MAY 17, 2004
INTERNATIONAL COVER STORY
From the Netherlands' Royal Ahold to South Korea's SK Corp., corporate
boards are taking major steps to improve shareholder rights in the wake
of financial scandals. More than 40 countries now boast codes or laws
regulating everything from financial disclosure requirements to the
structure of corporate boards. A veritable industry has sprung up
around the issue of corporate governance, with shareholder rights'
groups, nongovernmental organizations, and ratings agencies all getting
into the act.
Investors Fight Back
| Little by little, they're forcing companies in Europe and Asia to adopt better governance |
BusinessWeek's second annual Special
Report on corporate governance in Europe and Asia concludes that both
regions are making progress. While many companies still just go through
the motions, others have come to a real understanding that good
governance is necessary to attract and keep investors. The momentum is
strongest in Europe, where investors are challenging companies as never
before. There is more sensitivity to governance issues in Asia, too,
though the region's family- and government-controlled companies still
face potential conflicts of interest.
This year, BusinessWeek
has teamed up with Rockville (Md.)-based Institutional Shareholder
Services to present European and Asian highlights of its corporate
governance ranking of 1,785 non-U.S. companies, from Canada to Japan.
After a detailed analysis of eight core criteria for each company,
including the board of directors, audit committee, anti-takeover
provisions, executive and director compensation, and ownership
structure, ISS assigns a "corporate governance quotient." A score of 99
means that a company outperformed 99% of the companies ranked by ISS. BusinessWeek's tables include the highest- and lowest-scoring companies for 11 European and three Asian markets.
Governance experts consider such rankings a useful tool but warn that
they're only a guideline. "Corporate governance is a system of checks
and balances. There is no one measure that ensures a corporation is
well governed," says Florencio López-de-Silanes, director of Yale
School of Management's International Institute for Corporate
Governance. The ISS list turns up a few surprises. For example,
Eurotunnel PLC, the operator of the English Channel tunnel, scored
86.8, making it one of France's 10 best-governed companies. ISS gave
Eurotunnel good marks for, among other things, having a majority of
independent directors and a mandatory retirement age. But dissident
shareholders say management ignored their criticisms for years while
the company staggered under $12 billion in debt and its share price
plunged from $6 in 1987 to about 50 cents now. On Apr. 8 shareholders
voted to oust the entire board and management.
Eurotunnel raises a delicate issue: How much is good governance
reflected in stock performance? There's no direct evidence that markets
reward it, many experts say. However, there's a growing consensus that
over time markets punish poor governance. That's why transparent books
and board accountability are increasingly seen as insurance policies
against mismanagement. In the coming year, investors are likely to work
even harder to open up boardrooms.