Saturday, May 16, 2009
Wednesday, May 6, 2009
Shell and standards
The clock indicates you came in fourth by a fraction of a second but, hey, there was a headwind, you were trying harder than the other guy and, what's more, those stopwatches are all wrongly calibrated. Have bronze, instead, with our compliments.
The decision by Royal Dutch Shell's remuneration committee to overrule its own pay policy for top executives - for the second year running - looks terrible.
But Shell is no Bellway, the UK housebuilder that last year retroactively scrapped its performance targets without consulting shareholders, earning itself a justified beating at its annual meeting. In fact, the directors on Shell's remuneration committee have done almost everything right.
They asked shareholders for the opportunity to use discretion - either in favour or against pay awards - three years ago to avoid being forced into making an anomalous award. They rightly identified that, as a performance gauge, total shareholder return - which has grown like a poorly pruned hedge at many companies, overshadowing better measures - risked distorting the outcome. They then reviewed the policy in the light of shareholder concerns and added some new relative measures for 2009. Finally, they managed all this without having to rely heavily on external compensation consultants (though Towers Perrin supplied supporting data).
That shows a reassuring independence of mind. After all, if the likes of Sir Peter Job (former chief executive of Reuters), Lord Kerr (once Britain's ambassador to the US), Deutsche Bank's Josef Ackermann and Jorma Ollila of Nokia needed their hands held, Shell really would be in a pickle.
Where, then, did they go wrong? The committee exercised its discretion twice in two years to grant shares that executives did not, under a strict interpretation of Shell's own rules, deserve, and did so without further shareholder consultation.
These are not hanging offences. Not all investors will follow the recommendations of shareholder advisory groups to rebel. Shell could further refine its procedure next year simply by scheduling a couple of days between meetings of its remuneration committee and its board meetings to flag issues to big investors. But the titans and titled folk on the committee can't complain about being called to account, if only because mere mortals at other companies look to the race leaders to set the standard.
Source: http://www.ft.com/cms/s/0/e76674f8-39d5-11de-b82d-00144feabdc0.html?nclick_check=1
Tuesday, April 28, 2009
PNC Financial Shines In The Dark
It is not easy for an outsider to determine why PNC has such little exposure to the once-highly rewarding subprime and asset-backed securities markets. However, a quick review of PNC’s regulatory filings gives some clue. PNC’s remuneration policy is comprehensive. Risk management and the quality of corporate governance factor in the determination of executive compensation. Since fiscal 2006, executive incentive pay has been tied to not only such financial goals as EPS and ROCE growth, but also non-financial metrics as operating leverage, diversification and risk and governance ratings.
What really sets PNC apart from other financial firms is that the company has been putting serious efforts into meeting this set of long-term nonfinancial goals, instead of changing them as many financial companies did almost as a matter of expediency. PNC appears to remain immune to the current crisis because it has a strong governance culture committing directors and executives to implementation of strong, well-balanced policies.
Thursday, April 16, 2009
South Korea: Summary of Current Shareowner Rights
[I wrote the first draft of the following piece in May 2008. In April 2009, it was published in Shareowner Rights across the Markets: A Manual for Investors, a joint project by Governance Metrics International and The CFA Institute Centre for Financial Market Integrity. The manual can be downloaded at http://www.cfapubs.org/toc/ccb/2009/2009/2?cookieSet=1]
Shareowner engagement in South Korea is often hindered by the country's conglomerates, whose circular, complex networks of cross-holdings shield them from market disciplines. Shareowner activism is also hindered by the country's regulatory ambiguities, which often undermine shareowners' abilities to fully exercise their rights. A prevailing management structure that fosters the infrequent placement of independent members on company boards further weakens shareowner rights in this market. Despite these obstacles, shareowners in the South Korean market hold considerable rights.
-. Current Engagement Practices and Shareowner Rights Developments
Although shareowner engagement in South Korea has evolved rapidly, political factors and other influences have prevented fully realized shareowner rights. The issue of shareowner engagement has traditionally been treated as political, and considerable focus remains on the omnipresent financial and political influence that the country's family-controlled conglomerates, or chaebols, exert on society.
The issues of shareowner engagement and corporate governance entered public debate in 1998, when South Korea began restructuring the chaebol system under the International Monetary Fund's mandate. As a result of this activity, public companies improved the accountability of their boards by substantially reducing board sizes and by seating board members from outside the chaebol on their boards. Most restrictions on foreign ownership also were removed. In 2001, People's Solidarity for Participatory Democracy (PSPD), one of South Korea's largest civic groups, took advantage of this opening and started a minority shareowner campaign. With a mere 1 percent of voting stock, PSPD activists challenged management at the shareowner meetings of Samsung Electronics, SK Corporation, and others, thus bringing the issues of shareowner rights and activism to media attention. Although its five-year campaign failed to bring specific improvements to the governance of the chaebol companies that it targeted, PSPD's high-profile efforts have sustained public debate about the issues of shareowner rights and activism.
