the access rule. The access rule made the issue of majority voting acceptable to a wider group of people, especially corporations, because the access rule proposal caused everybody to think more deeply about how company directors are elected.

My experience is that many sophisticated people really didn’t understand how plurality voting works. They didn’t understand that votes withheld from directors are not deemed to be votes cast and, therefore, you could have an anomalous situation in which more votes are withheld than cast for directors – and they still get elected.

A lot of people who might have felt this was kind of a fringe matter realized it’s a core issue for the fundamental workings of shareholder democracy in the US. They also realized that our use of plurality voting in the election of directors is an anomaly when you look at international practice: almost every other country in the world requires a majority vote.

Why do you think there is so much debate around majority voting?

The reason there is so much caution in adopting it is that there needs to be clarity about what happens if and when a majority is not achieved for either a single director or a group of directors. There are no clear answers to that under state law – and we have to have some answers.

Where does the move to majority voting currently stand?

The American Bar Association’s committee on corporate laws is in charge of the model act [for majority voting] and it is looking at the whole question of implementation of majority voting for directors. It’s working on the legal issues with respect to majority voting and is going to have a preliminary paper out in July.

I feel very good about this. Lots of people from all sides of the governance spectrum are sitting down in a reasonable way, having discussions, analyzing the issue and working toward a solution. I think this is an unprecedented example of collaborative governance in action.

What is TIAA-Cref’s position on majority voting and other key governance issues?

We have not yet taken a formal position on majority voting outside of saying we are in favor of it. We want to wait and see what kind of detailed proposals are made; then we may be in a position to act. And I’m not certain TIAA-Cref would take a public position on the NYSE’s ten-day rule.

We are very interested in proxy reform but that is not very far along. Corporate governance principles are very important but if you cannot implement them, they are useless. Proxy voting is the primary governance tool so the system has to work well. We are very interested in making sure it does. These systems were developed under circumstances that existed at the time and we can do better.

Early in the year, Section 404 compliance hung like a weighty yoke around the necks of US listed companies. It sucked up resources, diverted the finance department’s attention and, in some cases, put pressure on earnings. It consumed far more dollars than anyone ever imagined – an average of $4.36 mn per company, according to a survey by Financial Executives International (FEI), a leading professional organization for CFOs and senior financial executives.

On March 16 thousands of companies breathed a sigh of relief. Having completed their first round of internal control certifications on time, their yoke had fallen. However, some companies still bear the awesome weight of impending Sarbanes-Oxley Section 404 compliance. Among them are several hundred companies that requested filing extensions, non-calendar year companies, and those dubiously ‘lucky’ small caps and foreign issuers that won a reprieve from the SEC and don’t have to file until 2006.

Mixed results
Not only does Section 404 require companies to identify, test and certify their internal controls over financial reporting, it also requires their public accounting firms to evaluate and attest to the effectiveness of these internal controls. With companies and auditors bound to report material weaknesses that come to light during their intensive 404 reviews, there was much speculation about how the market would react to such news.

For the many IROs like Don Washington, whose company passed the certification, the experience was almost a non-event. ‘Our investors have had very little curiosity about the results of the certification,’ recalls Washington, director of IR and corporate communications at EnPro Industries, a diversified manufacturer of capital goods. ‘The only question we have gotten has been about the cost of the whole effort. We never had any concern expressed about our ability to meet the requirements.’

Lori Barker, director of IR at SanDisk, a major supplier of flash memory data storage card products, had a similar experience. ‘SanDisk passed 404 and I had very limited questions from Wall Street,’ she reports. Barker says her company spent an ‘enormous’ amount of time and money on the process. ‘For companies that failed, or delayed [their] earnings release due to 404 work, stocks were penalized,’ she adds.

Other companies found their valuation affected after reporting in line with Section 404. Credit Suisse First Boston (CSFB) tracked the stock price performance of 74 companies that announced a material weakness between October 2004 and February 2005.

‘We looked at their stock price performance for the 20 trading days before the announcement and the 20 trading days after the announcement,’ comments David Zion, accounting analyst at CSFB. ‘The day after the announcement was – for this group of companies – the worst-performing day in that entire trading period.’

As many of the companies included in the study were small caps, CSFB compared their relative returns to stocks in the S&P 600 Small Cap Index. ‘If you look at that group of companies, stocks were sort of heading down before,’ Zion points out. ‘With the announcement of the material weakness [stocks in the study] headed down even more the next day, and 20 trading days after did not recover.’

