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MAY 17, 2004


Investors Fight Back
Little by little, they're forcing companies in Europe and Asia to adopt better governance

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.

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.

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