With trillions of dollars in capital sailing the globe in search of investments, the shareholders' crusade for more open, well-run companies is gaining strength across many major and emerging markets.
In what some call a worldwide corporate-governance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries and negotiating behind the scenes with businesses.
In earlier years, it was hard for shareholders to dig up details from thousands of global companies on their finances, their directors, executives' pay packages and other information critical to making investment moves.
"We've seen some dramatic changes," says Stanley Dubiel, head of governance research at RiskMetrics Group, the largest U.S.-based proxy research firm, with offices in 50 countries. "There's a strong desire on the part of many companies to attract capital from international investors."
Those investors carry a lot of weight. Pension funds and other large institutional investors oversaw $142 trillion in assets in 2006, reports the Organization for Economic Co-operation and Development.
More of those funds — led by Calpers (California Public Employees' Retirement System) and TIAA-CREF in the USA and the Hermes pension fund in the United Kingdom — are wielding their financial clout in the name of shareholders.
Dozens of countries are developing systems of watchdog corporate-governance and shareholder activism, with some modeling themselves after U.S. and United Kingdom governance practices or the Sarbanes-Oxley Act, the U.S. anti-fraud law passed after the Enron accounting scandal six years ago led to the demise of the company.
South Africa, Italy and Japan, for instance, have recently beefed up their corporate-governance codes to strengthen shareholders' oversight of corporate boards, pay practices, accounting and auditing policies and other watchdog issues.
While corporate-governance experts say there's still a long way to go, activist investors appear to be making progress globally on key issues, from clearer financial disclosure to winning a greater voice for shareholders in determining executives' pay packages.
Shareholders make gains
In the United Kingdom, shareholders gained clout in policymaking with passage of the landmark Companies Act of 2006, which went into force last year. Among other provisions: Severance pay for a director needs approval by shareholders if it's more than twice the director's annual salary.
In Australia, where investors gained the right to cast advisory votes on executive pay practices in 2005, shareholders of the country's top 200 companies tallied a record 22% dissenting votes against company pay proposals and other resolutions last year, RiskMetrics Group reports.
Last June, in a big leap forward for the European Union, the European Commission signed new rules that require even the most secretive of publicly traded companies to communicate more openly with shareholders. Companies must allow electronic voting, notify investors of annual meetings and answer shareholders' questions.
"For many countries, corporate governance is at the top of their business agenda," says Anne Simpson, executive director of the International Corporate Governance Network (ICGN), a London-based group of large investors in 30 countries with $20 trillion in assets. "The conduct of companies is everyone's concern."
Institutional investors are gradually making progress and learning to adapt their tactics to different business cultures.
Take Calpers, the largest U.S. public pension fund, which has sparked a shareholders' movement in Japan, the world's No. 2 economy after the USA.
In the 1990s, Calpers began investing in Japanese companies on the Tokyo Stock Exchange and lobbying aggressively for corporate-governance reform to break the stranglehold of the keiretsu, the secretive clubby network of Japanese corporate giants that dominate industries and stack boards with insiders.
But the Japanese business establishment rebuffed the foreign investors, and Calpers' hard-charging style met with limited success, according to management professor Sanford Jacoby at UCLA's Anderson School of Business.
Now, rather than embarrass poorly performing companies with media publicity, Calpers meets quietly with other pension-fund managers and large investors — including the Pension Fund Association, Japan's largest pension fund, with more than $100 billion in assets — to gain allies.
Among other changes, they're seeking more directors of Japanese boards who are independent of management, greater financial disclosure and the elimination of anti-takeover defenses that protect poorly run corporations. Calpers has $1 billion invested in Japanese companies such as Matsushita and Kenwood, and that number is likely to rise, says Dennis Brown, senior portfolio manager at Calpers.
About 21% of Calpers' $255 billion in assets under management are foreign stock holdings in 52 countries. The pension fund also is researching South Korea and South Africa for potential investments.