PSPD had largely discontinued the campaign by 2006, and in late 2006, Jang Ha-sung, one of the two college professors who led the campaign, began to work as an adviser to Lazard's Korea Corporate Governance Fund, the first such fund formed by a foreign entity. Kim Sang-jo, the other professor, began to lead Solidarity for Economic Reform, a governance and regulatory reform advocacy group that involved some former supporters of PSPD. The divergent routes of these leaders marked a shift away from the public perception that shareowner engagement is primarily a social justice issue.
In South Korea, shareowner engagement is hampered by the absence of a strong local advocate. Local engagement consultants have begun to emerge, but their influence appears marginal. Policymakers have long proposed using the National Pension Service (NPS) as a vehicle for shareowner engagement. For example, in March 2008, the NPS, which currently invests KRW14.5 trillion (USD14.5 billion) in local stock exchanges, said it would vote against appointing the founders of Hyundai Motor Company and Doosan Infracore as board members because of their involvement in financial scandals. This move was a first-of-its-kind shareowner engagement by the fund. Furthermore, new legislation planned for 2009 that will allow brokerages to conduct banking business suggests that the landscape of shareowner engagement in South Korea will change yet again. Once brokerages become full-fledged investment banks in South Korea, the need to articulate shareowner rights and engagement practices will be even greater.
In South Korea, regulatory inadequacies often impede both the formation of independent corporate boards and the improvement of shareowner engagement practices. South Korean regulations require that 50 percent of the board of a public company with KRW2 trillion (USD2 billion) in market value be independent; for a public company with less than KRW2 trillion, at least 25 percent of the board's members must be independent. The regulations do not explicitly define the term "independent," however, and the terms "independent director" and "outside director" are used interchangeably. The materiality threshold for related-party transactions is set at KRW5 billion (USD50 million), and no materiality/time threshold has been set for professional/personal services provided by outside board members. These unclear rules cumulatively result in corporate boards that tend to be far less independent than the companies claim them to be. Board member elections are often staggered because many board members are elected to two- or three-year terms on different schedules, although practice varies. New board members may be appointed to fill vacancies between annual general meetings, but they must stand for election by shareowners at the next available general meeting (annual or extraordinary).
In South Korea, takeover rules are modest. Poison pills are not allowed, although talk of introducing them has been going on since 2006. Shareholdings that enmesh chaebol affiliates into a web of cross-shareholdings greatly hamper the market mechanism of takeovers. The complex networks of cross-shareholdings, further strengthened by routine related-party transactions between chaebol affiliates, seriously reduce the exposure of the conglomerates to market disciplines.
-. Legal and Regulatory Framework
Key shareowner rights are stipulated in three pieces of legislation: the Company Law, the Commercial Code, and the Securities Trade Law. Legislation is administered by the Financial Supervisory Service (FSS), which has a wide range of enforcement powers. Disclosure and key market regulations are governed under the Securities Exchange Listed Company Regulations, which has legislative backing. The FSS oversees the enforcement of takeover rules and regulatory disciplines but has no criminal enforcement authority.
A number of mechanisms are available in South Korea for shareowner engagement and activism. The one share, one vote system is generally entrenched, and some restrictions are in place to hold the influence of chaebols in check. South Korea's anti-monopoly and fair trade regulations restrict the voting rights of the financial and insurance units of the conglomerates with KRW5 trillion (USD5 billion) in market value connected with the shares they own in other units of the same conglomerates. Their voting rights are reinstated but with a 30 percent voting power ceiling, regardless of the number of shares they own, when they vote on such key issues as mergers and acquisitions or amendments to the articles of incorporation. As of June 2008, the restrictions affect 1,003 affiliates of 41 conglomerates. The Securities Trade Law imposes a voting cap of 3 percent in the election of audit committee or audit board members.
A request for an extraordinary general meeting or a shareowner proposal may be made by a shareowner holding a minimum of 3 percent of the voting shares for companies with less than KRW10 billion (USD10 million) in capitalization or holding 1.5 percent of shares for companies with more than KRW10 billion (USD10 million) in capitalization.
Shareowners may appoint proxies for general meetings without restrictions and are not required to block shares in order to vote. Board members may be removed without cause with a supermajority vote of shareowners or of the board. On 3 February 2009, the Capital Markets Integration Act took effect. It lowers regulatory walls between banks and non-banking financial institutions. The act was designed to realign the financial industry by encouraging mergers and acquisitions, but it may take some time for this change to come to fruition because of the global financial crisis and the limited amount of capital available for acquisitions in the current environment.
Another bill in the parliament would affect shareowners' rights through amendments to the Commercial Code. Ongoing gridlock in the legislature, however, has slowed the progress of this bill. The amendments, if passed, offer mixed results for the future of shareowner engagement. Some proposals could help weaken the one share, one vote principle by allowing shares with differing voting rights; other proposals are designed to make it easier for shareowners to take such actions as calling special meetings or filing derivative lawsuits. In conjunction with the amendment, the lack of a national consensus on whether chaebols should be allowed to own controlling stakes in lending institutions offers another point of political contention.
