iiContentsIV Preface1 Introduction2 Objectives3 The Principles Appendix 1: The Principles5 Principle 1: Performance Orientation6 Principle 2: Nomination and Compensation Committees8 Principle 3: Disclosure10 Principle 4: Audit Committee13 Principle 5: Code of Conduct14 Principle 6: Conflicts of Interest15 Principle 7: Environmental and Social Commitment17 Principle 8: Conduct of the Board of Directors21 Principle 9: Responsibilities of Investors25 Principle 10: The Role of Directors in Turnaround Situations27 Appendix 2: Definitions of Director Independence32 Appendix 3: Case Study38 References42 Acknowledgment
iiiPrefaceOne of the root causes of the Asian financial crisis The Asian Development Bank expects to work withwas the failure in corporate governance. The social institutional investors, business enterprises,costs in terms of the resulting unemployment and multilateral institutions, and bilateral agencies thatdistress were severe. Consequently, there has been a share these beliefs and principles. From the vantagesurge of interest in the principles of good corporate point of institutional investors, good corporategovernance. governance is a key risk management tool that can help preserve scarce capital in ways compatible withAsian business and other leaders wish to minimize the their values. The winners among the Asia and Pacificrisk of indifferent governance in the future. While private sector will be set apart by their use ofseveral governments and corporations have taken corporate governance as a competitive weapon. A keysteps to enhance the enabling environment for tenet of good corporate governance is that companiescorporate governance, the financial pages of the be run in the long-term interest of shareholders.business press continue to report instances of Companies adhering to this principle will not onlysignificant corporate governance shortcomings in benefit their shareholders and other stakeholders, butpractice. Against this backdrop, it was felt that a set of also the wider economy and the environment.principles at the heart of good corporate governanceshould be enunciated. From our own interactions with Countries differ with respect to factor endowments,Asian private sector corporations, we have felt the stage of development, the size of economies, the sizeneed for specific pointers on implementing good of companies, extent of budgetary resources availablecorporate governance. This publication aims to serve for governance, the level of professional education,as a guide for those who wish to embark on a program and the state of legal infrastructure. Accordingly, ato strengthen governance practice in their uniform approach to the application of the principlesorganizations. may not be feasible. Considerable adaptation of the principles to local conditions may be unavoidable.This booklet could also be helpful to investors, the What is more important is that the principles bemedia, and other stakeholders in understanding the applied in a manner that captures the essence ofessence of good corporate governance. Knowledge of sound corporate governance. The principles of goodthe key principles would enable them to distinguish corporate governance are necessary, but notbetween companies that comply superficially with sufficient, conditions for economic or financialgood practice standards and those that have a success. However, the principles do not detract fromgenuine commitment. Private sector enterprises will success and indeed bolster the prospects for successincreasingly discover that traditional financial in the marketplace. As more experience is gained andperformance will be insufficient to attract investors on feedback received, suitable revisions will be made ina sustained basis and will need to demonstrate future versions of this paper.conduct consistent with the principles of goodcorporate governance.
ivAbbreviationsADB Asian Development Bank ICSA The Institute of Chartered Secretaries andAGM annual general meeting AdministratorsCEO chief executive officer NED nonexecutive directorED executive director NYSE New York Stock ExchangeEVA Economic Value Added (a trademark of ROE return on equity Stern Stewart & Co) ROI return on investmentICGN International Corporate Governance Network SEC Securities and Exchange Commission
vHermes Pensions Asian DevelopmentManagement Bankwww.hermes.co.uk www.adb.orgHermes Pensions Management is one of the largest The Asian Development Bank (ADB) is a multilateralpension fund managers in the City of London. development financial institution dedicated toHermes is owned by the British Telecom Pension reducing poverty in Asia and the Pacific. EstablishedScheme, which is also its largest client. Being owned in 1966, it is now owned by 61 member governments.by a pension fund gives Hermes a unique insight and It is rated triple-A by all the major rating agencies.close alignment to the needs of other long-term ADB extends loans to eligible governments in theinvestors and pension funds. Asia-Pacific region and in Central Asia. In addition, ADB extends loans to, and invests equity capital in,Hermes’ clients hold over 1% of the value private sector enterprises. ADB strives to promoteof nearly all of the largest 800 quoted companies on entrepreneurship, the quality of governance, andthe London Stock Exchange and also have index environmental and social development in itsand active holdings in over 2,000 public companies borrowing member countries.worldwide, including over 100 companies innon-Japan Asia. Through its long-term holdings in ADB plays a catalytic role in helping mobilize stableindex stocks, Hermes is necessarily exposed to and responsible domestic and international capitalunderperforming assets and for this reason it from institutional investors for investment in businessplaces great emphasis on exercising its stewardship enterprises operating in its target markets. Inrights in all the companies in which it invests. As addition, ADB works in partnership with its borrowinga result, it is at the forefront of the corporate member countries to help create an enablinggovernance movement in the United Kingdom. environment for the development of the infrastructureFurthermore, it has taken these principles to the next sector, and the financial and capital markets.level by being the first major investment institution inthe world to have established both UK and Europeanshareholder engagement funds. After identifyingcompanies underperforming their indices, Hermes’intervention and involvement as long-termshareholders aims to release the latent value thatexists within the company.
1Introduction1. Corporate governance is a major concern in the 5. The Asian Development Bank (ADB) hasAsia and Pacific region, especially in the aftermath taken a wide range of steps to improve corporateof the 1997 Asian financial crisis. The size and governance in the region. ADB’s aims include thefrequency of recent corporate governance debacles promotion of corporate enterprises and financialshow that poor governance is not only a formidable institutions in its developing member countries tohurdle to surmount but is also at the forefront of help accelerate economic growth and prosperity.economic development issues. A dilemma has ADB has invested in over 100 private sectorarisen from recent experience: it is possible for enterprises and financial institutions in the Asia andcompanies to appear to comply with the requisite Pacific region over the last 2 decades and hascorporate governance rules without complying with coinvested with governance-conscious institutionalthe principles and spirit of good governance. investors. This experience has provided ADB with a close look at actual governance practices in its2. Accordingly, it will be helpful to investors, the investee enterprises that vary from the advanced tomedia, and other stakeholders to be armed with the the rudimentary. The lessons gleaned from thiscorporate governance analytical principles, skills, experience have helped shape a set of corporateand tools that will enable them to distinguish governance principles that have been crafted andbetween companies that comply superficially or tailored to the conditions of the region.cosmetically, and those which have a genuinecommitment. Enterprises will increasingly discover 6. Ten core principles have been listed. An attemptthat traditional financial criteria will be insufficient to has been made to model the principles in a mannerattract investors and will need to demonstrate consistent with global best practice. All the principlesconduct consistent with the principles of good are interrelated and tied by the common threads of acorporate governance. performance orientation within the bounds of acceptable conduct. Good corporate governance3. Enterprises in Asia and the Pacific that genuinely requires an overriding commitment to a culture ofembrace, adopt, and adhere to the principles could governance that permeates all aspects of boardderive a multitude of benefits such as the availability and management conduct. The example and toneand lower cost of capital, the ability to attract top need to be set at the top to embed good corporatetalent and business partners, greater governance in an organization’s culture.competitiveness, better financial performance andmore transparency, and a more favorable impact on 7. This paper condenses the principal attributesemployment and the environment. of good corporate governance. Each principle addresses a particular facet of corporate4. Corporate governance usually refers to the governance. These relate to key board committees,conduct of the board of directors. Recent events the conduct of board members and others, thein the Asia and Pacific region and revelations environment, the role of directors in turnaroundelsewhere have shown that the practice of high- situations, and the responsibilities of investors inquality corporate governance is indispensable for influencing corporate governance. The principlesbuilding investor confidence and for sustained recognize that effective corporate governancegrowth. Enterprises that strive for governance requires the partnership of the board withexcellence will gain a long-term advantage. shareholders and management as well as theA review by Colin Melvin, Director, Corporate interface with an array of stakeholders such asGovernance, Hermes Pensions Management Ltd., employees, the media, creditors, and suppliers.of the evidence for a link between corporate Accordingly, some principles also encompass thegovernance and investment performance shows conduct of shareholders and management and thethat a key driver of corporate performance is management of the relationship with other entitiesinvestor activism. Mckinsey & Co. found that, that have a stake in the success of an enterprise.other things being equal, investors reward well-governed companies by paying a premium for 8. Each principle is accompanied by a commentarytheir shares. describing tips and guidelines helpful to directors
2and others who aspire to implement the principles. ObjectivesDetailed guidance on concepts and models can beaccessed by referring to the extensive set of 10. The objectives of the principles are to assistreferences listed at the end. (i) enterprises design and implement their9. ADB expects to work with those institutional own corporate governance guidelines byinvestors and private enterprises that share these benchmarking their practices against thesebeliefs and principles. From the vantage point of principles;institutional investors, good corporate governance isa key risk management tool that helps preserve and (ii) domestic and institutional investors, fund managers,grow capital in ways compatible with their values. as well as ADB, in their quest for excellence in corporateThe winners in the Asia and Pacific private sector governance in investee enterprises; andwill be set apart by the practice of high-qualitycorporate governance as a competitive weapon. (iii) governments in designing corporate governanceA key tenet of good corporate governance is that regulations.companies be run in the long-term interest ofshareholders. Companies adhering to this principlewill not only benefit their shareholders, but also thewider economy.
3The PrinciplesPrinciple 1: Performance Orientation rating agencies to assess the quality of corporate governance and the true financial condition of the11. The principal objective of business enterprise.enterprises is to enhance economic value for allshareholders by making the most efficient use of Principle 4: Audit Committeeresources. A company that meets this shareholdervalue creation objective will have greater internally 14. Audit committees with the following attributesgenerated resources, improving its prospects for are more effective: composed solely of independentmeeting its environmental, community, and social directors, at least two of whom should have theobligations; pay taxes; reward, train, and retain requisite knowledge of accountancy, financialkey staff; and enhance employee satisfaction. A analysis, and financial reporting; at least onekey focus area is a company’s human capital member should have a good understanding of thestrategy, which is a lead indicator of corporate business of the enterprise; have a written mandatesuccess. and terms of reference; engage only independent external auditors who should be answerable to thePrinciple 2: Nomination and Compensation committee; and require that a suitable system ofCommittees internal control and risk management is embedded into the fabric of the company; and focus on the12. A key success factor is the quality of leadership substance of underlying transactions.of an enterprise. A nomination committee with awritten mandate and terms of reference consistent Principle 5: Code of Conductwith good practice may ensure the selection ofdirectors and a chief executive officer (CEO) of the 15. All enterprises must have a written code ofhighest caliber. Comprising mainly of independent business conduct and establish systems to ensuredirectors, the committee should have a written that it and all applicable laws are followed in letterdefinition of independence, inclusive of both and spirit.subjective and objective criteria. A compensationcommittee should set the compensation policy for Principle 6: Conflicts of Interestdirectors and senior management, commensuratewith performance measured against comparable 16. Directors owe a fiduciary duty to the companyindustry benchmarks and key performance that requires them to act in the best interest of theindicators such as economic value added. company. Actual and potential conflicts of interest should be identified, disclosed, and explained inPrinciple 3: Disclosure sufficient detail to enable valid judgments to be made on their adverse impact. The persons who are13. To ensure transparency, companies’ annual conflicted should not participate in discussion andreports should disclose true and fair accounting decision of the issue in question, nor be entitled toinformation prepared in accordance with applicable vote on any resolution where they are conflicted.standards; consider substance over form in the Related party contracts should be disclosed in thepresentation of accounts; disclose and discuss all annual report.material risks; disclose and explain the rationale forall material estimates; show manner of compliance, or Principle 7: Environmental and Socialexplain deviations, if any, with applicable corporate Commitmentgovernance codes; discuss goals, plans, andprogress; and provide access to the register of 17. There is an inextricable relationship among theshareholders showing beneficial ownership. In objectives of corporate performance, socialaddition to annual disclosures, enterprises should development, and environmental protection.comply with applicable continuous disclosure Enterprises, to be sustainable, will need to recognizerequirements. Disclosures should be timely and and effectively deal with this triad of concerns, which,adequate to enable investors, third party analysts, or at times, may conflict with each other.