Zion describes what goes through an analyst’s mind when a company says it has trouble with Sox 404 compliance: ‘When a company announces a material weakness in internal controls, the initial thought process is, That’s not a good thing. Analysts wonder, Can it continue to put the same reliance on the numbers in the financial statements?’

Take control
However, Zion warns that the focus should be on the plans a company makes to correct the situation, not on the problems themselves. As he points out, when a company announces a weakness, it usually lays out a remediation plan. ‘You can take that as a positive,’ he stresses. ‘The weakness has been there, but it is getting fixed so, going forward, that’s a positive.’

Barker believes this is where clear communication is absolutely essential. ‘Each circumstance is different, but it is hard for investors to have time to investigate the specifics,’ she notes. ‘IROs owe it to the investor to make sure they clearly articulate the impact of the material deficiency and the fix.’

In evaluating companies’ Sox 404 announcements, investors need to consider the level of risk and uncertainty, according to Zion. ‘Investors should ask themselves a number of questions to try to get a feel for whether or not the company now appears more risky,’ he explains. ‘You need to ask questions like, Has the company had accounting problems in the past? What is the weakness? What line items does it affect? Does it, in fact, affect key performance metrics? Is it company-wide, or is it one item on the balance sheet? Now that it’s been fixed, would you argue that maybe there’s less risk? We would recommend that investors focus on the remediation efforts the company has laid out and how clearly it has laid them out.’

Zion’s approach also involves looking at what a company is saying about the material weakness and thinking about it in terms of how much uncertainty comes along with what it is saying. ‘[The biggest uncertainty is] when a company can’t comply with Section 404 and the auditor disclaims opinion – then the company has an incomplete 10K,’ he points out. ‘[The least uncertainty occurs] when both the company and auditor agree controls are effective and the auditor provides a clean opinion.’

For Zion, market reaction boils down to transparency. ‘The market doesn’t like uncertainty,’ he says. ‘To the extent a company can explain clearly how it is fixing these problems, I think that goes a long way to assuaging investor reaction.’

The bright line
Analysts, credit rating agencies and investors have received praise by some for how they’re approaching 404 results. ‘What I find very encouraging is that the investment community has been broadly sophisticated in its attempt to understand why companies have material deficiencies,’ says Paul Reilly, CFO of Arrow Electronics, which passed its 404 hurdle. ‘Remember, 404 is dealing with your system of internal controls. It does not mean your numbers are incorrect. It may be an indication that you need to invest more time, effort and better resources into a more efficient system of internal controls. But it also means you have the opportunity to ensure your numbers are correct through substantive testing.’

First time around, the learning curve has been pretty steep for everyone involved. There’s been some griping from companies about auditor inflexibility and lack of communication. Auditors have complained about companies getting started too late, or not placing oversight of 404 at a high enough level. And boards, management and investors have scoffed at the astronomical cost of compliance.

After the first round of Sox 404 filings, public company representatives, investor advocates, auditors, audit committee members, US regulators and other experts aired their comments at a roundtable convened by the SEC. Other stakeholders submitted comments for posting to the SEC’s web site. There seems to be a determination on everybody’s part to make the process go more smoothly next time around.

‘I’m encouraged by a sense of everybody understanding that the blame doesn’t fall squarely on any one party,’ says Robert Dohrer, partner in the national office of audit and accounting at McGladrey & Pullen and the firm’s co-national director of auditing services. ‘You know, management could have done a better job. There could have been more implementation guidance. The auditors could have used more judgment and more flexibility in determining the amount of work they had to do. There will be a lot of progress made to make this process more efficient going forward.’

Washington is hopeful his company has everything in place to make Section 404 compliance easier next year. ‘We thought it would probably be a one-person job with maybe a little bit of outside help, and it ended up being pretty much full time for three people with more outside help than we anticipated,’ he recalls. EnPro Industries has since added one person to internal audit. ‘We’ve got the process in place,’ Washington adds. ‘The people are here. It will be a question of continuing the things we did first time around.’

Reilly says that although his company’s Sox champions tested key controls at over 95 percent of the company’s operations around the world, he anticipates doing some streamlining next year. In April, while Sox 404 was still fresh in their minds, 25 high-ranking finance and IT executives at Arrow Electronics participated in a two-day summit for what Reilly calls a ‘did well – do better’ debrief.

The summit also provided a forum for the team to consider how it can be more definitive in identifying key financial controls and reducing the amount of testing.