"We're still in the very early stages of global advancement in corporate governance," Brown says. "A tremendous amount of work needs to be done."
Why is global corporate governance taking off now?
Corporate scandals in the USA and other countries have led to corporate reform laws such as the USA's Sarbanes-Oxley, aiming to strengthen corporate-governance rules.
Shareholders have suffered many billions of dollars in losses from major business scandals in recent years involving engineering firm Siemens in Germany, the Parmalat food-and-dairy company in Italy, energy giant Royal Dutch Shell in the Netherlands, China Aviation Oil in Singapore and other foreign firms.
"There's no question that the Enrons and WorldComs of the world have heightened the need for better governance, and that momentum has carried all over the globe," says Reena Aggarwal, a Georgetown University finance professor. "Everybody is trying to get their governance practices straight."
Global markets linked
Shareholders and companies also realize that the global financial markets are more closely linked than ever before, especially after the Asian financial crisis in the late 1990s led to debt crises in many countries and hastened the collapse of U.S. hedge fund Long-Term Capital Management.
Nor is shareholder activism likely to wane. Tens of millions of retiring workers in major economies will continue to feed the growth of activist pension and investment funds. Thousands of formerly state-run companies in Asia, Russia, Latin America and other regions will need much oversight as they join the financial markets and seek investors.
Advocates of tougher corporate governance face formidable hurdles, of course.
While shareholders fight for independent company boards and financial disclosure, many smaller economies abroad are dominated by family-run business dynasties such as the Wallenberg Group in Sweden or the Noboa conglomerate in Ecuador, says Randall Morck, a business professor at the University of Alberta.
"You've got these old-moneyed family firms that are extremely powerful, especially in countries with relatively weak corporate-governance laws and unrealized accounting disclosure rules," Morck says. "They have tiny financial stakes, but huge voting power with multiple votes per share."
Kayla Gillan, a founding member of the Public Company Accounting Oversight Board, fears that protectionist politicians and legislation, such as an anti-takeover law just passed by Hungary, will "limit the ability of (foreign) investors to influence some countries and politicians."
Some overseas businesses simply fail to put corporate-governance policies into practice. While some European companies boast of having independent directors, the directors often have hidden business and family ties to companies, says Mauro Guillen, director of the Wharton School's Lauder Institute and a leading expert on corporate-governance issues in Europe.
"There's been some convergence but mostly superficial," Guillen says.
Some countries follow the West's lead in corporate-governance oversight and enforcement. Much of China's securities market rules are modeled after those in the USA and U.K., plus the governance guidelines of the Organization for Economic Cooperation and Development.
The China Securities Regulatory Commission (CSRC), which oversees China's 1,400 publicly listed companies, requires firms to follow a code of conduct, file quarterly and annual reports and follow tougher accounting rules based on international standards.
But as China's financial markets grow at a rapid pace, the regulator faces many obstacles, including corruption, directors controlled by company owners and family-run firms fronted by "puppets" of the real shareholders, according to Daochi Tong, the CSRC's deputy director-general, in an article on ICGN's website, www.icgn.org.
The SEC and business groups also are pushing to merge U.S. and global accounting standards to make it easier for companies to invest in other countries.
"Right now, the system is a maze of interpreted and reinterpreted rules," says David Hirschmann, vice president of the U.S. Chamber of Commerce. "With the capital markets going global and people investing across borders, you need one set of accounting standards to function efficiently."
Industry self-policing and government enforcement are monstrous tasks, though, with auditors and investigators overwhelmed by the thousands of companies they must monitor. And countries with long histories of corrupt judges and politicians could take decades, if ever, to build Western-style legal systems.
That leaves corporate-governance practices as a quick fix to make executives more accountable to shareholders. More often than not, countries and companies find that strong governance reassures shareholders and ultimately boosts their stock markets and economies, according to Aggarwal.
"You need some level of governance, and only then will investors come in," she says. "And when investors come in, they demand better disclosure and transparency. It feeds on itself."