4Principle 8: Conduct of the Board of Directors Institutional investors, general partners, and fund managers have a fiduciary duty to actively monitor18. Directors are expected to preserve and enhance and vote on issues vital to the success ofshareholder value. Their effectiveness can be enterprises in which they invest as guardians of theenhanced if they are legally empowered, have the savings entrusted to them. Enterprises will find itrequisite qualifications for the board committees on helpful to communicate with them, deliver in a timelywhich they sit, make the needed time commitment, manner true and fair disclosure reports, and removegiven the appropriate directorship training, are impediments from voting by all shareholders bysuitably compensated, receive proper notice of taking advantage of modern communications andmeetings, have the right to propose agenda items, follow a one-vote for one-share policy. The fairconsult each other privately in the absence of treatment of minority shareholders must be ensuredmanagement and executive directors, and provided and large institutional investors should lead thewith appropriate information to enable them to pursuit of shareholder rights.perform their monitoring role and evaluate theperformance of directors. They should be proactive Principle 10: The Role of Directors inand diligent. Turnaround SituationsPrinciple 9: Responsibilities of Investors 20. Directors of troubled companies must play a proactive role in turnaround situations, but avoid19. The pursuit of good corporate governance in preferential treatment of creditors, or trade when theinvestee enterprises is a risk management tool. company is insolvent.
5Appendix 1Principle 1: Performance Orientation capital allocation, investment and compensation decisions. Economic value added (EVA) equals the1. The principal objective of business enterprises is excess of returns on capital employed over theto enhance economic value for all shareholders by opportunity cost of debt and equity.making the most efficient use of resources. Acompany that meets this shareholder value creation 4. The shareholder value mandate should be tightlyobjective will have greater internally generated woven into the fabric of a company’s managementresources, improving its prospects for meeting its procedures, organization structures, budgets,environmental, community, and social obligations; incentive programs, recruitment, and corporatepay taxes; reward, train, and retain key staff; and culture. To ensure a high degree of shareholderenhance employee satisfaction. A key focus area is alignment, the same metrics that correlate to valuea company’s human capital strategy, which is a lead creation and are monitored by the board should beindicator of success. used for planning, reporting, and compensation. Human capital is the resource that plays a pivotal2. The pursuit of sustainable, long-term shareholder role in the success or failure of a corporation.value is of paramount importance. Managements Boards must evaluate and have an input in humanshould prepare long-term goals in terms of shareholder capital strategies through the promotion of areturn objectives as well as strategies and business strategic, as opposed to a transaction orientedplans for review by the board. Their implementation human resources department.should be monitored by the board and compared withthe performance of competitors. If performance is 5. The decision to invest surplus capital in mergersanticipated to fall short of goals, early corrective can reduce shareholder value. Boards should makemeasures should be considered by the board. such decisions with particular care and, if necessary, return surplus capital to shareholders, rather than3. While shareholder return goals should be set in deploy it in value destroying activities. Common flawsterms of metrics that are based on standard are overpaying, or, acquiring businesses incompatibleaccounting techniques, it is critically important to set with the core competencies of the company.long-term goals also in terms of economic profit as Conversely, the directors of a target company shoulddistinct from measures based on accounting be mindful that they do not reject a good offermethodologies. Popularly used metrics based on contrary to the interests of its general body ofaccounting concepts are return on equity (ROE) and shareholders. An active merger and acquisitionreturn on investment (ROI). Project investment market provides an impetus to good governance.criteria should be based on the net present value of Barriers to mergers can lead to complacency amongcash flow technique. Metrics using accounting entrenched underperforming managements andmeasures are necessary but the pursuit and boards, leading to the suboptimal use of capital.recognition of economic profit must always beparamount in judging corporate success. The metric 6. Reforms: Governments need to consider theeconomic value added1–a measure of economic removal of impediments to mergers andprofit–should be monitored and be used to make acquisitions.
6Principle 2: Nomination and Compensation (v) Institute a process for monitoring directorCommittees performance. Regular performance reviews of directors and of the board as a whole should7. A key success factor is the quality of leadership of be made, with independent directors meetingan enterprise. A nomination committee with a written at least once annually in the absence of othermandate and terms of reference consistent with good directors. Director performance should bepractice may ensure the selection of directors and a judged relative to the goals of the enterpriseCEO of the highest caliber. Comprising mainly of on issues they are directly responsible for.independent directors, the committee should have awritten definition of independence, inclusive of both (vi) Oversee the preparation of annual disclosuresubjective and objective criteria. A compensation statements that directors are required tocommittee should set the compensation policy for make.directors and senior management commensuratewith performance measured against comparable 9. Several traits are important in a director, one ofindustry benchmarks and key performance indicators which is the ability to add value to the enterprise.such as economic value added. The selection must be made on merit devoid of political considerations and influence. According to8. The effectiveness of a nomination committee can Mervyn King and Geoffrey T. Bowes, “goodbe enhanced with a written mandate listing its corporate governance hinges upon the competenceresponsibilities.3 The main functions are: and integrity of directors and the board.” In selecting a director, the following factors and traits of (i) Engage the most competent directors and a candidates should be considered: CEO by adopting a process designed to produce the desired result without bias. If (i) relevance of the candidates’ experience and necessary, the committee should employ an knowledge to the enterprise, as well as external search firm. managerial and leadership experience; (ii) Be responsible for succession planning. (ii) knowledge of the industry, investee company, and countries where the enterprise (iii) Make recommendations to the board on the conducts its business; appointment and term of directors and senior executives bearing in mind the need for a (iii) record of diligence, integrity, and willingness balance of skills on the board. Ultimately, and ability to be independent and objective directors should be elected by shareholders. as well as to serve actively as a director; Some observers believe that to maintain independence, major family shareholders (iv) the frequency of absences at board of family-run firms should not be entitled to meetings and the ability to make the time vote on the nomination of independent commitment to serving on the board directors. considering his/her regular duties and memberships of other boards and the ability (iv) Define independence including both and willingness to act quickly in a crisis–in subjective and objective criteria and monitor general, more than three to four directorships director independence on a regular basis. could be burdensome; The totality of circumstances should be considered in determining whether a board (v) limited insider relationships and links with member is independent. Those who have competitors; relationships that might interfere with the exercise of independent judgment should be (vi) a track record of success in business with excluded. Various definitions of director familiarity and experience with the role of a independence are given in Appendix 2. board member; and
7 (vii) a knowledge of relevant special issues such outperformance by reference to key performance as environmental issues in the case of indicators and by comparing corporate companies where such issues are of performance with industry benchmarks. Care importance. If financial derivatives are should be taken to avoid interlocking important, then at least one board member compensation committee memberships with must be literate and experienced in boards of other companies. If external derivatives. Younger candidates should also compensation consultants are used then these be considered if they bring new skills or should be independent and must be selected, ideas of value to the enterprise. appointed, and be answerable to independent board members. References for the committee are10. Those who may not normally be considered in the Principles of Best Practice on Executiveprivate sector boards are current government Remuneration published by ICGN and 20officials or regulators or those who have been Questions Directors Should Ask about Executivelegally disqualified. Directors should be subject to Compensation, available at the web site of there-election at intervals of no more than 3 years. Canadian Institute of Chartered Accountants.Directors that have served for 10 years or moreshould be not be regarded as independent. 12. Reforms: Stock exchange listing rules and banking regulations should (i) require companies11. Compensation Committee: The compensation and financial institutions to have nomination andof directors and senior management must be compensation committees comprising of a majorityaligned with the interests of shareholders. The of independent directors; (ii) promulgate a definitioncompensation of directors must be commensurate of director independence; and (iii) require disclosurewith the important responsibility that is entailed by of the board meeting attendance record of boardthe strict legal duties, potential liabilities, and the members and other board memberships of boardneed to devote extra time and effort during members. Governments should enact legislation toemergencies. It should reflect the heightened disqualify errant directors whose track recordresponsibilities that directors are now expected to shows their lack of competence in discharging theshoulder. The committee should set the duties of directorship. An example of such legislationcompensation of the CEO. The performance is the United Kingdom’s Director Disqualificationbonus should be earned only if there is Act 1986.
8Principle 3: Disclosure (ii) Disclosure of Corporate Governance System: Annual reports should articulate the13. To ensure transparency, companies’ annual company’s corporate governance system asreports should disclose true and fair accounting well as compliance, or explain divergence,information prepared in accordance with applicable if any, with the stated system, or, applicablestandards; consider substance over form in the corporate governance codes. The corporatepresentation of accounts; disclose and discuss all governance system and annual reports inmaterial risks; disclose and explain the rationale for English should also be accessible on theall material estimates; show manner of compliance, web site of companies that have websitesor explain deviations, if any, with applicable see Best Practices for Online Governancecorporate governance codes; discuss goals, plans, Disclosure, Dominic Jones, The Corporateand progress; and provide access to the register of Board, at www.blunco.com. To allowshareholders showing beneficial ownership. In shareholders to monitor the provision ofaddition to annual disclosures, enterprises should nonaudit services, the company shouldcomply with applicable continuous disclosure disclose in its annual report and proxyrequirements. Disclosures should be timely and statement an auditor independence policyadequate to enable investors, third party analysts, or and the fees paid by the company for eachrating agencies to assess the quality of corporate category of nonaudit services;governance and the true financial condition ofthe enterprise. (iii) Corporate Boards: Corporations should disclose upon appointment to the board and (i) Disclosure of Major Risks and Accounting thereafter in each annual report or proxy Estimates: Published accounts and annual statement information on the identities, core reports should be required to disclose the competencies, professional or other major risks, the major items that have been backgrounds, factors affecting estimated, and deviation, if any, from independence, and overall qualifications of applicable accounting, auditing, and board members and nominees so as to corporate governance standards. Segment enable investors to weigh the value they add results should be disclosed as well as the to the company. Information on the degree of exposure to the risk of adverse appointment procedure should also be impact from fluctuations in exchange rates, disclosed annually; interest rates or other market prices, if material. Any information that a reasonable (iv) The annual report and proxy statement person would expect, if it were generally should also include a copy of the audit available, to have a material effect on the committee charter, contain a statement by price or value of securities should be the audit committee that it has complied with disclosed. The essence of the the duties outlined in the charter, confirm Management’s Discussion and Analysis is to that the audit committee pre-approved provide a narrative description of the contracts for nonaudit services, and contain financial statements that conveys the context a statement by the audit committee that it in which they should be viewed. believes that the external auditor’s It should include other information about independence has not been impaired by the financial performance and trends and risks audit firm’s provision of permitted nonaudit with possible future consequences including services; those arising from off-balance sheet arrangements. Banks should also comply (v) Internal Control Report: Each annual report with the disclosure practices recommended should contain an “internal control report,” by the Bank for International Settlements which shall: (1) state the responsibility of (see www.bis.org); management for establishing and maintaining
9 an adequate internal control structure and of a corporation, or the dilution of the procedures for financial reporting; and (2) shareholding or other economic interests of contain an assessment, as of the end of the existing investors. Shareholders should be company’s fiscal year, of the effectiveness of given sufficient information about any such the internal control structure and procedures proposal, sufficiently early, to allow them to of the issuer for financial reporting. The make an informed judgment and exercise external auditor shall attest, as a stand-alone their voting rights. For any nonintentional assignment, to, and report on, the material selective disclosure, a company assessment made by the management; must make prompt public disclosure, or for any intentional material selective disclosure,(vi) Data that should also be readily accessible a company must make simultaneous public by shareholders are: identities of major disclosure. shareholders and others that control or may control the company, including information (viii) The appropriate officers of the enterprise or on special voting rights, shareholder the board of directors should affirm on a agreements, the beneficial ownership of regular (at least annual) basis, the accuracy controlling or large blocks of shares, of the company’s financial statements and significant cross-shareholding relationships the adequacy of its internal controls. and cross-guarantees, as well as information on differential voting rights and related party 14. Reforms: Introduce international accounting transactions; standards. See Report of the Disclosure and Accounting Standards Committee, Singapore and(vii) Shareholders should be given sufficient Corporate Disclosure in Annual Reports, A Guide to information about any proposal involving Current Requirements and Recommendations, Hong strategic modifications to the core business Kong Society of Accountants.
