Shareowners in Global Corporate Governance

1. Shareowners in Global Corporate Governance OECD/World Bank South East Europe Corporate Governance Roundtable Bucharest, Romania September 2001 Stephen Davis, Ph.D.

2. Why Corporate Governance? • Emerging investor consensus : Activism pays • Emerging company response: investor rights and protections are perceived to lower risk, bringing more capital at lower cost • Better performance

3. Activism Findings: McKinsey • Investors would pay an 18-28% premium for superior board and disclosure practices • Board quality is often more important than financial issues in stock selection • The less investors trust shareholder protections, the more they value governance. Companies with poor governance face a steep barrier in gaining access to capital.

5. Other Recent Evidence… • Stanford U: Strong link between governance and value in Russia (Bernard Black) • CLSA: Best governance yields double value in emerging markets • Univ. of Vienna: shareowner monitoring critical where blockholders wield control (Klaus Gugler) • Wilshire 2001: ‘CalPERS Effect’ activism made companies jump from 96% under to 14% over market

6. And still more • ANZ study: Poor governance cost NZ 7% • Stiglitz/World Bank: Privatization only works in combination with good corporate governance • Millstein/MacAvoy: Good boards=premium • Harvard Business School: Activist institutions associated with positive corporate performance

7. Shareowner Trends • Routine Voting: More monitoring, less expense • Benchmarks: Codes, pressure on indexers and analysts, ratings • International Alliances: CalPERS/Hermes, ICGN, World Bank/OECD GCGF Investor Taskforce, , GIGN, ACGA • Cross-Pollination of Tactics, Ideas: Web • Disclosure Rules: Policy statements required UK, Australia, Germany, • Stakeholder Issues, Unions: ICFTU, Rio Tinto, climate change • Focus Funds: Target under-performing, under-governed companies or tilt toward well-governed

8. Case Studies: Costly Errors • PetroChina • Poor governance profile damaged IPO • Tomkins • Imperial CEO suppressed value, triggering rebellion

9. Case Studies: Success Stories • Daewoo Securities and Grupo Elektra • Open governance reform dialogue with foreign investor • Shell • Investor rebellion spurs IR overhaul • Pfizer • Focus on governance wins merger backing • Vivendi • Governance initiative gains investor support for merger

10. What Shareowners Want Companies to Do • Create a Corporate Governance Balance Sheet • Identify CG assets and liabilities • Consider a CG rating • Overhaul Investor Relations • Add research & development—find best new ideas • Re-position road shows to reach right investors • Gather intelligence on investor priorities • Modernize the proxy/AGM notice—use web • Introduce a code, IAS, governance disclosure

11. What Shareowners Want Policymakers to Do • McKinsey 2001: improve law, regulation and attack corruption • Local benchmarks reflecting global standards • Disclosure rules to allow application of benchmarks and promote integrity • Law & regulation empowering shareowners—easier voting and communication, protection of minorities • Tax and statutes to spur shareowner value—incentive pay, end to cross-holdings, fair takeover rules

12. Conclusion • Assume there are no borders in corporate governance. Institutional investors from any part of the globe are monitoring markets and companies everywhere and basing decisions, in part, on how they rank with global competitors on governance criteria.

13. Davis Global Advisors, Inc. 57 Hancock Street Newton MA 02466-2308 USA T+1 617 630 8792F +1 617 630 0398E dga@davisglobal.comwww.davisglobal.com