5 February 2004

 

Mr. Mats Isaksson
Corporate Affairs Division
Organisation for Economic Cooperation and Development
2, rue André Pascal
F-75775 Paris Cedex 16
France

 

Re: Proposed Revisions to OECD Corporate Governance Principles

 

Via e-mail to corporate.affairs@oecd.org

 

Dear Mr. Isaksson:

 

The AIMR Global Corporate Governance Task Force (“Task Force”) of the Association for Investment Management and Research (“AIMR”)* is pleased to comment on the Organisation for Economic Cooperation and Development (“OECD”) proposed revisions to the OECD Corporate Governance Principles (the “Principles” or the “Proposal”). The Task Force is charged with developing best practice guidelines relating to corporate governance, and has 15 volunteer investment professionals, representing 12 different countries, who provide a variety of viewpoints based on their market experience and expertise, and draw upon the collective knowledge of AIMR’s global network of investment professionals.  

 

General Comments

 

The Task Force commends the OECD for their work and strongly supports the Proposal, except where noted below. AIMR has long been an advocate for investors and the Task Force notes that many of the OECD revisions strengthen shareholder rights.  

 

The Task Force believes that corporate directors have a fiduciary duty to shareholders – that is, they have a duty of loyalty to shareholders and must work for their best interests.  Directors do not work for the company or for the company’s management – they work for the shareholders and are their representatives charged with overseeing management.  Directors are stewards of the corporate assets and are responsible for overseeing management’s allocation of those assets so as to maximize shareholder value.  

 

The Task Force believes that this priority of director’s responsibility to shareholders is not communicated clearly in some cases in the Proposal, as indicated below.  In addition, while the Task Force is generally supportive of the Principles, there are occasions where the Principles reach beyond corporate governance and address governance of third parties (e.g., analysts) or legal issues. The Task Force believes that it is important to distinguish between the responsibilities of corporate management and directors, and those of other parties (e.g., shareholders, analysts, institutional researchers and money managers, and other stakeholders).  We believe that it might add greater clarity to the proposals if the responsibilities of the different stakeholders were separated into different sections or even different chapters within the document.

 

The Task Force also strongly supports the additions related to disclosure of potential conflicts of interest. Such disclosure is consistent with AIMR’s Code of Ethics and Standards of Professional Conduct and the AIMR Research Objectivity Standards, all of which are attached. Investors and other parties must be informed of potential conflicts of interest so that they can make fully informed decisions and better understand and interpret the information that is provided to them.

 

Finally, the Task Force requests that the OECD produce a summary of the changes to the Principles (and annotations) that are made so that interested parties can easily identify and understand the changes.

 

Specific Comments

 

Principle I. The Rights of Shareholders and Key Ownership Functions

 

The Task Force recommends that the text in the Annotation at the beginning of Principle I include a discussion of the need for governments to ensure that the proxy voting processes in their countries allow for the efficient and effective voting of proxies and does not carry any associated penalties or trading restrictions.  The voting process should be made as easy as possible in order to encourage maximum shareholder participation.  

 

Principle I.C.3.

 

The Task Force believes that the second sentence of Principle I.C.3. also should cover key executives. In this regard, the Task Force recommends that the OECD rephrase the second sentence to read, “Shareholders should be able to make their own views known on the remuneration policy for board members and key executives.”  

 

In addition, the Task Force recommends that the remuneration policy governing compensation for board members and executives also be subject to separate shareholder approval.  The Task Force further recommends that executive remuneration be explicitly linked to the company’s long-term fundamental performance.  This will serve to better align executive and shareholder interests.

 

Moreover, the Task Force believes that the granting of compensation to corporate executives and directors poses a significant conflict of interest if it is not subject to review and approval by those whose wealth will be most directly affected by the granting of that compensation (i.e., the shareholders).  Indeed, academic research has repeatedly demonstrated a negative correlation between the amount of compensation granted to senior executives and directors, and the performance of the company.  

 

Principle I.D.

 

The Task Force also believes that Principle I.D. should be modified as follows:  “Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be discouraged. In those situations where such arrangements are legally permitted, companies should disclose not only the existence of such arrangements, but also describe in what situations those arrangements may affect other shareholders, and the manner and extent to which those arrangements will affect other shareholders.”  

 

The Task Force recognizes that certain classes of shares may have limited voting rights (or none at all), and this is reflected in the share price. Nonetheless, the Task Force is concerned about situations where certain classes of shares (so called “super shares”) have voting rights that are greater than those of the common shareholders (i.e., more than “one share, one vote”).  These arrangements should be discouraged because of the potential for a minority shareholder(s) to override the majority of shareholders.  In cases where these arrangements do exist, they must, at a minimum, be disclosed.  Accordingly, the Task Force also recommends that the deleted sentence (“Given the capacity of these mechanisms to redistribute the influence of shareholders on company policy, shareholders can reasonably expect that all such capital structures and arrangements be disclosed.”) in the Annotations section to Principle I.D. remain in the document.