10Principle 4: Audit Committee event-driven situations and to investigate the emergence of serious issues;15. Audit committees with the following attributesare more effective: composed solely of independent (ii) Internal and External Auditors: Review thedirectors, at least two of whom should have the internal audit annual work plan and provide arequisite knowledge of accountancy, financial direct channel of communication betweenanalysis and financial reporting; at least one the external and internal auditors and themember should have a good understanding of the board and assist the board in ensuring thatbusiness of the enterprise; have a written mandate the external audit is conducted in a thoroughand terms of reference; engage only independent and objective manner;external auditors who should be answerable to thecommittee; require that a suitable system of internal (iii) Auditor Performance: Review annually thecontrol and risk management is embedded into the performance of the external auditors andfabric of the company and focus on the substance of the extent of their nonaudit services, andunderlying transactions. the value for money obtained from auditors’ fees for both statutory audit work and16. Charter. The audit committee should have nonaudit work;written terms of reference that has been approvedby the full board. The committee should be (iv) Auditor Independence: Review, at leastappointed by the full board. The Audit Committee4 annually, the auditors’ independence. Theplays a vital role in ensuring the integrity of an independent members of the committeeenterprise. It has the following four critical functions, should evaluate the conflicts of interest ofwith decisions being made by the full board: auditors. Factors that may help contain this risk are: the auditors should not be beholden (i) engaging, communicating with, and providing to management, there should be limits on oversight of external auditors; nonaudit fees, the compatibility of nonaudit services with the auditors’ independence, (ii) ensuring the adequacy and effectiveness of absence of economic interests of auditors a system of risk management and internal such as ownership of shares in the company controls; to be audited that are not sold within 90 days of the auditor’s appointment, need for the (iii) ensuring that there is proper disclosure of rotation of audit firms and audit partners, a the accounts giving a true and fair view, and distance between auditors and company favoring substance over form; and managements, absence of mutual employment relationships between the audit (iv) communicating with internal auditors. firm and the company to be audited, the appointment of auditors by the audit17. Each audit committee member should be committee instead of management,“independent”, i.e., not receiving, other than for limitations on nonaudit fees, broadening theservice on the board, any consulting, advisory, or universe of firms eligible to perform audits,other compensatory fee from the company, and as and annual declarations by auditorsnot being an affiliated person of the company, any confirming that they have maintained theirsubsidiary thereof or be related to any person in independence (see the note below on auditorthe company. independence policy); The following is a list of some of the practices of (v) Auditor Appointment: The committee shouldeffective audit committees: recommend the appointment and compensation of external auditors to the (i) Frequency: Meet with an appropriate board and the shareholders and should frequency (e.g. six times a year) and under consider to competitively tender auditor
11 selection, although the level of their fees need tasks appropriately. If the business involves not be the primary or sole criteria. As a trading or otherwise dealing in derivatives to condition of appointment, auditors should be a significant extent, at least one committee required to maintain and perform in member should have knowledge and accordance with a quality control standard. experience of derivatives. The risk of a The board should be designated as the client funding shortfall in a defined benefit pension of the external independent auditor; scheme should be addressed. If pension issues are significant, then a pension(vi) Minutes: The minutes of the committee’s committee should be established (see meetings should be circulated to the full pension governance at www.watson board after each meeting; wyatt.com). In the case of financial institutions, a risk management committee(vii) Private Meetings: The chairman, the chief of the board should be established; executive officer, and the finance director and other members of the senior (x) Information: The information provided by management team, together with the management and the independent auditor external auditors, can normally attend should fully inform the committee about meetings of the committee, except when the any financial irregularity, regulatory committee wishes to meet alone. The investigations, potential liabilities and risks, committee should also confer privately with and any other sensitive information that both external and internal auditors on a requires disclosure; regular basis; (xi) Compliance: The committee should ensure(viii) Internal Controls: The committee should that the enterprise has the systems for identify any significant weaknesses or monitoring compliance with the Code of failings, or a breakdown of checks and Business Conduct, relevant laws, and balances, and determine whether suitable the enterprise’s conflict of interest policy. remedial action has been taken. If failings It should monitor infractions and related are identified, the committee should consider remedial action. Monitoring a company’s whether the findings indicate a need for more conflicts of interest policy should be the extensive monitoring of the system of responsibility of the committee. Boards that internal control. The committee shall fail to establish effective corporate establish procedures for the “receipt, compliance procedures may face retention, and treatment of complaints” substantial liability. Those who do may be received by the issuer regarding accounting, treated more leniently by the courts. internal controls, and auditing. Audit Auditors should be required to maintain all committees should certify that the company audit or review work papers for 7 years or has adequate and effective internal controls. more as mandated by law. Companies can Best practice standards as laid down in adopt a corporate governance self-rating reports such as the Turnbull Report,5 or the system (see http://www.sec.gov.ph/sec- Committee of Sponsoring Organizations memo-5,s2003.pdf); (COSO) report, should be adhered to; (xii) Report: The audit committee should submit(ix) Risk Management: The committee should an annual report to the board and its require the adoption and implementation of shareholders on its activities and findings. an appropriate risk management system The committee should follow-up on its and require that competent professionals inquiries and recommendations; undertake risk-prone activities or products and that they are provided with the requisite (xiii) Advisors and Funding: The committee training and resources for performing their should have the authority to engage
12 independent counsel or other advisors, (ii) Under no circumstances should a company’s as it determines necessary to carry external auditor provide: out its duties. The company should provide appropriate funding to the • nonaudit services prohibited by relevant committee; and regulation; (xiv) Audit Committee Effectiveness and • financial information systems design or Performance: The board should evaluate implementation services; the performance of the Audit Committee and its effectiveness using criteria such as • internal audit consulting services; or that in Audit Committee Effectiveness– Self-Assessment Tool designed by Brad • management consulting services. Davidson and Clarence Ebersole. (iii) To ensure that the provision of permitted18. Auditor Independence Policy: The Council of nonaudit services does not compromiseInstitutional Investors (http://www.cii.org/ the external auditor’s independence,corp_govenance.asp) has recommended the a company’s management and the auditfollowing auditor independence policy: committee of the board of directors should formulate an auditor independence policy (i) An external auditor should not perform any and compliance should be monitored by nonaudit services for its audit clients, except: the board of directors. The audit committee’s preapproval should be • services that are required by statute or required for any contract for nonaudit regulation to be performed by a company’s services in excess of $50,000 to be external auditor, such as attest services; entered into with the company’s external and auditor. • services related to tax return preparation, 19. Reforms: Governments and stock exchanges provided that such services should not in the Asia and Pacific region should ensure that include (a) the provision of advice the fiduciary duties of audit committee members regarding the structuring or any and other board members as well as those of transaction, (b) serving as the company’s external independent auditors are embedded in advocate or representative in the tax audit the law and in stock exchange listing rules. process, (c) unless, however, these There should be strict rules requiring auditor services are in connection with independence. Regulations for penalties and acquisitions or divestitures of company auditor and audit committee liabilities should be subsidiaries or business, and accounting introduced or clarified. Consideration should be and tax services provided in connection given to establishing a body to regulate audit with an acquisition or divestiture. firms.
13Principle 5: Code of Conduct 23. Governments need to do their part in minimizing the risk of misconduct. Governments and regulators20. All enterprises must have a written code of should set an example by conducting their ownbusiness conduct and establish systems to ensure operations with transparency. They should createthat it and all applicable laws are followed in letter and implement:and spirit. (i) a “freedom of information” measure that makes21. A corporation’s business can be severely all government actions open unless there is aadversely affected, and in certain cases, result in specific, agreed-upon necessity for secrecy;closure and a total loss to shareholders due tomisconduct by the corporation, or its CEO, the (ii) “whistle blower” protection and rewardboard, or its employees. Misconduct can take mechanism that prevents the use of legalvarious forms such as mismanagement, improper intimidation to suppress legitimateaccounting and disclosure, inattention to product complaints and reward whistle blowers;quality, valid customer complaints, bribery to orfrom customers, suppliers or others, and (iii) a requirement for the declaration of assets ofnoncompliance with laws, or noncooperation with all major public officials;regulatory authorities. This issue is of criticalimportance to all stakeholders, including (iv) prohibitions against conflicts of interest ininstitutional investors. To show their seriousness in government decision making; anddealing with this risk, all enterprises should have awritten code of business conduct to be posted on a (v) transparent and fair procedures forweb site. government contracts with private sector or other entities.22. Guidelines codifying business conduct shouldbe succinct and sufficiently detailed to give a clear 24. Developed economies should discourage and/ordirection to staff and board members and other prohibit corrupt practices by companies incorporatedparties that deal with the corporation. A template in their jurisdictions in their dealings with developingsetting out conduct guidelines can be accessed by countries. Any form of corruption, whether throughreference to the King Report on Corporate improper paying or receiving of benefits, is not to beGovernance.6 In addition, the techniques that can tolerated.be employed to help fashion implementable codescan be found on the web site of the Institute of 25. Reforms: Stock exchange bodies and regulatorsBusiness Ethics. An antifraud hotline can be useful should require companies and financial institutionsin identifying fraud, and in deterring unacceptable to publicize their codes of business conduct.conduct and should be mandatory for listed Governments should introduce “whistle blower”companies. regulations with suitable safeguards.
14Principle 6: Conflicts of Interest 29. Process and Checks. All material conflicts and material changes in them should be disclosed before26. Directors owe a fiduciary duty to the a contract is authorized to enable an independentcompany that requires them to act in the best and objective decision as to the benefit of theinterest of the company. Actual and potential contract, or arrangement, for the company. Theconflicts of interest should be identified, conflicted officials, CEO or directors should not takedisclosed, and explained in sufficient detail to part in making the decision and should absentenable valid judgments to be made on their themselves while the matter is under discussion byimpact. Conflicted persons should not participate the un-conflicted parties. Management, directors,in discussion and decision of the issue in and auditors should pay special attention to suchquestion, nor be entitled to vote on any resolution contracts to ensure that shareholder interest is notwhere they are conflicted. Related party compromised. Related party contracts should onlycontracts should be disclosed in the annual be entered into on an arm’s-length basis.report. 30. Annual Report Disclosure of Related Party27. Importance. A major cause of corporate or bank Transactions. The annual report should disclosefailure, or underperformance, is the existence of related party transactions in accordance with theconflicts of interest, including related party contracts new International Accounting Standard 24. Suchand connected lending. Directors, management, disclosure should cover (i) the business purposesupervisors, and staff should all be subject to written of the arrangement, (ii) identification of relatedconflict of interest guidelines. parties and the ultimate controlling party of the related party, (iii) how transaction prices were28. Fiduciary Duty. Directors, officers, and determined, (iv) a description of how any fairnessemployees owe a fiduciary duty to the company, evaluations were made with respect to suchand must therefore avoid any actual or apparent transactions, and (v) any ongoing contractual orconflict of interest with the company. Conflicts can other commitments resulting from the arrangement.arise when: an employee, officer or director takes A material related party transaction should not beactions or has interests that may make it difficult to concealed in an aggregate disclosure. An interestsperform his or her work objectively and effectively; register should be kept.when an employee, officer, or director, or amember of his or her family, receives improper 31. Reforms. Governments should enact laws thatpersonal benefits as a result of his or her position prohibit management, directors, and the CEO fromin the company; and when employees put pressure voting when they are conflicted and these should beon underwriters, stock analysts or auditors, or, give reflected in a company’s constitutive documents.or receive tangible benefits or favors from them Central banks should limit connected lending thatwithout disclosure and approval. Employees must has, in the past, led to the failure of several financialimmediately report such conduct. The CEO and institutions. Governments, or stock marketboard members must report any such regulators, should pass regulations that preventcircumstances to the corporate governance or audit analysts from receiving compensation directly tied tocommittees. Those seriously conflicted (e.g., those investment banking fees, require brokers to revealrelated to competitors) should, in extremis, leave the their direct or indirect financial interest in companiesboard and new board members should eliminate they assess, and restrict analysts trading in theirsuch conflicts before assuming board membership. personal portfolios.
