Forces For Stabilization - pension funds

International Economy, The, Jan, 2001 by George R. Hoguet

CalPERS, TIAA-CREF, State of Wisconsin, and State of Florida are among the U.S. institutions most often associated with the shareholder activism movement. Even so, institutional shareholder activism in the United States is not particularly visible. For example, although CalPERS owns shares in over 1,600 U.S. corporations and carefully votes the proxies of each, it only targets ten companies with suspect governance practices and poor performance histories for more active participation in its annual "Focus List."

The emerging markets comprise a very diverse set of countries with profoundly different political, economic, cultural, and regulatory regimes. (Korea, commonly regarded as one of the most advanced emerging markets, is a member of the OECD, while Zimbabwe is a very poor country.) In many countries, the legal and institutional structures that permit corporate governance issues to be adjudicated do not exist, or are arbitrarily enforced. Weaknesses in corporate governance were frequently cited as one source of the Asian crisis. This has led to large technical assistance programs by the Group of Seven, and the emergence of incipient global norms. For example, Korea mandated that "outside" directors comprise at least 25 percent of major Boards.

What are some of the policies and procedures that large U.S. pension funds might follow in pursuing a corporate governance dialogue with emerging companies? They might include:

* Communicating international guidelines to the management of leading emerging market companies.

* Voting directly proxies for emerging market companies. For years, fund managers have had a fiduciary duty under ERISA to vote domestic proxies. These duties have been fulfilled either in-house or are outsourced to consultants like Institutional Shareholder Services (ISS) and Investor Responsibility Research Center (IRRC). As both companies expand their services and competitors enter the market, we can expect the price, as well as the difficulty, of voting emerging market proxies to decrease substantially.

* Entering into dialogues with select corporate managements that stand to benefit from U.S. investment and management expertise.

* Formulating international corporate governance standards. Presumably, these could draw from general guidelines applicable in the United States, while at the same time reflecting the unique aspects of emerging markets investing. In this regard, the International Corporate Governance Network, which was founded in 1995, has put forward a "Statement of Global Corporate Governance Principles."

* Including emerging companies in the international guidelines.

* Possibly funding investment managers, whose mandate would be to take concentrated positions :in poorly performing firms, and agitating for change.

The goal is not a proxy fight or acrimonious dialogue, but the fostering of communication and the better understanding of objectives. Initial discussions need not be confrontational, but exploratory. There can be little doubt that the differences between the Anglo-Saxon legal and institutional traditions, and those of the rest of the world will be evident. But managements of top flight emerging market companies are increasingly realizing that adopting the norms of U.S. corporations can confer tangible benefits. Many have issued American Depository Receipts (ADRs) in order to access U.S. capital markets and increase interest and liquidity in their shares. In so doing, they must adopt U.S. GAAP, or reconcile their financial statements to U.S. GAAP, depending on the type of issue. (About 45 percent of the MSCI EMF can be bought via ADRs.)