Thursday, April 9, 2009
Chronicle of A Death Foretold II
-. Washington Mutual, Inc.
In fiscal 2006, Washington Mutual, Inc. removed a regulatory-compliance goal from its set of bonus metrics. With the connivance of the board, Washington Mutual executives have since maneuvered to keep their jobs and bonuses, instead of taking on the credit crunch head-on. Two decisions in April 2008 by the board prompted shareholder action. In the month, the Human Resources Committee decided to exclude subprime mortgage-related losses from the metrics for executive bonuses. Washington Mutual passed up merger negotiations with JPMorgan Chase & Co in favor of $7 billion in capital injections from a consortium led by private equity TPG. A merger between the two financial institutions, which is about the size of the capital infusion in value, could have greatly improved shareholder interests at Washington Mutual, while the deal with TPG has diluted existing shares.
At the AGM in 2008, Washington Mutual shareholders had little option but to approve the plan because it was the only recapitalization plan put before them. However, they successfully unseated Mary E. Pugh, the non-independent outside director, who chaired the board committee responsible for asset quality, and had the board retract its decision to exclude subprime losses from bonus calculations. Shareholders could not stop executives from taking home hefty paychecks until the bank’s last days. In September 2008, Washington Mutual agreed with Alan H Fisherman, the new CEO replacing Kerry Killinger, to pay a salary of $1 million and 3.65 times base salary in bonuses and other cash and stock payouts. About 18 days after Mr. Fisherman’s appointment, the bank collapsed and was eventually acquired by JPMorgan Chase & Co, following a brief takeover of its assets by the federal government.
-. IndyMac Bancorp, Inc.
In fiscal 2006, at IndyMac Bancorp, Inc., the board’s Management Development and Compensation Committee gave up the right to reduce the amounts of executive bonuses if regulatory ratings worsened or if certain strategic criteria were not met. In the same year, 45% of IndyMac Bank’s CEO Richard H. Wohl’s cash bonus was tied to a single metric vaguely termed “mortgage professionals.” The metric appears to have referred to as Mr. Wohl’s ability to hire and retain mortgage professionals.
As late as fiscal 2006, IndyMac’s compensation metrics included many pro-shareholder factors such as ROE and TRS. In fiscal 2007, when its stock began to fall substantially, the bank scrapped all existing metrics, in what it said is to weigh “IndyMac’s pay for performance principles against the need to motivate and retain the management team to successfully adapt IndyMac’s business to the new mortgage environment and to rebuild IndyMac’s business and financial model.” In other words, the bank renounced the bedrock principles of compensation policy to retain the very management team that pushed it into crisis. In that year, all named executives were paid bonuses. In July 2008, IndyMac became nationalized after extensive financial losses.
Wednesday, April 8, 2009
Chronicle of A Death Foretold I
• The growth in foreign capital had a profound effect on the global economy. Foreign holdings of U.S. government and corporate debt skyrocketed. China’s monthly average purchases of U.S. long-term securities went from less than $2 billion in 2001 to over $15 billion in 2007.
• In the U.S., mortgage origination as a percentage of total mortgage debt outstanding rose from an average of 6.3% between 1985 and 2000 to 10% between 2001 and 2006. Subprime debt, in particular, grew from just over 2% in 2002 to 14% in 2008. In a sustained environment of cheap capital, lending standards for residential mortgages simply deteriorated.
• In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, like CDO tranches, rated triple A.
Source: http://www2.goldmansachs.com/ideas/public-policy/lcb-speech-to-cii.html
Wednesday, December 3, 2008
Samsung Quietly Demands Regulatory Changes to Keep Its Governance Intact
"I have learned that Samsung has been contacting the Finance Committee of the National Assembly, the Fair Trade Commission and lawmakers of the governing Grand National Party to rewrite a bill to exempt Samsung Electronics from some clauses governing holding companies,” a government source said on condition of anonymity.
Currently Samsung Life Insurance Co., Ltd., the mutual insurer of the conglomerate, owns about 7.2% of Samsung Electronics common stock and is the largest shareholder of Samsung Electronics. The insurer is majority held by the founding Lee family and Everland Samsung, the amusement park operator, which is the backbone of the conglomerate’s complex web of cross shareholdings. The conglomerate’s shift to a holding company would mean that the insurer will be a subsidiary of Samsung Everland and that Samsung Electronics will be a subsidiary of the insurer.
The current regulations do not allow a financial unit of a chaebol to directly own a non-financial unit of the same chaebol. A legislation bill, which is currently under consideration at the National Assembly, also places ownership restrictions on financial units of chaebols regardless of whether they own stakes in non-financial units as part of cross shareholdings or as part of a holding company. Samsung wants the restrictions relaxed or removed. Samsung Group denied Hankyoreh’s exclusive report as groundless, citing that there have been no group-wide lobbying efforts for the amendment bill. However, a Samsung spokesperson said: “However, legal counsels or strategic planners of each affiliate [of Samsung Group] can express their opinions about the bill.”
Translated and edited by Kap Seol