15Principle 7: Environmental and Social such cases boards should also consider establishing aCommitment subcommittee dealing exclusively with environmental issues and the management of environmental risks32. There is an inextricable relationship among and provide an orientation program to all boardthe objectives of corporate performance, social members on the methods to recognize and mitigatedevelopment, and environmental protection. environmental and social risks.Business enterprises, to be sustainable, will needto recognize and effectively deal with this triad of 36. Environmental Management System: Boardsconcerns, which at times, may conflict with should require an effective EMS, with the followingeach other. characteristics and checks and balances:33. Rationale for Major Governance Concern: (i) a clearly defined set of responsibilities withEnvironmental and social issues, including labor the expectation of a proactive approach frompractices, are major board concerns due to (i) the all links in the chain of command;requirement to institute environment best practicesby providers of debt and equity such as institutional (ii) a management information system thatinvestors, multilateral development banks, and enables the appropriate monitoring ofothers; (ii) the impact on public opinion and performance versus plan and compliancecorporate image; (iii) the need to enhance an requirements and identification of earlyenterprise’s competitive position; and (iv) the warning signals to ensure a proactive timelyenforcement of criminal and civil penalties that response;impose liability upon directors for offensescommitted by the enterprise. An effective (iii) training that diffuses environmentalenvironment management system (EMS) serves as knowledge throughout the organization;a key due diligence defense against enforcementand penalties and may help secure director’s and (iv) the ability to anticipate changes in, andofficer’s liability insurance. compliance with, environmental regulations, ensure compliance with environmental34. Commitment to Environmental Excellence: covenants in loan agreements andBoards of directors of enterprises need to make a compliance with company policies andcommitment to excellence in environmental procedures and benchmark them againstgovernance and set the tone from the top. appropriate ISO standards;Environmental consciousness has now reached astage where denial of, or inattention to, (v) monitoring and acting on environmentalenvironmental issues can be detrimental to long- policies of suppliers, favoring those thatterm corporate profitability, competitiveness, and employ sound environment policies;sustainability. Accordingly, good boards aligncorporate governance with environmental goals. A (vi) monitoring the views and preferences ofreference for directors on sustainable development customers and stakeholders and acting onis Value, Growth and Success–How Sustainable is environmental implications of productsyour Business: A Briefing Note For Directors,7 sold, and making changes in productavailable at: http://www.defra.gov.uk/environment/ design and manufacturing processes overacbe/pubs/pdf/directors.pdf. the life cycle of a product that is environment-friendly;35. Board Composition and Orientation Program:Depending on the seriousness of the link between (vii) monitoring environmental costs–armed withenvironmental issues and corporate sustainability, environmental costs, enterprises can makeboards should include at least one member who is strategic choices such as continuing orsufficiently experienced in environmental matters. In discontinuing products; knowing the full
16 costs of production and processes will help 37. The guidelines of the International Labour minimize compliance costs, reduce operating Organisation on labor practices should be accessed. costs, and relate the enterprise’s ADB’s environmental guidelines are helpful resources environmental and financial goals; for the management of environmental issues.(viii) instituting a multidimensional performance 38. There may be instances where a project, such measurement system for employees, which as a road or a power generation project, should rewards gains made due to value-added proceed for the greater benefit of society, in spite of environmental ideas and performance its potential adverse effects on some people. In such where environmental performance is truly cases, the people who may be adversely affected by important. Evaluations and rewards should the project should be consulted; compensated for highlight such contributions; and their losses; and assisted to rebuild their homes and communities, reestablish their enterprises, and (ix) instituting an environment audit program develop their potential as productive members of including independent review for reporting society at a level generally at least equivalent to that to management and the board of which was likely to have prevailed in the absence of directors. the project.
17Principle 8: Conduct of the Board of Directors All this is particularly true of a unitary board. Its potential advantages are its singleness of39. Directors are expected to preserve and enhance purpose and its capacity to integrate insideshareholder value. Their effectiveness can be knowledge and outside experience in theenhanced if they are: legally empowered, have the service of an enterprise. Turning that potentialrequisite qualifications for the board committees on into reality is the job of the chairman. Chairmenwhich they sit, make the needed time commitment, have to win agreement on the purpose of theirgiven the appropriate directorship training, suitably boards and on how executive and outsidecompensated, receive proper notice of meetings, directors can best work together in pursuit ofhave the right to propose agenda items, consult that purpose. Members of an effective boardeach other privately in the absence of management work together as a team, but retain theirand executive directors, and be provided with independence of judgment, they also balanceappropriate information to enable them to perform their loyalties to each other and to the board.their monitoring role and evaluate the performance These are some of the tensions at work withinof the directors. They should be proactive and a board and without the right degree of tensiondiligent. boards would be too comfortable and complacent to do their job. It is for chairmen to40. Value Addition: The primary duty of a board is manage these tensions constructively. Thereto add to shareholder value by selecting a has to be a balance on a board betweencompetent CEO, assisting the CEO, and evaluating individuality and collegiality, and betweenthe CEO’s performance. Board members should continuity and change. It is chairmen who aremaintain a cooperative and collegial atmosphere, responsible for finding these crucial points ofbring their skills to bear on the issues at hand, balance.”share ideas to enhance performance, and bringtheir network of contacts for the benefit of the 42. Board Structure: Some observers are of theenterprise. The board should let the CEO and the view that, in private sector businesses, it ismanagement run the enterprise. However, in crisis useful to separate the positions of the chairmansituations, or serious underperformance, director’s and the CEO. The board should not be dominatedduties may call for a more proactive, hands-on, by one person. The quality of a board is enhancedapproach. if at least half of the board members are independent of management. The board must not be41. The Role of the Chairman: Sir Adrian Cadbury, unwieldy–a maximum of 11 members may bein his book, Corporate Governance and appropriate.Chairmanship, points out that: 43. Director Orientation: Before accepting a board “It is the chairman’s task to turn a group of membership, directors should acquaint themselves capable individuals into an effective board team. with the history of the company, the annual reports This demands application and an understanding of previous years, the minutes of previous board of the nature and motivations, and strengths and meetings, and any significant pending litigation. The weaknesses, of all members of the board. It directors must acquaint themselves with the means spending time with each director to strengths, weaknesses, and strategy of the appreciate how they see their roles as board company. The company should provide directors members and in turn assisting them to with an orientation program with a “helicopter” view contribute as incisively as possible to the work and introduce directors to key personnel and of the board. The object is to enable board shareholders. Directors should keep abreast of good members to work together as a team, in order corporate governance practices. that they may achieve as a group what would be beyond them separately. This requires a talent 44. Time Commitment: Board members should limit for listening, for leading, and for inspiring, and their board memberships consistent with their ability the time to do so. to discharge their responsibilities diligently. Risks of
18incurring director liability may rise when the number possible, to avoid the element of surprise and toof board memberships increase beyond this level. contribute to a sense of teamwork.45. Governance Manual: The manual should 50. Recusal in Cases of Conflict of Interest: Acontain (i) the detailed responsibilities of board director must always act with independence,members, which should be made available to them objectivity, impartiality, and be free of bias. Where aand be accessible to shareholders; (ii) a formal director is conflicted on a particular resolution, he/Charter of Expectations that each director should be she should disclose the conflict and recuse himself/expected to sign and be committed to; (iii) the list of herself (i.e., not participate in the discussions) andmatters reserved for the discretion of the board; offer to exit the boardroom when the concerned(iv) the list of disclosures to be made by directors; matter is under discussion.(v) the requirement to include a statement bydirectors confirming the truth and fairness of the 51. Minutes: Directors should require the minutescompany’s financial statements and the contents of of board meetings to be sent to all directors withinprospectuses; and (vi) the list of fines and other three business days of a meeting and submit theirconsequences if directors violate, or omit to carry comments or approval. The minutes should state theout their duties, under applicable law. reasons for the decisions taken. Tape-recorded proceedings may help in ensuring the accuracy of46. Director Guides: Directors will find guides minutes. Minutes are legal documents and shouldsuch as those prepared by the UK’s Institute of be retained.Directors, the National Association of CorporateDirectors (NACD) and The Canadian Institute of 52. Monitoring Role: A key role of directors isChartered Accountants (CICA) helpful in discharging monitoring the performance of the company and thetheir responsibilities. Each CICA guide includes a CEO and to seek remedial action as needed. Not alllist of 20 questions that directors should raise (see data or information is critical to the success of anwww.http://www.cica.ca/index.cfm/ci_id/14543/la_id/ enterprise. Directors must be able to distinguish1.htm). See also Board Role in Risk Management, between information that is, or is not, vital forMark Anson & Cindy Ma at www.nera.com and Ten success. The main focus should be on the keyCommandments for Bank Directors, T.K. Kerstetter. performance indicators, the lead indicators, the main value drivers of the business, as well as early47. Consultation with other Board Members/ warning signals. Corrective action needs to beShareholders: Where warranted, particularly on initiated if performance falls behind plan.contentious resolutions, the directors should discusskey issues, in advance, with other board members 53. A monitoring tool that directors can use is aor shareholders. “dashboard” (see Does Your Board Have an Effective Management System of Its Own,48. Voting: Directors should vote in accordance by Carolyn Brancato, The Conference Board).with their independent judgment. If directors A dashboard is a visual display of indicatorsanticipate that they will be in a minority on an considered to be the key information that should beimportant issue, they should insist that a minority monitored. The dashboard should report the keyopinion is minuted. performance indicators. These are a few indicators, like those found on the dashboard of a car, which49. Dissent: While directors should aim at building a help determine if a company is on track in meetingcordial working relationship with each other and its goals. The indicators can be financial, such asmanagement, directors are entitled to dissent on profit margins and return on equity, as well asimportant matters. To be effective, dissent should be nonfinancial such as customer satisfaction, qualityin writing stating the reasons and require that the control, staff departures, environmental compliance,text of the written submission be made a part of the the results of regulatory inspections, and actionminutes. If dissent is intended, other directors taken to comply with deficiencies noted byshould be consulted and informed in advance, if regulators. The information should be presented in
19an easy-to-understand format by using tables, liability, if actions that constitute breaches ofcharts, graphs, or other diagrams. A high-quality director’s duties by nominees are authorized by theirdashboard monitoring system improves the board’s employer. To contain this risk, nominators shouldefficiency and time management. seek legal advice to prevent the occurence of such implicit liabilities.54. Each measure should have a “target” and an“actual” amount that focuses attention on which Directors should ensure that adequate systems existareas are performing and which need attention. By to enable the timely and accurate submission of“drilling down” into the numbers used to compile reports and returns required by law, regulators andeach major statistic, the data can also be used to government agencies. A similar system should existidentify early warning signals. Performance should to ensure that appropriate and timely action is takenbe judged relative to that of overall industry and to rectify deficiencies identified by regulators.competitor performance. In the case of funds andinvestment trusts, performance should be judged It will be helpful for directors to familiarizerelative to other funds with similar investment themselves with the tips contained in Personalobjectives and risk tolerance thresholds. Liabilities of a Company Director at http:// www.elbornes.com/articles/persliab.htm and in,55. A key lead indicator is the quality of human Flunking the Duty of Care, The Four Most Commoncapital. Directors need to evaluate human capital Mistakes Made by Directors, Michael F. Sullivan,strategies of corporations. The consultancy firm Brickler & Eckler LLP.8 In summary the latter articleWatson Wyatt’s2 research shows that–“superior states the following:human resource practices are correlated withfinancial returns. They are a leading indicator of “Directors can minimize the risk of a bad decisionincreased shareholder value. Further, we found that resulting in a successful claim for breach of dutysuperior human resource management leads financial of care by taking the following steps:performance to a much greater extent than financialoutcomes lead good human resource practices. We (i) document contemporaneously the analysiswere also able to identify certain HR practices as that goes into decisions and thevalue drivers and throw a cautionary flag in front of recommendations made to the board;some conventional practices actually associated witha decrease in financial performance.” (ii) maintain a record which shows that the board was familiar with the experiences of its56. Director Liability: Directors must carry out their experts prior to their retention, and selectfunctions with reasonable skill, care and diligence and and retain in a manner that will precludemay be liable if they are negligent. To minimize, or receiving advice tainted by conflict ofavoid, liability, directors should undergo professional interest;director training; take decisions in conformity with thebusiness judgment rule; follow procedures that (iii) take enough time to assemble and analyzeensure compliance with their duty of care and duty of data before making a decision to show bothloyalty; ensure that suitable director’s and officer’s the reality and the appearance of due care toliability insurance is in place; and seek legal advice. a third party who may not have access to theA higher standard of care is required of a director who same kind of high-tech resources as thehas particular or professional qualifications in relation board; andto matters where those skills or qualifications haveparticular relevance. (iv) consider cost-effective alternatives to obtain additional insight and liability protection whenCompanies often nominate their employees as facing an important decision.nominee directors of subsidiary, or affiliated,companies. Such nominee directors may expose the With these guidelines in mind, duty of care litigationcompanies that have nominated them to vicarious may be nipped in the bud, as plaintiffs discover that
20they will be attacking a documented record of (iii) require regular written reporting ensuring thatattention to, and concern for, the corporation’s the remittance procedures are functioning.”interest.” 58. Fees and Compensation: Directors are expected57. Director’s Liabilities for Unpaid Taxes. to perform an important task requiring both expertiseAccording to David J. Rotfleisch: and a substantial commitment of time. They should be adequately compensated for this. To align director “Directors have liabilities under various statutes, and shareholder interests, part of the compensation which, for example, result in liability for wages and of directors can be in the form of the company’s vacation pay, environmental liabilities, workplace equity shares. In addition, directors should have the liabilities and liabilities under corporate statutes. right to engage consultants or advisors whose fees However, it is with respect to amounts owing to should be paid by the company. Expenses for the government for various taxes that most director’s and officer’s insurance and for attending directors incur liability. Taxing authorities have board meetings should be borne by the company. been very zealous in recent years in going after directors for unremitted source deductions, unpaid 59. Performance Evaluation: Good boards evaluate sales taxes, etc. Accordingly, every director the performance of board members. Such boards should: find that meetings are run more smoothly, they receive better information, and they pay more (i) familiarize himself with the withholding and attention to performance and strategy. remittance requirements; 60. Reforms: Governments in the region should (ii) ensure that an appropriate system to impose fiduciary duties on directors, liabilities for not withhold and remit has been implemented by performing the duties, and immunity in case of the Corporation; and compliance with the business judgment rule.
