DIAShow IAM 96

1
The Role of Corporate Governance for attracting
Investors Attention   22nd April 2005    Kyiv,
Ukrainian Stock Exchange Prof. Dr. Rüdiger von
Rosen Managing DirectorDeutsches Aktieninstitut
e.V. Frankfurt am Main
2
Definition Corporate Governance

• The purpose of Corporate Governance is to achieve
  a responsible, value-oriented management and
  control of companies.
• Corporate Governance Rules promote and reinforce
  the confidence of current and future
  shareholders, lenders, employees, business
  partners and the general public in national and
  international markets.
• Definition of the German Panel on Corporate
  Governance, 2000

3
Corporate Governance aims for...

• Long-term, added value based supervision and
  management.
• Implementing tools in form and content to meet
  shareholders interests.
• Especially more transparency for shareholders and
  stakeholders regarding the work of management and
  - if existing - supervisory boards as well as
  accounting and auditing.
• Safeguarding shareholders rights, e.g. voting
  rights in general meetings.
• More foreign investors interested in a company
  awarding a good and transparent corporate
  governance.

4
Corporate Governance concerns..

• Ownership
• Separation of and
  Control
• Shareholders
• Conflict of Interest between
  and (Principal Agent Problem)
  Management
• Management Self-Interest like
  Salary, Employment
• Shareholders Profit Maximisation
  / Shareholder Value

5
German Corporate Governance Code of 2002

• The German Corporate Governance Code (the "Code")
  of February 2002 presents essential statutory
  regulations for the management and supervision
  (governance) of German listed companies and
  contains internationally and nationally
  recognized standards for good and responsible
  governance.
• Its purpose is to promote the trust of
  international and national investors, customers,
  employees and the general public in the
  management and supervision of listed German stock
  corporations.
• The Code recapitulates the requirements by law
  and gives recommendations (shall) and
  suggestions (should or can). Art. 161 of the
  German Stock Corporation Act demands an annual
  declaration of conformity (comply or explain)
  regarding the fulfilling of the recommendation
  (soft law character of the Code).
• Foreword of the German Corporate Governance
  Code 2002

6
Reasons for the continuous Corporate Governance
Activism in Europe and Northern America

• Corporate scandals - Enron, Worldcom, Parmalat
• Regaining investors faith in capital markets
  after crash in 2000
• Excessive executive remuneration becoming a
  concern
• Changing stakeholder expectations

7
Attraction for Investors

• McKinsey Study 2002How important is Corporate
  Governance relative to financials issues, e.g.,
  profit performance and growth potential, in
  evaluating which companies you will invest in?
  (percentage of investors)

McKinsey Global Investor Opinion Survey on
Corporate Governance 2002
8
Attraction for Investors

• McKinsey Study 2002 How does Corporate
  Governance affect your investment
  decision?(percentage of investors, multiple
  response possible)

Avoidance of certain companies
Decrease/increase holdings of certain companies
Avoidance of certain countries
Decrease/increase holdings of certain countries
McKinsey Global Investor Opinion Survey on
Corporate Governance 2002
9
Attraction for Investors (Example)

• CalPERS (California Public Employees Retirement
  System)
• Largest public pension plan in the United States
  and third largest in the world, with assets
  totaling 165.3 billion at August 31, 2004
• CalPERS Conclusion already 20 years ago "good"
  corporate governance leads to improved long-term
  performance
• Measures of Influence
• Publication of an annual Focus List review of
  the performance of the US companies in its stock
  portfolio, and identification of those that are
  among the lowest long-term relative performers
  (review contains also a corporate governance
  screening) List contains those companies that,
  at the end of the screening process, continue to
  merit public and market attention
• -gt leads to CalPERS effect positive
  development of stock price
• Publication of Proxy Voting Decisons, Global
  Proxy Voting Principles

10
OECD Principles of Corporate Governance
(Revisions of 2004)
Institutional investors They should disclose
their corporate governance policies, how they
decide on the use of their voting rights and how
they manage conflicts of interest that may
compromise their voting Restrictions on
consultations between shareholders about their
voting intentions should be eased to reduce the
cost of informed ownership. Conflicts of
interest and auditor responsibility A new
principle calls for rating agencies and analysts
to avoid conflicts of interest which could
compromise their advice The duties of the
auditor must be strengthened and include
accountability to shareholders and a duty to the
company to exercise due professional care when
conducting an audit Auditors should be wholly
independent and not be compromised by other
relations.
11
OECD Principles of Corporate Governance
(Revisions of 2004)

• Stakeholder rights and whistle-blower protection
• The principles make reference to the rights of
  stakeholders, whether established by law or
  through mutual agreements.
• A new principle advocates protection for
  whistleblowers, including institutions through
  which their complaints or allegations can be
  addressed and provides for confidential access to
  a board member. 
• Shareholder rights
• Shareholders should be able to remove board
  members and participate effectively in the
  nomination and election processes.
• They should be able to make their views known
  about executive and board remuneration policy and
  any equity component should be subject to their
  approval. (N.B. no disclosure of individual
  remuneration).

12
The Main Corporate Governance Issues
Compensation Systems for Executive and Non
Executive Directors
Executive and Non- Executive Stock Ownership
Structure and Independence of the Board
Shareholder Rights and their Protection
Independence and Integrity of the Audit process
13
Structure and Independence of the Board
(different Systems)

• Two-tier board system
• management board
• supervisory board

• One-tier board system
• unitary administrative board

none of the two systems is accorded priority (in
accordance with OECD-Principles) both systems
are converging
14
New Chances for Companies in the European
UnionSocietas Europaea (European Company, SE)

• 8 October 2004 European Company Statute comes
  into force and the related Directive should be
  implemented in the Member States .
• The SE is a supranational legal form with
  national roots its incorporation of an SE is
  characterised by a mandatorycross-border
  element.
• The SE is designed for big enterprises with a
  certain minimum size which may be quoted on an
  exchange by giving a minimum capital of 120,000
  Euro.
• The corporate structure offers the choice between
  two systems (one-tier or two-tier board).
• SE is a milestone in the creation of a company
  law framework and in strengthening European
  companies in the global market.

15
The Role of Corporate Governance for attracting
Investors Attention   26th November
2004    Kyiv, Ukrainian Stock Exchange Prof. Dr.
Rüdiger von Rosen Managing DirectorDeutsches
Aktieninstitut e.V. Frankfurt am Main