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Corporate-Governance Concerns Are Spreading, and Companies Should Take Heed
By Allan Murray
The Wall Street Journal
Wednesday, April 12, 2006

For many executives, "corporate governance" is a nuisance -- or worse.  It diminishes their power while increasing that of board members, shareholders and various outsiders who want a say in company affairs.  Their quiet hope:  Governance is a fad that will soon pass.

They shouldn't hold their breath.

A study of more than 300 institutional investors around the globe, to be released next week, finds corporate-governance concerns are still very much on the rise.  A surprising 63% of those surveyed believe corporate governance will be even more important to their firms over the next three years than it has been over the past three years.

The study was conducted by Institutional Shareholder Services, an advisory service for big investors, and it included pension funds, mutual funds, hedge funds and other large money managers in North America, Europe and Asia.

The upshot:  Institutional-investor activism is not just alive and well, but growing and spreading.  For companies based in the U.S., Canada and continental Europe, that's likely to mean a continued pounding on the hot-button issue of executive pay.  For those in China and Britain, it will mean more focus on the independence and structure of boards.  And for those in Japan, it will mean pressure to stop antitakeover measures.

Jeffrey Skilling's testimony in Houston this week is an unpleasant reminder of where this all started.  Though the former Enron president declared he is "absolutely innocent," the chiefs of every other company in the world are living with the profound changes that Skilling & Co. wrought.  It was the scandals at Enron and elsewhere that forced regulators, investors and many of the rest of us to conclude that perhaps giving chief executives unfettered power over giant corporations wasn't such a great idea.

If the scandals provided the spark, institutional investors are providing the tinder that keeps these fires burning.  The ISS study shows the flame is spreading from the large public pension funds -- like California Public Employees' Retirement System, or Calpers -- which were the first to adopt activist tactics, to hedge funds and even once-dormant mutual funds.  While the mutual funds are still reluctant to be considered "activists," 79% of those responding said corporate governance has become more important to their firms over the past three years, and 72% said it will become more important still in the next three years.

"We take this stuff extremely seriously," a portfolio manager at one U.S. mutual fund told ISS.  "You don't want to be in The Wall Street Journal saying you voted for a management team that turned out to be a bunch of clowns."

Is all this attention to corporate governance good for business?  Many corporate executives I talk with worry about the creation of a culture of compliance in their companies.  Too much executive time and attention, they fear, is spent on defensive matters like governance, accounting and complying with regulations, leaving too little time and attention on the company's growth.

But big investors clearly believe attention to governance increases the value of their investments.  Fifty-nine percent said monitoring corporate governance of companies they invest in enhances investor returns.

One clear message of the ISS study is that corporate governance means different things to different people.  Chinese investors give the strongest endorsement to corporate governance, with 90% of them saying it was either "important" or "very important" to their firms.  But those investors are concerned with achieving basic levels of board accountability and transparency in Chinese companies already common elsewhere.  Japanese investors put primary emphasis on eliminating poison pills and other measures designed to prevent takeovers, which can boost shareholder returns.

As a result, devising a simple formula for better governance -- and measuring the returns from better governance -- isn't easy.  One British manager of a quantitative hedge fund told ISS that no one has been able to show him how integrating corporate governance into his strategy "can create alpha" -- excess returns.

But Dennis Johnson, a senior portfolio manager at Calpers, says his firm has invested $4 billion with activist managers who focus on different corporate-governance measures in different markets with great success.  "It's one of the best-performing strategies in all of equity investing for Calpers," he says.

If the ISS study is to be believed, the Calpers view is becoming the majority view.  For better or worse, institutional investors have decided they have an even bigger role to play in running large corporations.  And the companies they invest in had better get used to it.

Write to Alan Murray at

Alan Murray's Business, published Wednesdays, examines the intersection of business, public policy and economics. Alan shares reader reactions in the Talking Business column on Saturdays.

Alan is an assistant managing editor at The Wall Street Journal and a regular contributor to CNBC. A graduate of the University of North Carolina, he joined the Journal in 1983; he served for nearly a decade as the Journal's Washington bureau chief before joining CNBC in 2002. He holds a master's degree in economics from the London School of Economics. Alan is the author of "The Wealth of Choices: How the New Economy Puts Power in Your Hands and Money in Your Pocket." He is also a regular panelist on Public Broadcasting Service's "Washington Week in Review."
Write to him at