 

Principles I.F.1. and I.F.2.

 

These principles do not seem to support the general intention of Principle I.F, which is to facilitate the exercise of ownership rights by all shareholders. Specifically, subparagraphs 1 and 2 relate to requiring institutional investors to disclose their voting policies or records, an issue that is beyond the control of all but the board of directors of the institutional investor and its shareholders and clients. While the Task Force does not necessarily disagree with these concepts, they seem out of place as currently worded.  

 

Principle I.G.

 

The Task Force requests further explanation of this Principle with regard to the phrase “inappropriate collusion.”  Please provide additional information regarding what the OECD believes is appropriate versus inappropriate collusion, perhaps indicating by example what precisely is intended by the expression.

 

Principle III. The Role of Stakeholders in Corporate Governance

 

The Task Force suggests adding the following to the text in italics at the beginning of Principle III.: “Laws protecting the interests of stakeholders or other state activity should not be devised in a way that deprives the company of free enterprise of its substance, or handicap its proper operation, thus preserving the interest of society at large in retaining a free market economy.”

 

Principle III.C.

 

While non-shareholder employee participation on boards may be permitted in some countries, the Task Force does not believe this represents best practice and recommends changing the Principle to read: “Mechanisms for non-shareholder employee participation on the board should be discouraged.”  

 

Principle III. F.

 

This Principle is a legal or regulatory issue and, consequently, the Task Force believes it is better suited for a different section of the document.  The Task Force also believes that the OECD should state that companies should adhere to all laws and regulations seeking to protect shareholders’ rights.

 

Principle IV. Disclosure and Transparency

 

The Task Force recommends moving Principle IV.F. to a section that discusses responsibilities of related parties.  Analysts, brokers, and rating agencies are outside of the control of the company, and it may be confusing to combine the responsibilities of the company with those of other parties in this Principle.

 

Principle V. The Responsibilities of the Board

 

As stated in “General Comments” above, the Task Force believes boards of directors must first work in the best interests of the shareholders.  In certain circumstances, the best interests of the company may not be the same as the best interests of the shareholders, as in cases where shareholders may wish to pursue a higher-growth strategy than is in the best interests of bondholders.  In these cases, the board must continue to consider alternatives that are best for shareholders.  Accordingly, the Task Force strongly recommends revising Principle V.A. to read “…with due diligence and care, and in the best interests of the shareholders.”

 

Principle V.C.

 

The Task Force also recommends keeping the text that was deleted in this Principle which read “…ensure compliance with applicable law and…” as this is a key role of the board.

 

Principle V.D.

 

The Task Force recommends revising this Principle to read “The board members should fulfill…”  This change emphasizes the individual responsibility of each board member to ensure that the board properly fulfills its responsibilities.  The Task Force also recommends adding a Principle that states that in order to fulfill their duties, board members must be granted access to the necessary relevant information.

 

Finally, we believe independent, high quality research makes an essential contribution to securities markets.  It is the responsibility of all market participants to foster an environment in which research can thrive.  High quality research can only be produced when analysts are free from pressures to bias their work, whether positively or negatively.  Corporate actions retaliating against analysts for negative research do not serve the interests of investors or encourage independence and objectivity by analysts.

 

Fear of lawsuits, of being denied access to management of the companies being covered, of job loss, etc., does not create a climate where independence of thought can thrive. Rather, fear of such actions may deter investment professionals from entering or staying in the securities research profession and cause analysts to have second thoughts about stating their true conclusions if those conclusions would not satisfy a company. Ultimately, this is bad for analysts and their research, and disadvantages all investors.

 

Therefore, the Task Force recommends that the OECD include requirements for the board to ensure that the company does not retaliate, or threaten to retaliate, against analysts for negative research, opinions, or recommendations.  Companies must not attempt to influence the research or recommendations by exerting pressure through other business relationships (e.g., investment banking).  These types of pressures serve to bias research and inevitably harm investors.  In addition, when disclosing information or granting access to corporate management, companies should not discriminate among different analysts or investors based on their prior research, opinions, or recommendations.

 

Closing Remarks

 

The Task Force appreciates the opportunity to comment on the proposed revisions to the OECD Corporate Governance Principles.  If you or your staff have questions or seek amplification of our views, please feel free to contact Patricia D. Walters, Ph.D., CFA, by phone at 1-434-951-5315 or by e-mail at patricia.walters@cfainstitute.org.

 

Sincerely,

 

/s/ R. Charles Tschampion
R. Charles Tschampion, CFA
Chair, Global Corporate Governance Task Force

 

/s/ Patricia D. Walters
Patricia D. Walters, Ph.D., CFA
Senior Vice President, Professional
Standards & Advocacy

 

* With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research is a global, non-profit organization of more than 68,300 financial analysts, portfolio managers, and other investment professionals in 116 countries of which 56,000 are holders of the Chartered Financial Analyst® (CFA®) designation.  AIMR’s membership also includes 127 Member Societies and Chapters in 46 countries.