New research finds global governance convergence

Corporate governance practices in areas such as executive compensation and board composition are coming more closely into line around the world, even while major variations persist, according to a new report.

Farient Advisors, in conjunction with its partners in the Global Governance and Executive Compensation Network (GECN), which comprises advisory firms specializing in compensation and governance matters, looked at regulations and companies’ behavior in 17 countries.

‘Since governance practices, standards and enforcement vary widely from country to country, numerous oversight challenges persist for directors,’ the authors of the report write. ‘In light of this, many progressive boards and managements are not just tracking trends in their proverbial backyards but are required to do so globally.’ With that in mind, ‘there is an unmistakable and growing trend toward commonality in governance practices around the world. This convergence of governance norms is likely to persist,’ the authors add.

According to the survey, the focus on governance is rated as intense in most developed countries, particularly in the US and Europe, and moderate in many Asian countries and Brazil. Mexico is viewed as having a weak focus on governance, while the research finds China viewed as weak but improving – for example, some Chinese state-owned enterprises are addressing governance issues by establishing external boards with greater authority.

The attention given to governance is expected to increase in roughly two thirds of the countries surveyed, including those that at present are seen as having a weak or moderate focus. ‘The primary reason for a renewed and now nearly global focus on corporate governance is the need for systemic economic stability and safer capital markets,’ the authors say.


COMPENSATION
One area where Farient and the GECN find some cross-border alignment is executive compensation. The financial crisis led to an expansion of say-on-pay voting by investors, with the practice now in place in most developed countries, the report notes. But countries with mandatory say-on-pay votes are split between:

• Those with binding votes, such as Brazil, India, Sweden and Switzerland
• Those with non-binding votes, such as Australia and the US
• Those with bifurcated approaches in which some aspects of remuneration are binding and others are non-binding, such as Norway and the UK.

Other countries, including Canada, Belgium, Germany and Ireland, allow voluntary votes. In those countries, the prevailing best practice for public companies is to hold annual votes, the researchers find. For example, they note that 80 percent of Canadian companies traded on Toronto Stock Exchange hold votes each year.

Aside from statutory requirements and investor voting, a number of best practices have emerged in executive pay, according to the report, which states that common themes include:

• Giving investors more detailed data on issues such as pay governance, pay components, performance goals and the rationale for pay decisions
• Using competitive benchmarks as support for establishing pay levels, dilution norms and pay practices.

The authors note, however, that wide variations remain in this area. For example, they say, employment agreements are statutorily required in many EU countries because they are considered to serve the public interest of keeping people employed, but not in the US because they can potentially augment executive rights at the expense of shareholder rights and interests.


BOARD COMPOSITION
Although there are few statutory requirements around the world regarding board composition, best practices are emerging, even though they vary and can be a matter of public policy, according to the report. For example, in countries such as Brazil, Sweden and the UK, age limits are prohibited as they are deemed to be tantamount to age discrimination. Meanwhile, limits on director tenure tend to be company-specific.

Diversity among board members has also become a hot topic. ‘Not only is diversity a matter of public policy in some venues, it is also a matter of good business by bringing diverse views to business issues,’ the report authors write. Statutory requirements regarding gender diversity exist in Belgium, Germany, India and Norway, while best practice norms for diversity – defined broadly by gender, race, ethnicity, age and skills – tend to be supported in countries including Australia, Brazil, Canada, Singapore, South Africa, Sweden, Switzerland, the UK and the US.


TAKING ACTION
Amid such trends and the growing focus on corporate governance, the authors recommend that company boards, and in particular their nominating and governance committees, should take steps including:

• Understanding and keeping up to date on the highest standards of corporate governance practices around the world, while recognizing when such standards are not in the best interests of the specific company’s shareholders
• In areas in which change is warranted, establishing a governance change road map. ‘Changes that may not make sense now may make sense later. Boards should determine the evolutionary road map as well as the triggers for change,’ the authors suggest
• Amending, as needed, and disclosing the company’s governance policies in the proxy and through shareholder engagement. Proactively engaging with shareholders on matters of domestic and global governance issues and the company’s policies and plans with respect to such issues
• Enhancing the independence and effectiveness of control functions for areas such as compliance and internal audit.