Integrating 404
‘Sox 404 is not a one-off event, or something that companies can focus on late each year,’ notes Reilly. ‘It’s something you need to live each and every day. We’ve now aligned Section 404 with how we actually operate the company, with how we make strategic decisions around initiatives we’re carrying out in the company to make us better or more effectively streamlined. One of the really important lessons learned is that this really needs to become part of your living culture and how you drive the business forward.’

At the same time, Reilly acknowledges the somber side of Section 404, the side that’s causing the buzz. ‘We have to be very honest with ourselves and recognize that the processes required by Sox, especially Section 404, are a bit burdensome for companies, and a bit costly,’ he concludes. ‘What we are trying to do is drive it forward to ensure we get something more than just an opinion from our auditors. But it will be difficult to get those benefits from a financial point of view [to] be the same amount of money that it costs us to do Sox 404 compliance.’

In the ever-evolving corporate arena, the weight of new disclosure rules is leading many companies to realize they have to do more than just provide their shareholders with endless pages of dull financial and legal information. Designers and creative consultants are helping companies turn their IR web sites and annual reports into effective marketing, advertising, recruiting and PR tools as well.

According to the IR magazine-commissioned Investor Perception Study, US 2005, company IR web sites continue to be the primary information source for retail investors, while institutional investors put more stock in the printed annual report. But companies are moving beyond a bare-bones compliance approach to one that seeks to maximize the potential of their communications.

LONDON – CEO remuneration at large-cap companies is growing faster than company profits, thanks to a surge in 'performance related' pay this past year. So concludes a recent survey conducted by Independent Remuneration Solutions (IRS), a London-based executive compensation advisory and Manifest, an independent corporate governance and proxy-voting specialist in the UK.

BUDAPEST -- The online corporate data provided by listed companies in Greece and Turkey is on par with that obtainable from their counterparts in Central & Eastern Europe (CCE), according to a new survey by the Budapest-based Partners for Financial Stability (PFS) Program.

VIENNA -- The number of Austrian listed companies making detailed corporate governance declarations has risen sharply, indicating that firms are improving transparency levels. So says a survey of 2004 annual reports from Vienna Stock Exchange companies by Aktienforum, a local capital markets promotion group.

CHARLOTTESVILLE, VIRGINIA -- The CFA Centre for Financial Market Integrity is urging the Delaware Bar Association to support a majority voting system for electing directors in response to a discussion paper released earlier this summer by the American Bar Association's (ABA) committee on corporate law. The paper analyzes majority voting as an alternative to the current plurality voting system for director elections and actually suggests that the best solution is an improved plurality voting system.

SINGAPORE -- As shareholders react to corporate scandals, companies listed on the Singapore Exchange (SGX) may find directors' and officers' (D&O) insurance harder to access.

Effective June 30, 2005, the British Columbia Securities Commission along with most Canadian Securities Commissions adopted National Instrument 58-101 Disclosure of Corporate Governance Practices and National Policy 58-201 Corporate Governance Guidelines. The adoption of NI 58-101 and NP 58-201 fundamentally alter the manner in which reporting issuers must conduct and report their corporate governance practices and procedures.

In her article in the Journal of Applied Corporate Finance in the fall of 2004, titled Beyond Financial Reporting – An Integrated Approach to Disclosure, Amy Hutton of Dartmouth College’s Tuck School of Business said the following about disclosure: “The goal is not simply to provide more disclosure, but to convey greater understanding.” Non-financial information can fill the information gap left behind by the financials.

Financial information tells us what the net result of corporate action has been (for example, the extent to which revenues and earnings have increased or costs changed). Non-financial information can help us understand why this has occurred (e.g. through new product launches and higher market share), how management has achieved its performance (e.g. by improving productivity or unit cost) and, most importantly, what steps the company is taking to sustain or enhance its performance (such as entering new growth markets). After all, share valuation is based on expected future results. In the Regulation Fair Disclosure world, where companies are loath to provide too much forward-looking financial information, non-financial drivers of performance become even more valuable.

Choosing what non-financial information to convey depends on the industry and the company itself. IROs need to ask what drives the performance of their companies and whether this is being adequately conveyed. Is there an opportunity to increase awareness of the results drivers?

If increased disclosure of non-financial information is called for, it’s important to find the best way to do so. The annual report is a good place to start. Investor presentations and dialogue with investors and analysts are good next steps.