21Principle 9: Responsibilities of Investors Companies, and the pronouncements of the International Corporate Governance Network61. The pursuit of good corporate governance in (www.icgn.org). Institutional investors can take theinvestee enterprises is a risk management tool. following steps:Institutional investors, general partners, and fundmanagers have a fiduciary duty to actively monitor (i) seek the removal of impediments to costand vote on issues vital to the success of effective and efficient voting as outlined inenterprises in which they invest as guardians of the the Global Share Voting Principles of thesavings entrusted to them. Enterprises will find it International Corporate Governancehelpful to communicate with them, deliver in a Network (see www.icgn.org). Legaltimely manner true and fair disclosure reports, and restrictions on the transfer of shares shouldremove impediments from voting by all shareholders be sought to be removed;by taking advantage of modern communications andfollow a one-vote for one-share policy. The fair (ii) vote on all material issues including thetreatment of minority shareholders must be ensured appointment of directors. Each directorand large institutional investors should lead the should stand for election on a regularpursuit of shareholder rights. basis and, in any event, at least once every 3 years and shareholders should be entitled62. As the largest sources of debt and equity to exercise their vote in respect of thecapital, institutional investors can influence the election of each individual director;behavior of managements and boards. Investorsshould use this ability to require high-quality (iii) require prior shareholder approval for majorcorporate governance. This is a serious strategic modifications to the core businessresponsibility since it is in the interest of the millions of a corporation, or proposals that result inof savers, on whose behalf institutional investors the dilution of equity, or erode the economicprovide stewardship. Dispersed ownership can help interests or share ownership rights ofif investors exercise their rights, but passivity the existing shareholders;lack of objectivity, and conflicts of interest amonginstitutional investors can often mean that under- (iv) engage corporate governance analysts wellperformance can remain unchecked. versed in the best practices of corporate governance and financial analysis;The low percentage of votes cast is indicative of the (v) communicate their views on corporatedormancy of the voting power of shareholders. governance shortcomings to the boards ofVoting rights are part of a share’s value and investee enterprises;exercising these rights contributes to good corporategovernance. 3 to 4 weeks notice should be given (vi) encourage corporate governance ratings;for shareholders meetings (see A Guide to BestPractice for Annual General Meetings, ICSA). (vii) require the inclusion of corporateShareholders should have equal access to governance covenants and conditionsinformation, be able to vote in person, or online, precedent in loan or investment agreements;or in abstention, and equal effect should be given tovotes, whether cast in person, or, in abstention. (viii) avoid investing in instruments such as global depository receipts if the investor is63. A good model of the conduct of responsible denied voting rights of the underlying shares;investors can be found in reports such as“Shareholder or Shareowner” available at the web (ix) adopt suitable criteria to screen investeesite of Hermes Pensions Management Ltd. at enterprises for underperformance; andwww.hermes.co.uk (see case study on HermesInvestment Management Ltd. in Appendix 3), the (x) be vigilant about investee underperformance,Hermes’ Code of Conduct In Support of reporting delays, poor quality accounting, or
22 other red flags or early warning signals of underperformed due to financial shenanigans. corporate underperformance. In such cases If warranted, file claims10 to recover investors should initiate steps to require investment monies and damages against the prompt remedial action. errant parties, including auditors, investment bankers, or external counsel, if they have64. To undertake the aforementioned steps, been negligent, subject to conflicts of interest,responsible institutional investors can find the or have aided and abetted the errantfollowing helpful: company, its directors, or managers; (i) enunciate their corporate governance (ix) appoint a lead investor to act on behalf of a guidelines and principles; group of investors to lessen monitoring costs. In class action suits triggered by (ii) join associations of institutional investors corporate fraud, institutional investors should that champion the rights of shareholders and be prepared to act as lead plaintiffs given corporate governance; the relatively large size of their holdings and the associated losses. The prestige of (iii) adhere to, and require third party fund institutional investors that act as lead managers to adhere to, codes of conduct plaintiffs gives them the clout necessary for such as that of the Association of the defendants to pay meaningful amounts. Investment Management and Research The lead plaintiffs are more likely to have the (see www.aimr.org); human capital, the budgetary resources, and legal departments to support litigation; (iv) engage high caliber investment, accounting, and corporate governance professionals with (x) consider nominating a qualified and suitable delegated authority; independent nominee director as a champion of good corporate governance in (v) provide a suitable budget for monitoring underperforming enterprises; investee companies and allocate staff or delegate monitoring to a qualified, (xi) require internal and external fund managers unconflicted, and trustworthy third party; to include the quality of corporate governance as part of their investment (vi) request investee companies to nominate one criteria; independent director as principal liaison with investors; (xii) consider subscribing to external investment research services that are completely (vii) due to the different nature of independent from investment banks and underperforming companies, have a policy companies; for engaging underperforming enterprises–a separate monitoring group for such investees (xiii) consider investing in corporate governance- may be considered; oriented funds; (viii) investigate who the responsible parties are (xiv) communicate closely with other institutional and whether proper disclosure was made in investors on corporate governance matters; cases where investor capital is put at undue risk in instances of intentional (xv) proactively vote, or require fund managers to misrepresentation, fraud, aiding, and vote, on key issues at company annual or abetting by third parties and negligence by extraordinary general meetings; fund managers or other violations of their fiduciary duties; or where companies are (xvi) all investors should be required to abide unable to repay bond obligations, or have by best practice standards of valuing
23 investments. Reference can be made to fund should be required to comply with them; simply such as those enunciated by the Association that where a fund chooses not to comply with them, of Investment Management and Research it should have to explain–publicly, and to its (see www.aimr.com) and the European members–why not.” Venture Capital Association (see www.evca.com); and 67. Consistent with their fiduciary obligations to their limited partners, the general partners and fund (xvii) train staff in good practices of corporate managers of venture capital, buyout and other governance, analyzing and detecting private equity funds, mutual funds, and investment corporate governance weaknesses, rights of trusts should use appropriate efforts to encourage shareholders, and in uncovering financial the companies in which they invest to adopt long- shenanigans. term corporate governance provisions that are consistent with the principles outlined herein or65. For institutional investors to discharge these in other comparable governance standards.responsibilities, they should be run by qualified Fund managers should disclose their votingprofessionals without interference from other practices.quarters; follow a systematic investment processrequiring appropriate due diligence; have a policy for 68. Reforms. In developing countries, where capitalthe retention of records, including e-mails; and adopt markets are at a nascent stage and institutionalgood practices of governance and management of investors are developing, the positive influence thattheir own internal operations. These relate to: significant investors can exert on corporate governance could be absent. Governments should (i) the composition, qualifications, therefore foster capital market development, not compensation, and experience of their only as a way to mobilize savings, but also to boards and trustees and the process for empower shareholders who can demand good selecting them; corporate governance in investee enterprises. The following are some areas to be considered: (ii) quality of the CEO and the selection process, internal risk management systems, (i) Enable electronic communication between and portfolio management policies; companies and shareholders including the transmission of annual reports and notices of (iii) conflict of interest policies; shareholder meetings, electronic proxy voting, and web-casting of shareholder (iv) fund performance evaluation criteria; and meetings. (v) the criteria and procedures for engaging and (ii) Strengthen laws relating to minority removing fund managers. shareholder rights including, among others, providing for low thresholds for66. Good practices for the governance of requisitioning shareholder meetings; highinstitutional investors can be found in (i) The thresholds for passing shareholderGovernance Practices of Institutional Investors, resolutions on critical issues; voting onReport of the Canadian Standing Senate Committee director appointments using the cumulativeon Banking, Trade and Commerce, chaired by The voting technique that enables minorityHonourable Michael Kirby; and (ii) Institutional shareholders to gain seats on the board;Investment in the United Kingdom–A Review rights of shareholders to sponsorprepared under the chairmanship of Paul Myners. resolutions at shareholder meetings orMr. Myners mentions that it is helpful to state some convene extraordinary meetings; and classbasic principles of an effective approach to action suits and shareholder derivativeinvestment decision making, which are listed in only actions that enable legal actions bytwo pages. “The Review’s proposition is not that any shareholders on behalf of companies
24 and actions against auditors for allocation decisions based on the “prudent negligence. In the case of takeover bids, expert principle.” Such a shift should not shareholders should have the right to be occur in isolation but should go hand in hand consulted and bids should not be rejected with the enunciation and implementation of by boards without reference to high-quality internal governance standards of shareholders. institutional investors.(iii) Impose a statutory fiduciary duty on the 69. The “prudent expert principle” is defined as trustees, boards, and managements of (i) discharging duties with the care, skill, prudence, institutional investors. and diligence that a prudent person acting in a like capacity with the same resources and familiar with(iv) Remove, or prohibit, undue restrictions on like matters exercises in the conduct of an the transfer of shares. enterprise of like character and like aims; (ii) diversifying the holdings of each fund to minimize(v) Shift from a regime of asset allocation set in the risk of loss and maximize the rate of return; and law to a regime that provides freedom to (iii) discharging duties solely in the interest of, and professional trustees in making asset for the benefit of, the beneficiaries.
25Principle 10: The Role of Directors in constituents in a turnaround is a director’s firstTurnaround Situations step. Most turnarounds cannot succeed solely by restructuring lender debt. Other major70. Directors of troubled companies must play a constituents that must be addressed in varyingproactive role in turnaround situations, but avoid degrees by directors are suppliers, customers,preferential treatment of creditors, or trade when the employees and shareholders.”company is insolvent. 72. Some legal regimes impose special rules on the71. According to Ed Marks, President of Marks conduct of the business of a company when it isConsulting Inc.9 experiencing financial difficulties that may lead to liquidation. In these circumstances, it may be unfair “A director’s role in a troubled company is very and/or unlawful for a company to favor certain different from that of a director of a healthy business. suppliers or customers and to pay some debts The increased emphasis on directors assuming ahead of others. Further, directors may also incur larger roles in managing a company’s affairs means personal liability to creditors if they permit a that their responsibilities and time commitments must company to continue to carry on business while it is also increase. Troubled companies require deeper insolvent. Directors should seek legal advice at the involvement from their boards and the assumption of first sign of serious financial difficulty. According to some risk by directors. the Principles of Corporate Governance in The Commonwealth: Director involvement begins with meeting many of the major parties impacted by a troubled “The board must ensure annually that the company and understanding their concerns. corporation will continue as a going concern for Outside turnaround consultants can help its next fiscal year. The intent behind this directors in analyzing and developing a principle is not that a corporation continues in turnaround plan, especially if the board and perpetuity but to have a process in place which company management have limited turnaround will prompt directors to act expeditiously when it experience or have damaged their credibility is believed that the business may no longer be a with lenders and other constituents. going concern. Developing, managing and monitoring a It is the responsibility of the board, all things turnaround are ultimately the fiduciary being equal at the time the financial statements responsibility of the board. Failing to perform these and annual audit have been completed and functions conscientiously may leave boards and reviewed, to satisfy itself that the corporation will directors more vulnerable to lawsuits and may continue as a going concern in its next fiscal even reduce the protections of director’s and year. Any conclusion arrived at by the board that officer’s insurance. the corporation will continue as a going concern should result from the evaluation by the board of A director of a troubled business best objective criteria. The conclusion should be demonstrates his or her commitment to the reported in the financial statements for the organization by taking an active role in the benefit of the shareholders, but also be company. Attending only quarterly directors’ communicated as appropriate to the meetings is wholly inadequate in turnaround corporation’s other relevant stakeholders.” situations. Frequent informal meetings with management, including attendance at important 73. In some jurisdictions, directors also owe a staff meetings, should augment formal directors’ fiduciary duty to creditors when a company enters meetings. Generally, involvement by directors the “vicinity of insolvency.” In such situations the bolsters confidence of management and staff that fiduciary duty may shift in favor of creditors. The something is being done to right the business. board of directors of a solvent corporation should Understanding relationships among the major consider creditors’ interests if a proposed
26transaction could potentially push the corporation to lead to bankruptcy, or are impermissiblethe brink of insolvency. While the advice of counsel under loan covenants;should be sought, the following do’s and don’ts canbe helpful: (vi) avoid related party contracts and carefully scrutinize payments to affiliates and related (i) act to protect creditor’s interests; parties; and (ii) install an early warning system, including (vii) avoid the preferential treatment of one, or a monitoring bankruptcy and liquidity tests, group, of creditors as against others. and ensure early corrective action; 74. Experience has shown that directors of (iii) require a contingency plan for major risk financially troubled enterprises are particularly factors, an effective internal control vulnerable and, if they have not taken the system, and the proper maintenance of appropriate steps, run the risk of being disqualified records; from performing the role of a director in the future. A handy reference is Crisis Management for Directors (iv) take decisions that satisfy the Business available at the web site of the Canadian Institute of Judgment Rule–this may involve Chartered Accountants. (a) disclosure of financial difficulties in the annual report; (b) viewing assets as a trust 75. Directors should ensure that companies fund to be preserved for creditors and other discharge their binding obligations to employee constituents; (c) conserving operating costs pension funds and, in the case of defined benefit and cash flow; and (d) maximizing assets, schemes, seek compliance with statutory minimum minimizing liabilities, and preserving wealth- funding rules. generating capacity; 76. Reforms: Governments should enact laws to (v) avoid repurchase or redemption of shares, or modernize bankruptcy procedures and provide for payment of dividends, if such payments will the protection of creditor rights.
