Study on monitoring and enforcement practices in corporate governance in the Member States

1. European Commission – Contract No. ETD / 2008 / IM / F2 / 126 Study on monitoring and enforcement practices in corporate governancein the Member States Presentation at the Swedish Corporate Governance Board Stockholm – 3 December 2009 Jean-Nicolas Caprasse – European Corporate Governance Head, RiskMetrics Group In consortium with: Study conducted by:

2. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

3. Scope and methodology (as per EC tender)

4. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

5. The comply-or-explain regime has been widely adopted by Member States Adoption of a mandatory comply-or-explain regime

6. Market participants broadly support the comply-or-explain approach Perception of business associations and director institutes Business associations and director institutes broadly support the comply-or-explain approach: • Flexibility (more flexible than regulation) • Better consideration of company-specific situations • No clear tendency to try to comply with code recommendations when not suitable • No significant cost impact (except for SMEs)

7. Market participants broadly support the comply-or-explain approach 60% 50% 40% % of respondents answering the question 30% 20% 10% 0% Supportive of national Code Supportive of pan-European Code Other Don't know / no opinion Perception of institutional investors The investor survey shows broad support for the comply-or-explain approach* Are you generally supportive of a comply-or-explain regime? *Results based on 71 respondents answering the question

8. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

9. The level and quality of explanations for deviations from corporate governance code provisions by companies needs to be strengthened Assessment of the quality of explanations for deviations • Proportion of the total number of explanations per reference corporate governance code* • Transitional: If companies indicated that the code provision from which they currently deviate will be applied at a later stage, these explanations were classified as “transitional” • Invalid: Explanations of deviations which only indicate a deviation without further explanation were classified as “invalid” • General:Explanations of a general nature in which the company mostly indicates disagreement with the code provision without identifying a company specific situation, were classified as “general” • Specific:Explanations relating to a specific company situation were classified as “specific” • Limited:Explanations in which companies do not explain the reasons for deviating from the code, but where additional information (such as an alternative procedure) was given, were classified as “limited” * 1,141 explanations provided by a sample of 270 companies

10. According to market participants, companies could improve the quality of explanations for deviations from corporate governance code provisions Assessment of the quality of explanations for deviations • by business associations and director institutes* • by investors* *Results based on 72 respondents answering the question *Results based on 31 respondents answering the question

11. The quality of explanations for deviations from corporate governance code provisions by companies significantly differs depending on the level of information provided Number of General Provision-per-provision Type of disclosure companies information information Disclosure : companies disclosing 233 61% 39% Comply-or-explain information Average number of explanations 233 2 10* Information quality :: proportion of specific 233 53% 36% and transitional information Full compliance :: companies disclosing full 52 92% 8% compliance *5 excluding Hungary Quantity and quality of explanations for deviations

12. Enhance the role of market-wide monitors Granting additional monitoring and enforcement powers to market-wide monitors could improve the level of transparency required for an adequate functioning of the comply-or-explain approach

13. Enhance the role of statutory auditors Mandating statutory auditors to verify certain facts contained in the corporate governance statements could enhance the level of information provided by companies within the comply-or-explain framework

14. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

15. Business associations and director institutes view the impact of corporate governance codes on (supervisory) boards as positive Have national corporate governance codes had a significant effect on the (supervisory) board? • Has this effect been positive or negative? Significance of effect: 5 = very significant, 4 = significant, 3 = neutral, 2 = insignificant, 1 = very insignificant Positiveness/negativeness of effect: 5 = very positive, 4 = positive, 3 = neutral, 2 = negative, 1 = very negative

16. Business associations and director institutes view the impact of corporate governance codes on management as positive Have national corporate governance codes had a significant effect on the management? • Has this effect been positive or negative? Significance of effect: 5 = very significant, 4 = significant, 3 = neutral, 2 = insignificant, 1 = very insignificant Positiveness/negativeness of effect: 5 = very positive, 4 = positive, 3 = neutral, 2 = negative, 1 = very negative

17. Business associations and director institutes view the adequacy and clarity of corporate governance codes positively but see some room for improvement Positive assessment Room for improvement Assessment of content of codes • Board composition • Functioning of the board • Board evaluation • Role of the chairman • Role of independent directors • Role of executive management • Relationship between the board and management • Shareholder’s meeting • Shareholder’s rights • Communication with shareholders • Relationship between shareholders and the board • Conflicts of interest • Internal audit • External audit • Remuneration of executive directors • Internal governance • Board transparency • Committee’s transparency • Disclosure on conflicts of interest • Transparency on remuneration • RM perspective internal control • RM strategic scenarios/product development • Transparency on financial & non-financial risk profile • Stakeholder interest

18. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

19. Institutional investors were polled on their perception of corporate governance codes and their practices in monitoring corporate governance 9% 7% Germany 48% 6% UK 43% 47% 7% France 40% Netherlands 16% 8% Spain 9% 16% UK (+ Ireland and Jersey) Benelux France Germanic Nordic Other Continental Europe Non-European (US, Japan) Overview of respondents per country of origin and country of investment Country of origin Country of investment – top 5 • Over 2,000 investors were polled • 100 respondents

20. Polled institutional investors vote at the majority of companies held in portfolio Percentage of equities voted as a percentage of companies held in 2008 56%

21. Polled institutional investors vote the majority of their assets under management 35% 30% 23% 25% 20% 17% %of Respondents Answering the Question 13% 15% 11% 9% 9% 9% 10% 4% 4% 5% 2% 0% =0% >0% - <10% >10% - >25% - >33.3% - >50% - >66.6% - >75% - >90% - =100% <25% <33.3% <50% <66.6% <75% <90% <100% Percentage of equities voted as a percentage of assets under management in 2008 53%

22. According to institutional investors, shareholder rights could be enhanced in two areas 27% 73% no yes Need to enhance shareholder rights on remuneration and on corporate governance statements Should shareholders’ rights to vote on a remuneration statement be enhanced?* Should shareholders’ rights to vote on a corporate governance statement be enhanced?* 5% 95% no yes *Out of 65 respondents

23. A large number of shareholders appear to choose not to exercise their monitoring and enforcement responsibilities. This free-rider issue represents a significant market failure The market failure caused by the «  absentee landlords » "Engaged shareholders" Dialogue Vote ? Free-ride "Absentee landlords"

24. Raising the fiduciary responsibilities of investors can address the free-rider issue regarding monitoring of company practice Enhance shareholder responsibilities

25. Agenda • Scope and methodology • Introduction and legal review • Company practice • Company and director perception of CG codes • Investor perception of CG codes • Conclusion

26. Conclusion • Broad market acceptance of the comply-or-explain regime • Two types of deficiencies should be adressed: • Unsatisfactory level and quality of information on deviations by companies • Low level of shareholder monitoring • The comply-or-explain approach should not be abandoned. It should be strengthened

27. Questions & answers The study can be found at: http://ec.europa.eu/internal_market/company/ecgforum/studies_en.htm For addition enquiries: Jean-Nicolas Caprasse jean-nicolas.caprasse@riskmetrics.com Stockholm, 3 December 2009