Where does the IRO fit into the non-financial information paradigm? IROs are expected by investors and analysts to be well versed in all types of information about their companies, non-financial included. A good IRO has answers to most questions and can commandeer resources to obtain the remaining answers. In areas where detailed technical knowledge is required, the IRO can involve knowledgeable company management in meetings with investors. Not only does this provide all the information the investor needs, it also showcases the caliber of management, engenders greater confidence in the company and increases its investment merits.

Just how important is the IRO in the communication of non-financial data? Consider the results of a Thomson Financial survey in June 2004 of 88 institutional investors in the U.S., representing $2.4 trillion in equity assets under management. Only 18% expect to receive ‘financial data’ from an IRO during a discussion. In contrast, 64% anticipated having ‘operational and strategic information’ and ‘outlook/forward-looking information’. Another important conclusion of this survey is that “buysiders widely use fundamental quantitative screening as an initial step in the investment process, followed by additional qualitative analysis” – that is, the numbers help institutional investors identify the targets to buy, but qualitative criteria like strategy drive the actual decision to buy.

Despite the survey results, it is important to remember that financial and non-financial information go hand in hand. Neither on its own will likely convey a sound understanding of the company but together, they are invaluable in painting a picture of how and what the company has achieved and, most importantly, what it plans to accomplish.

The Canadian Securities Administrators (CSA) will implement amendments to National Instrument 55-101 Insider Reporting Exemptions (the “Instrument”) and Companion Policy 55-101CP (the “Policy”) on April 30, 2005, subject to receipt of the necessary ministerial approvals.

There's nothing like the prospect of a little jail time to help focus the mind.

The Canadian Securities Administrators (“CSA”) have released a proposed national policy containing new corporate governance guidelines (Proposed NP 58-201) together with a proposed national instrument containing disclosure requirements of corporate governance practices (Proposed NI 58-101). These CSA proposals replace the two competing corporate governance proposals that were circulated last year, one supported by British Columbia, Alberta, and Quebec, and the other by Ontario and Alberta.

As the definition of what constitutes governance expands, so too will the board's reliance on the investor relations officer.

Rating Version Three of ‘Board Games’
Newsline - A Fund Manager’s View Volume 15 Issue 1 January 2005

DOES Corporate Governance MATTER TO CANADIAN INVESTORS?
BY STEPHEN R. FOERSTER AND BRIAN C. HUEN
FALL 2004 • CANADIAN INVESTMENT REVIEW

Today’s Supreme Court Ruling Reassures Directors Regarding Fiduciary Duty Owed to Creditors

Fund Manager’s View Column from Newsline Volume 14 Issue 4 – July 2004
Mamma, Don’t Let your Children Become CEOs

In the wake of earnings manipulation scandals and criticisms of excessive compensation packages, employee stock options continue to be a very hot topic.

Newsline Volume 14 Issue 3 May 2004

[reference Knocking on the Boardroom Door lead article from Volume 14 Issue 3 May 2004 issue of Newsline]
Thanks to Barry Landen of Agnico-Eagle for providing the list of items he regularly reports on at Agnico-Eagle's quarterly board meetings.

We hope that the following will enable you to answer any questions about 58-201 and further clarify the positions we took in our comments to the Canadian Securities Administrators. It is intended to be a "living" document that we will add to as we refine our positions or as other questions/issues arise. We will, from now on, work to produce something like this each time we release a position paper or comments.

Newsline Volume 14 Issue 2 March 2004

Among the many new corporate governance requirements, one is intended to bring home to chief executive officers and chief financial officers the importance of their own personal responsibility for accurate disclosure.

Lead article from Newsline, Volume 14 Issue 2 March 2004.

Companies that used to grumble about the Toronto Stock Exchange’s guidelines for good corporate governance are facing a far more onerous regulatory regime now that Canadian securities administrators have drawn up a set of rules that, when passed, will bear the full force of law.

A number of significant changes in disclosure rules will take effect in 2004. As the year begins, here is an update on the status of these measures, which have been gestating for a very long time.

Canadian securities regulators in mid-January announced proposed guidelines for corporate governance best practices (Multilateral Policies 58-201 Effective Corporate Governance and 58-101 Disclosure of Corporate Governance Practices) for comment by April 15, 2004. Once finalized, they will replace the TSX corporate governance guidelines and related disclosure requirements. They are being considered by securities regulators in all jurisdictions except B.C., while Quebec plans to provide its own guidelines.

The Globe & Mail ran a series of articles today regarding Investor Relations. Randy Ray's article on Investor Relations and Corporate Governance may be found online at GlobeInvestor.com