27Appendix 2Definitions of DirectorIndependenceA. Hermes Investment Management Ltd - was formerly an executive;1. Hermes endorses the Cadbury Committee’sdefinition of independence: that nonexecutive - is, or has been paid by the Company in anydirectors “should be independent of management capacity other than as a nonexecutiveand free from any business or other relationship that director;could materially interfere with the exercise ofindependent judgment.” - represents a trading partner or is connected to a company or partnership (or was prior to2. Hermes will interpret this to mean that to be retirement), which does business with theconsidered independent a NED must not: Company; - be or have been an employee of the company - has been a nonexecutive director for nine years - i.e., three 3-year terms; - serve as a director for more than 10 years or be over 70 years of age - is closely related to an executive director; - represent significant shareholders or other - has been awarded share options, single interest groups ( e.g., supplier, creditor) performance-related pay, or is a member of the Company’s pension fund; - receive an income from the company other than NED fees - represents a controlling or significant shareholder; - participate in the company’s share option or performance-related remuneration schemes - is a new appointee selected other than by a formal process; - have conflicting or cross-directorships - has cross-directorships with any executive - have any other significant financial or personal director; or tie to the company or its management which could interfere with the director’s loyalty to - is deemed by the Company, for whatever shareholders. reason(s), not to be independent.B. National Association of Pension Funds C. Federal Deposit Insurance Corporation(NAPF) and the Association of British 4. “Independent of management” is generally aInsurers (ABI) determination each institution may make. This term3. The issue of a nonexecutive director’s absolutely excludes a director whoindependence has been highlighted by theHampel Committee and a company’s viewpoint (i) is, or has been within the preceding year, anon an individual’s status is likely to be challenged officer or employee of the institution or itsfrom time to time. The ABI and the NAPF affiliates;suggest the criteria set out below as theminimum likely acceptable to institutional (ii) owns or controls, or has owned or controlledinvestors. The assumption is that the individual is within the preceding year, assetsindependent unless, in relation to the Company, representing 10% or more of any outstandingthe director: class of the institution’s voting securities; and
28 (iii) beyond this, the institution should consider (vii) is not employed by a public company in whether the director which an executive officer of the company serves a director; • has been, prior to the preceding year, an officer, or employee of the institution or its (viii) has not had any of the relationships affiliates; described above with any affiliate of the company; and • serves as a consultant, adviser, promoter, underwriter, legal counsel, or trustee of or (ix) is not a member of the immediate family of to the institution or its affiliates; any person described above. • is a relative of an officer or other employee E. Council of Institutional Investors of the institution or its affiliates; 6. An independent director is one whose only nontrivial professional, familial, or financial • holds or controls, or has held or controlled, connection to the corporation, its chairman, a direct or indirect financial interest in the CEO or any other executive officer is his or her institution or its affiliates; and directorship. • has outstanding extensions of credit from Notes: Independent directors do not invariably the institution or its affiliates. share a single set of qualities that are not shared by nonindependent directors.D. California Public Employees Retirement Consequently no clear rule can unerringlySystem (CalPERS) describe and distinguish independent directors.5. “Independent director” means a director who: However, members of the Council of Institutional Investors believe that the (i) has not been employed by the company in promulgation of a narrowly drawn definition of an executive capacity within the last 5 years; an independent director (coupled with a policy specifying that at least two thirds of board (ii) is not affiliated with a company–that is, an members should meet this standard) is in the adviser or consultant to the company or a corporation’s and all shareholders’ ongoing member of the company’s senior financial interest because management; (i) independence is critical to a properly (iii) is not affiliated with a significant customer or functioning board; supplier of the company; (ii) certain clearly definable relationships pose a (iv) has no personal services contract(s) with the threat to a director’s unqualified company, or a member of the company’s independence in a sufficient number of cases senior management; that they warrant advance identification; (v) is not affiliated with a nonprofit entity that (iii) the effect of a conflict of interest on an receives significant contributions from the individual director is likely to be almost company; impossible to detect, either by shareholders or other board members; and (vi) within the last 5 years, has not had any business relationship with the company (iv) while an across-the-board application of any (other than service as a director) for which definition to a large number of people will the company has been required to make inevitably miscategorize a few of them, this disclosure under Regulation S-K of the risk is sufficiently small that it is far Securities and Exchange Commission; outweighed by the significant benefits.
297. Stated most simply, an independent director is a sales or assets when such predecessor becameperson whose directorship constitutes his or her only part of the corporation. Recent merger partnersconnection to the corporation. The definition are also considered predecessors. A recentapproved by members of the Council contains this merger partner is a corporation that directly orbasic formulation. It then adds to it a list of the indirectly became part of the corporation or arelationships members believe pose the greatest predecessor within the last 10 years andthreat to a director’s independence. The existence of represented more than 50% of the corporation’sany such relationship will remove a director from the or predecessor’s sales or assets at the timeindependent category. of the merger.8. The following notes are supplied to give added A subsidiary is an affiliate if it is at least 80%clarity and guidance in interpreting the specified owned by the corporation and accounts for 25%relationships. of the corporation’s consolidated sales or assets.9. A director will not generally be consideredindependent if he/she has either of the following (ii) He/she is, or in the past 5 years has been,qualifications: an employee or owner of a firm that is one of the corporation’s or its affiliate’s paid (i) He/she is, or in the past 5 years has been, advisers or consultants. employed by the corporation or an affiliate in an executive capacity. Notes: Advisers or consultants include, but are not limited to, law firms, accountants, Notes: The term “executive capacity” includes insurance companies, and banks. the Chief executive officer (CEO) and operating, financial, legal, and accounting officers of a (iii) He/she is, or in the past 5 years has been, company. This includes the president, treasurer, employed by a significant customer or secretary, controller, and any vice-president supplier. who is in charge of a principal business unit, division, or function (such as sales, Notes: A director shall be deemed to be administration, or finance) or performs a major employed by a significant customer or policy-making function for the corporation. supplier if the director An “affiliate” relationship is established if one • is, or in the past 5 years has been, entity either alone or pursuant to an employed by or has had a 5% or greater arrangement with one or more other persons, ownership interest in a supplier or owns or has the power to vote more than 25% customer where the sales to or by the of the equity interest in another, unless some corporation represent more than 1% of other person, either alone or pursuant to an the sales of the customer or supplier or arrangement with one or more other persons, more than 1% of the sales of the owns or has the power to vote a greater corporation; percentage of the equity interest. For these purposes, equal joint venture partners meet the • is, or in the past 5 years has been, definition of an affiliate, and officers and employed by or has had a 5% or greater employees of equal joint-venture enterprises are ownership interest in one of the considered affiliated. corporation’s debtors or creditors where the amount owed exceeds 1% of the Affiliates include predecessor companies. corporation’s or the third party’s assets; A “predecessor” of the corporation is a corporation that within the last 10 years Ownership means beneficial or record ownership, represented more than 80% of the corporation’s not custodial ownership.
30(iv) He/she has, or in the past 5 years has had, a of the corporation serves on the board of personal services contract with the another corporation that employs the corporation, its chairman, CEO, or other director. executive officer or any affiliate of the corporation. F. New York Stock Exchange’s Definition Notes: Council members believe that even 10. The following note has been extracted from small personal services contracts, no matter the web site of Mcguire Woods LLP at http:// how formulated, can threaten a director’s www.mcguirewoods.com/news-resources/ complete independence. This includes any publications/corporate_services/article667.asp. arrangement under which the director borrows or lends money to the corporation On 12 March 2003, NYSE separately filed the at rates better (for the director) than those director independence portion of its corporate available to normal customers–even if no governance proposals, which was in some other services from the director are specified respects modified from the August 2002 submission. in connection with this relationship. Some of the changes were driven by the Sarbanes- Oxley Act of 2002, which became law just days(v) He/she is, or in the past 5 years has been, before NYSE’s Board of Directors acted on the an employee, officer, or director of a Committee’s recommendations in August, and the foundation, university, or other nonprofit Securities and Exchange Commission’s (SEC) rules organization that receives significant grants implementing certain provisions of that Act. or endowments from the corporation or one of its affiliates. 11. As originally and currently proposed, NYSE director independence rules would Notes: This relationship includes that of any director who is, or in the past 5 years has (i) require that a majority of the directors of been, an employee, officer, or director of a NYSE-listed companies be “independent”; nonprofit organization to which the corporation or its affiliate gives more than (ii) require that the board of directors $100,000 or 1% of total annual donations affirmatively determine that a director has no received (whichever is less), or who is, or in material relationship with the listed company the past 5 years has been, a direct for the director to be considered independent beneficiary of any donations to such an and that such determination be publicly organization. disclosed; and(vi) He/she is, or in the past 5 years has been, a (iii) prohibit directors associated with current and relative of an executive of the corporation or former auditors and directors in interlocking one of its affiliates. compensation committee relationships from being considered independent. Notes: Relatives include spouses, parents, children, siblings, mothers- and fathers-in- In its recent filing, NYSE clarified its law, sons- and daughters-in-law, brothers- definition of “director independence” in the and sisters-in-law, aunts, uncles, nieces, following key respects. nephews, and first cousins. Executives include those serving in an “executive i. Former Employees and Independent capacity.” Contractors(vii) He/she is, or in the past 5 years has been, 12. In its August 2002 filing with SEC, NYSE part of an interlocking directorate proposed that no director who is a former employee in which the CEO or other executive officer of the company can be independent until 5 years
31after the employment relationship has ended. the customer or supplier falls below theseIn its current proposal, NYSE intends to eliminate thresholds.the per se bar to independence for all recent formeremployees in favor of a rebuttable presumption that 16. The rule would permit the board to use itsany person who receives (or whose immediate discretion to find a lack of a material relationshipfamily member receives) more than $100,000 per with regard to persons associated with suppliersyear in direct compensation from the company has or customers who transact less than thesea material relationship with the company and is threshold amounts of business with the listednot independent until 5 years after he or she ceases company.to receive more than $100,000 per year.The presumption applies to both employees and 17. The rule would also permit persons affiliated withindependent contractors who receive direct consultants and advisors to the listed companycompensation from the listed company. (other than auditors) to be considered independent directors, subject to a finding of a lack of material13. In its commentary on the proposal, NYSE states relationship, as long as the compensation their firmsthat the presumption of nonindependence may be receive as “suppliers” to the listed company doesrebutted by a unanimous determination by the not exceed these threshold amounts.existing independent directors that, based upon therelevant facts and circumstances, the payments do 18. During the 5-year period following enactment ofnot constitute a material relationship. The listed the director independence standards, the 5 yearcompany will also be required to disclose the “cooling off” period for determining presumptionsspecifics of such determinations. and prohibitions will instead be measured as any shorter period following the enactment of the14. For purposes of the rule, direct compensation standards. Thus, for example, if measured a monthdoes not include director’s fees or pension or after enactment, a person who has not been andeferred compensation paid in respect of prior employee of the listed company during the month,service to the company. Also, if the compensation but who did receive over $100,000 in directrecipient dies or becomes incapacitated, the compensation from the company 3 years before, willpresumption will cease immediately. not be subject to the presumption of a material relationship even though the compensation wasii. Significant Suppliers and Customers received within the last 5 years.15. The NYSE intends to prohibit persons from 19. The SEC has not yet published for commentbeing considered to be independent if they are NYSE’s latest corporate governance proposal, andexecutive officers or employees of, or if their therefore no deadline for comments has beenimmediate family member is employed in an established. However, once these corporateexecutive capacity by, suppliers or customers that governance standards have been adopted, NYSE-conduct business with the listed company at a level listed companies will have 18 months, or, in theof $1,000,000 or 2% of the gross revenue of the case of companies with classified boards, a total oflisted company, whichever is greater. Such 30 months after adoption to comply with the newprohibition would remain in effect until 5 years after independence standards.
32Appendix 3Case Study: Hermes InvestmentManagement Ltd.I. Introduction governance policies and principles is posted on its1. Hermes places great emphasis on exercising web site at http://www.hermes.co.uk.stewardship at all the companies in which it investson behalf of clients. The aim is to ensure that 5. The governance approach of investors such ascompanies are run by managers and directors in the Hermes is twofold. First, if enterprises in developingbest long-term interests of shareholders. Hermes countries wish to attract capital from suchapproach to stewardship is based on a fundamental institutions, it will be to their advantage if theybelief that companies with concerned and involved conform to the governance principles such as thoseshareholders are more likely to achieve superior that Hermes espouses. Second, domesticlong-term returns than those without. institutional investors in developing countries can consider adopting similar governance principles2. Good stewardship creates value. These corporate tailored to the specific conditions of their countries.governance guidelines explain in detail how Hermeswill exercise its clients ownership rights in practice. 6. By way of illustration, some extracts fromThe guidelines are intended as a basis for dialogue Hermes’s statement on UK Corporate Governancebetween companies and shareholders. Hermes will and Voting Policy 2001 are given below.apply the guidelines with thought, giving dueconsideration to the specific circumstances of II. Statement of General Principleindividual companies, and adopting a pragmatic 7. Directors of public companies are responsible forapproach where appropriate. running companies in the long-term interests of shareholders. Shareholders and their agents haveHermes Investment Management Limited responsibilities as owners to exercise stewardship of3. Hermes is one of the United Kingdom (UK)’s companies. Corporate governance should provide alargest fund managers with 36 billion pounds under framework where both parties can fulfill thesemanagement as of 30 September 2002. Hermes responsibilities.Investment Management is one of the largestpension fund managers in the city of London. It is 8. A company run in the long-term interests of itsowned by, and is the principal fund manager for, the shareholders will need to manage effectivelyBT Pension Scheme, the UK’s largest pension fund. relationships with its employees, suppliers, andHermes also manages portfolios for the Post Office customers; to behave ethically; and to have regardPension Plan and other major corporate and public for the environment and society as a whole.pension schemes. Hermes’s approach to social, environmental, and ethical matters is explained in Appendix 4 of its4. It takes its corporate governance responsibilities corporate governance document.seriously. It has published its approach togovernance in three documents, i.e., The Statement 9. Nonexecutive directors (NEDs) should workon UK Corporate Governance and Voting Policy, cooperatively with their executive colleagues andInternational Corporate Governance Principles, and demonstrate objectivity and robust independence ofthe Hermes Principles. It has also established three judgment in their decision making.funds focused on governance issues in which it hascoinvested together with other governance 10. Hermes supports a standard approach toconscious investors. It performs a stewardship role corporate governance. Hermes welcomes theand takes active part in voting on resolutions publication of the Combined Code on Corporateproposed by its investee companies as well as Governance and will normally apply itspublishes its approach at various fora in the world’s recommendations. Consideration will also be givencapital markets. The full text of Hermes’s corporate to the fuller discussions in the Cadbury, Greenbury
33and Hampel reports that underlie the Combined disclosure in the annual report of any factors to beCode. Where relevant, reference will be made to the taken into account in judging an individual’spolicies of the National Association of Pension independence in accordance with the aboveFunds and other related bodies. There are some criteria.issues that Hermes believes, primarily because of itsinvestment policies, require greater emphasis or an 16. It is good practice for all boards to conduct analternative approach. In addition, the Hampel report annual review of the performance of NEDs and theleft open some matters of detail for shareholders to chairman and to consider the effectiveness of theresolve with company boards. This supplementary board as a whole. The role of the NED is becomingstatement is intended to assist directors’ increasingly complex and Hermes recommends thatunderstanding of Hermes’ views on these issues. companies encourage NEDs to participate in the range of seminars and workshops offered byIII. The Board organizations such as Cranfield School ofA. Composition Management, Henley Management College, Institute11. The precise number of executive directors (EDs) of Directors and Spencer Stuart.and NEDs for any company is for its board todetermine with the approval of its shareholders. It is 17. Hermes contributes to several of thesethe overall balance of the board that is important. development fora, which encourage a participatoryNot all NEDs need to be independent but there approach and include case studies illustratingshould be a strong core of NEDs that are both difficult situations.independent and seen to be independent. IV. VotingB. Role of NEDs 18. Hermes believes that a separate resolution12. The key role of NEDs is to ensure that the chief seeking approval of the annual report and accountsexecutive and the board as a whole concentrate on should be tabled at all annual general meetingsmaximizing long-term shareholder value. (AGMs).13. There are three aspects of this for which NEDs 19. Hermes welcomes the introduction of electronicshould expect to be held accountable. These are the proxy voting and encourages companies to adoptstrategic function, expertise and the governance this as soon as practicable.function. 20. Takeovers are an important part of an efficientC. Independence of NEDs and competitive corporate environment but do not14. The board should have a core of at least three always add to shareholder value, particularly for thevigorously independent directors on whom bidding company. Hermes’s predisposition in ashareholders can rely for the independence of their hostile bid is to support existing management, butjudgment and who can act as agents for change this support is conditional. It does not apply whereshould the need arise. Hermes endorses the confidence has been lost in management, or forCadbury Committee’s definition of independence: example, where synergistic or strategic benefitsthat NEDs should be independent of management clearly justify a bid premium. Unreasonable orand free from any business or other relationship that unjustifiably expensive defense tactics will not becould materially interfere with the exercise of their supported.independent judgment. 21. Hermes acknowledges, on behalf of its clients,15. Hermes accepts that not all NEDs need to be that shareholders have responsibilities as owners toindependent in accordance with this definition and participate in the stewardship of companies andthat there can be a role for other NEDs provided a that, in companies outside their home market, themajority of NEDs satisfy the above test of primary way of achieving this is through proxyindependence. We believe that the final decision on voting. Accordingly, Hermes will endeavor to lodgewhether NEDs are independent lies with the proxies at company general meetings, subject toshareholders who elect them. There should be full
34Appendix 3 continuedexcessive costs or administrative difficulties. should clearly communicate the plans they areCompanies, for their part, can promote good pursuing and the likely financial and widerpractice and system development in their own consequences of those plans. Ideally, goals, plansmarket, thus minimizing the obstacles to and progress should be discussed in the annualshareholder voting. Hermes recommends following report and accounts.the International Corporate Governance Network’sGlobal Share Voting Principles to achieve this end. Financial Principle 2 Companies should have appropriate22. Management of companies run in the long-term measures and systems in place to ensure that theyinterests of shareholders can be confident of know which activities and competencies contributeHermes’ continuing support. Hermes is committed most to maximizing shareholder value.to applying its corporate governance and votingpolicies with thought, giving due consideration to Shareholder valuethe specific circumstances of individual companies, Principle 3 Companies should ensure alland will adopt a pragmatic approach where investment plans have been honestly and criticallyappropriate. Hermes will reconsider, at the request tested in terms of their ability to deliver long-termof a company, any company-specific shareholder value.circumstances that may make it inappropriate toapply Hermes’ standard policies. Principle 4 Companies should allocate capital for investment by seeking fully and creatively to exploit23. Hermes will contact companies to explain its opportunities for growth within their core businessesreasons for voting against or abstaining on rather than seeking unrelated diversification. This isresolutions. Hermes prefers these discussions to be particularly true when considering acquisitive growth.kept private. Hermes welcomes correspondencefrom companies in which its clients invest and where Principle 5 Companies should have performanceappropriate wishes to encourage discussions with evaluation and incentive systems designed cost-company directors and executives. effectively to incentivize managers to deliver long- term shareholder value.24. Corporation’s ordinary shares should featureone vote for each share. Corporation should act to Principle 6 Companies should have an efficientensure the owner’s rights to vote. Fiduciary capital structure which will minimize the long-terminvestors have a responsibility to vote. Regulators cost of capital.and law should facilitate voting rights and timelydisclosure of the levels of voting. Strategic Principle 7 Companies should have and continueV. Hermes’ Business Principles to develop coherent strategies for each businessHermes’ overriding requirement is that companies be unit. These should ideally be expressed in terms ofrun in the long-term interest of shareholders. market prospects and of competitive advantage theCompanies adhering to this principle will not only business has in exploiting these prospects. Thebenefit their shareholders, but also the wider economy company should understand the factors which drivein which the company and the shareholders market growth, and the particular strengths whichparticipate. We believe a company run in the long-term underpin its competitive position.interest of shareholders will need to manage effectivelyrelationships with its employees, suppliers and Principle 8 Companies should be explain why thecustomers, to behave ethically, and have regard for are the “ best parent” of the businesses they run.the environment and society as a whole. Where they are not best parent they should be developing plans to resolve the issue.CommunicationPrinciple 1 Companies should seek an honest, Social, ethical, and environmentalopen, and ongoing dialogue with shareholders. They Principle 9 Companies should manage effectively
35Appendix 3 continuedrelationships with their employees, suppliers, and for our focus funds. Following the Myners Report, allcustomers and with others who have a legitimate institutional investors are being required to take aninterest in the company’s activities. Companies active role in monitoring performance. To that endshould behave ethically and have regard for the the Institutional Shareholders Committee (ISC) hasenvironment and society as a whole. published guidelines for trustees and their agents. Hermes welcomes the guidelines as a benchmarkPrinciple 10 Companies should support voluntary for the fund management industry and anand statutory measures which minimize the endorsement of our stewardship activities.externalization of costs to the detriment of societyat large. With our fully integrated approach to corporate governance and investment management, includingVI. Shareholder or Shareowner? our ownership of the only institutional shareholderHermes believes that companies with active and engagement (Focus) fund, we believe that we areinformed investors achieve superior returns over the uniquely positioned to meet the letter and spirit oflong-term and, accordingly has been a leader in the guidelines (see table). Additionally, our expertisepromoting better stewardship at investee companies in the field of engagement is available to investorsfor over a decade. Passive fund management with portfolios managed by third party managersshould include active ownership and our index- for mutual clients. We welcome the opportunitytracking funds benefit from an active approach to to carry out governance and interventionownership. The 40 person team involved in activities on behalf of our existing and futuregovernance and engagement are not reserved just clients.
36Hermes’ ApproachMyners/ISC Requirements Hermes’ ApproachStatement of activism policyOwners should be clear about what they expect Published and sent to all UK investee companies:from companies: - Corporate Governance and Proxy Voting– it should be clear, consistent and comprehensive Statement– it should be well-communicated - Hermes Principles on strategy and performanceMonitor performance of and have dialogue withinvestee companiesOwners should have a systematic process which: See chart overleaf.– reviews company performance Votes clients’ shares at all UK general meetings.– undertake core ownership duties (voting and Graduated approach: proxy voting decisions based engagement/dialogue) on annual report disclosures, discussions with– identifies situations where further intervention is company and independent analysis. Database of merited contract and vote. Companies included in “core engagement program” or “focus funds” if further intervention merited.Intervene where necessaryOwners should be able to explain reason for, Company-specific. Companies included in “coreobjective of, and measures of success of engagement program” on basis of formal proposalintervention approved by Corporate Governance Committee which oversees engagement process. Similar but more detailed approach for “focus funds”.Escalate intervention on a case-by-case basis– Meetings with management, board, advisers Regularly meets with executive and nonexecutive– Intervene jointly with other investors directors on both company-specific and general– Public statements in advance of AGM governance and performance issues. Works with– Call EGM/put shareholder resolutions at AGM other investors as appropriate. Prefers not to take public route unless all other alternatives exhausted but when necessary will use press and general meetings to drive change.Evaluate impact of activism and report toclients Has staff of 40 focused on governance and– Auditable process stewardship activities. Broad range of– Agree format of reports to clients backgrounds/expertise including corporate (pic board-level), investment, legal, financial, strategic management consultancy and forensic accountancy.
37Hermes’ Corporate GovernanceFunctionReceipt of Proxy MaterialCorporate Governance Analysis of AnnualReport and Accounts covering:• Total shareholder return performance• Board structure Further research: – Number of non-executive directors • In-house governance database – Independence of non-executive directors • Governance research services – Chairman/ chief executive roles split • Proprietary news and information services – Nominated senior non-executive director • Companies’ house public records – Committee structures • City and governance contacts• Remuneration – Total package – Incentive pay• Directors’ contracts – Risk management – Reporting systems• Social, ethical, and environmental matters• Shareholder base ProblemsNo Problems Engagement and InterventionVote in favor of management Speak to company * In extreme cases Course of action taken differs case-by-case Speak to company’s brokers Write to company Meet with company executives and nonexecutives Formulate a plan for change Consult other shareholders Vote against or abstain on management resolution Attend AGM/EGM Put shareholder resolutions on proxy card* Call EGM* Problems solved Vote in favor of management resolutions at AGM/EGM
38References1 Value of Corporate Governance, Investor 4 Audit Committee Effectiveness Activism and Economic Value Added (i) Jim Kaplan’s Auditnet at www.Auditnet.org/(i) The Value of Corporate Governance, Colin corpgov.htm. In particular see Audit Committee Melvin, April 2003 (available at Effectiveness-Self Assessment by Brad www.hermes.co.uk). Davidson and Clarence Eberse.(ii) Corporate Governance Develops in Emerging (ii) Best practices and sample audit committee Markets, Campos, Newell & Wilson, McKinsey charters are included in the report of the Blue on Finance, Winter, 2002 at Ribbon Committee on Improving the www.mckinsey.com Effectiveness of Corporate Audit Committees at www.nyse.com/content/publications/(iii) The concept of Economic Value Added NT000113C6.html. has been popularized by the consulting firm Stern Stewart & Co. An explanation (iii) Various materials at the KPMG Audit of the concept can be found at Committee Institute web site at http:// www.sternstewart.com. www.kpmg.com/aci/additional.htm.(iv) 7 Common Traits of EVA Companies, Tad (iv) The Financial Aspects of Corporate Leahy at www.business financemag.com. Governance, The Cadbury Report, 1 December 1992.2 Human Capital and Shareholder Value (v) Audit Committees, Good Practices for(i) Human Capital Index: Measuring your Meeting Market Expectations, Organization’s Greatest Asset at PricewaterhouseCoopers http://www.watsonwyatt.com/search/ publications.asp?Component=Strategy (vi) Related Party Transactions, Corporate &ArticleID=7379. Governance series, Ernst & Young at www.ey.com.au.(ii) Human Capital Index®: Human Capital As a Lead Indicator of Shareholder Value at (vii) Accounting and Auditing for Related http://www.watsonwyatt.com/research/ Parties and Related Party Transactions at resrender.asp?id=W-488&page=1. http://www.aicpa.org/news/relptv1.htm and http://fp.aicpa.org/public/download/news/3 Model Terms of Reference of Nomination relpty_toolkit.pdf. and Renumeration Committees (viii) Financial Statements Due Diligence(i) Guidance Note, Nomination Committee – Questionnaire, Corporate Governance Terms of Reference, at the web site of Series, Ernst & Young at The Institute of Chartered Secretaries and www.ey.com.au. Administrators (ICSA) at www.icsa.org.uk. (ix) Red Flags in Board Reports, A Guide for(ii) A set of written terms of reference is Directors, Comptroller of the Currency available at www.bhpbilliton.com/ Administrator of National Banks (this guide is bbContentRepository/AboutUs/Governance/ relevant to bank reports). NomsCommittee.pdf. (x) Financial Shenanigans, 2nd Edition, 1999: How(iii) Guidance Note, Remuneration Committee – to Detect Accounting Gimmicks and Fraud in Terms of Reference, at ICSA’s website. Financial Reports, Howard Schilit.
39(xi) The Financial Numbers Game, 2002: (ii) Effective Governance, UK Institute of Detecting Creative Accounting Practices, Chartered Accountants at http:// Charles W. Mulford and Eugene E. Comiskey. www.blindtiger.co.uk/IIA/uploads/2c9103- ea9f7e9fbe—7ebc/EffGovKC.doc.(xii) Sarabanes-Oxley Act of 2002: see summaries at http://www.aicpa.org/info/ (iii) The COSO Report: Internal Control—Integrated Sarbanes_oxley_summary.htm and http:// Framework, prepared by the Treadway www.cov.com/publications/297.pdf and http:// Commission, i.e., National Commission on www.mayerbrown.com/legal/SecU093002.pdf. Fraudulent Financial Reporting. See http:// bear.cba.ufl.edu/hackenbrack/acg5637/PDF/(xiii) SEC Proposes Auditor Independence and NCFFR.pdf. Work Paper Retention Rules Required Under Sarbanes_Oxley Act at www.sec.gov/news/ (iv) Internal Control: A Practical Guide, KPMG at press/2002-165.htm. www.kpmg.co.uk/kpmg/uk/image Internalcontrol.pdf.(xiv) Audit Committee : Terms of Reference at www.icsa.org.uk. and Audit Committee (v) Internal Audit in Banks and the Supervisor’s Guide, Arthur H. Bill at http:// Relationship with Auditors, Basle Committee on www.bowne.com/bsc/pubs_audit.asp Banking Supervision, at http://www.bis.org/ publ/bcbs84.htm.(xv) Management’s Discussion and Analysis of Financial Condition and Results of Operations: (vi) Framework for Internal Control Systems see “the MD&A Rules” at www.sec.gov. in Banking Organizations, Basle Committee on Banking Supervision at http://www.bis.org/(xvi) See the website of Blunn & Company for publ/bcbs40.pdf. improving online annual reports at www.blunn.com. (vii) Management Reports on Internal Controls, David M. Willis and Susan S. Lightle at(xvii) Audit Committee Financial Expert definition: http://www.aicpa.org/pubs/jofa/oct2000/ see 15 January 2003 press release at U.S. willis.htm SEC website. (viii) Internal Controls and the Sarbanes-Oxley Act,(xviii) How to Work with and Protect the Board and Mathew Leitch at www.auditnet.org. Audit Committee, Margaret M. Zagel, Altheimer & Gray, 26 February 2003 at 6 Code of Business Conduct and www.complianceweek.com. Implementation(xix) For some tips for minimizing compliance costs (i) The Commonwealth Association of Corporate Governance has reproduced a template for see: Corporate Governance on a Budget, Amar Budarapu, Compliance Week, 1 July, 2003. designing a corporate code at http:// www.combinet.net/Governance/FinalCer/ codeof.htm.(xx) Employee Hotlines: A Valuable Compliance Tool for the Board, Tony Malone & Ralph Childs, Directors Monthly, March 2003. (ii) Corporate Codes of Conduct, Bureau for Workers’ Activities, International5 Internal Controls Labour Organisation at http://www.itcilo.it/ english/actrav/telearn/global/ilo/code/(i) The Turnbull Report: the full text is available at main.htm. http://www.cabinet-office.gov.uk/risk/ Corporate_Governance_folder/turnbul.pdf.
40(iii) A Bank Director’s Guide to Codes of Conduct, Michael F. Sullivan, Bricker and Eckler LLP at American Association of Bank Directors. http://www.bricker.com/newsevents/articles/ 157.asp.(iv) A Bank Director’s Guide To Internal Investigations, American Association of Bank (ii) Corporate Governance and Chairmanship, Directors. A Personal View, Adrian Cadbury, Oxford University Press, 2002(v) Another helpful web site is that of the Institute of Business Ethics. It contains model codes as (iii) Guidance for Chairmen, and Guidance for well as numerous tips and suggestions to Non-Executive Directors, Derek Higgs review, ensure that codes are in fact adhered to. 20 January, 2003 at www.dti.gov.uk. See http://www.ibe.org.uk/code.htm. (iv) Board Meeting in Session, Evaluating the(vi) ICSA Guidance Note, Directors’ Share Board of Directors, Korn/Ferry International. Dealings at www.icsa.org.uk. (v) The Insolvency Service: A Guide for Directors,(vii) Cinergy Corp. Insider Trading Policy at available at http://www.insolvency.gov.uk/ www.cinergy.com. information/guidanceleaflets/directors/ gindex.htm.(viii) Examples of whistleblower materials are the UK’s Public Interest Disclosure Act and the (vi) What Makes Great Boards Great, Jeffrey A. US’s False Claims Act. See http:// Sonnenfeld, Harvard Business Review, Sept. www.whistleblower.org/ and the website of 2002. Public Concern at Work at http:// www.pcaw.co.uk/. Whistleblowing laws should (vii) Directors’ Duties, Corporate Governance be credible and not cosmetic. Series, Ernst & Young at www.ey.com.au.7 Environment (viii) Personal Liabilities of a Company Director at http://www.elbornes.com/articles/persliab.htm.(i) Sustainability, Eco-efficiency, Life-Cycle Management & Business Strategy, Kevin (ix) The Board Agenda, Good Practices for Meeting Brady, Patrice Hanson, James Fava at Market Expectations, PricewaterhouseCoopers. www.firewinds.com. (x) Board Meeting In Session, Twenty “Best(ii) Value, Growth, and Success–How Sustainable Practices to Improve Board Performance,” Korn is your Business: A Briefing Note for Directors Ferry International. at http://www.defra.gov.uk/environment/acbe/ pubs/pdf/directors.pdf. (xi) Best Practices in Board Reporting, Ernst & Young at www.ey.com.au and Does your Board(iii) Primer on Choosing and Using Environmental Have an Effective Management System of Its Consultants, Bruce Klafter at www.orrick.com/ Own – Carolyn Brancato, The Conference news/environ/primer.htm. Board.(iv) Various publications at ADB’s website (xii) Reporting Progress, Good Practices for www.adb.org. Meeting Market Expectations, PricewaterhouseCoopers.8 Directors’ Duties (xiii) The Role of a National Bank Director: The(i) Flunking the Duty of Care, The Four Most Director’s Book, Comptroller of the Currency Common Mistakes Made by Directors, Administrator of National Banks.
41 (xiv) A Bank Director’s Practical Guide to (xxv) Rights and Duties of Directors, 5th edition, Avoiding Enforcement Actions, American Martha Bruce, FCIS, Tolley Lexis NexisTM Association of Bank Directors. (xxvi) The ICSA Director’s Guide, Martha Bruce. (xv) The Regulatory Exclusion in Directors and Officers Liability Insurance Policies and 9 Turnaround Situations Obtaining Regulatory Coverage in the Present Market, John C. Hockenbury and (i) The web site of the Turnaround Management Gregory J. Manderlink, American Association at http://www.turnaround.org Association of Bank Directors. (ii) Corporate Turnaround, Managing (xvi) Frequently Asked Questions About Directors Companies in Distress, Stuart Slatter & and Officer’s Liability Insurance, January David Lovett, Penguin, 1999. 2000, www.haledorr.com. (iii) Corporate Governance Screen used by(xvii) ICSA Compliance Note: Matters Reserved CalPERS at http://www.calpers- for The Board, at www.icsa.org.uk. governance.org/alert/selection/screening- process.asp.(xviii) Independent Director Definition, Council of Institutional Investors at http://www.cii.org/ (iv) Company Director’s Disqualification Act 1986 independent_director.asp. and Failed Companies. (xix) Various guides for directors in the ‘20 (v) Officer and Director Liability in Financially Questions’ series available at the web site of Troubled Corporations, Jamey S. Seely the Canadian Institute of Chartered available at the web site of Thompson & Accountants, including 20 Questions Knight at http://www.tklaw.com. Directors Should Ask About Management’s Discussion and Analysis. 10 Shareholder Rights (i) OECD Principle of Corporate Governance & (xx) Director’s Liability (for unremmitted taxes), David J. Rotfleisch, at www.taxpage.com/ Corporate Governance Practices and the Articles/taxart5.htm. Rights of Shareholders, Parliament of the Commonwealth of Australia, 1991 at (xxi) Staying Out of Trouble: Officer and Director www.aph.gov.au. Liability in Connection with Registration (ii) Understanding Securities Class Action Statements; How to Draft Documents to Limit Liability, Jack R. T. Jordan, November Litigation at www.securitiessleuth.com/ 1999 edition, Andrews Corporate Risk corporatefraud/understanding.html. and Class Action Dilemmas, Hensler et al, Rand Spectrum. Institute of Civil Justice at http://(xxii) ICSA Guidance Note, Matters Reserved for www.rand.org/publication/MR/MR969.1/ MR969.1pdf the Board.(xxiii) The Responsibilities of Company Directors, (iii) See claim recovery by institutional investors in Bernstein, Litowitz, Bergman & 2nd Edition, Andrew Sparrow, Financial Times, Prentice Hall. Grossmann LLP at http://www.blbglaw.com/ settlements/main.cfm.(xxiv) Fund Directors Guidebook, American Bar Association.
42AcknowledgmentThe following contributed to the preparation of thispaper: Peter Butler and Colin Melvin of HermesInvestment Management Ltd and Robert Bestani,Alfredo E. Pascual and Arvind Mathur of the AsianDevelopment Bank. A number of other staff fromvarious departments of the Asian DevelopmentBank also commented on an earlier draft.
HERMESHERMES PENSIONS MANAGEMENT LIMITEDHermes Pensions Management Limited Asian Development BankLloyds Chambers 6 ADB Avenue, Mandaluyong City1 Portsoken Street P.O. Box 789London E1 8HZ 0980 Manila, Philippineshttp://www.hermes.co.uk http://www.adb.org/PublicationsCopyright 2003 Asian Development BankISBN 971-561-500-7Publication Stock No. 050403The contents of this paper do not necessarily reflectthe views of the Asian Development Bank or HermesPensions Management Ltd.The photograph of the Singapore skyline on the coverand back page has been reproduced courtesy of theSingapore Tourism Board. The photographs of the stockexchange and the laboratory are from the AsianDevelopment Bank. ISBN 971 - 561 - 500 - 79 789715 615006 >Printed in the Philippines