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June 12, 2006 at 08:00 PM
ROCKVILLE, Md. (HedgeWorld.com)–Investment advisers from hedge funds, mutual funds and pension funds around the world may have widely disparate views on investing, risk and strategies, but according to a newly released survey from Institutional Shareholder Services, nearly all agree that corporate governance is no longer a compliance obligation for companies, but an imperative business responsibility.
Ninety-four percent of the 320 firms surveyed in the 2006 Global Investors Study from ISS said that corporate governance is important to their firms, and four major concerns were shared among all advisers and regions: better board accountability, aligning executive pay with performance, more trustworthy disclosure, and bottom-line performance by companies and their chief executives.
Comprising interviews with investment officers in 18 countries, the survey was predicated on the idea that corporate governance is no longer an issue limited to Anglo-American markets. A majority of investors in all markets ISS studied said that corporate governance was either “very important” or “extremely important” to their affairs, ranging from 61% in Europe up to 90% in China.
Another example can be found in investors’ dealings with issuers, according to Stephen Deane, director of ISS’s Center for Corporate Governance.
“A majority of investors in all markets said relationships with portfolio companies have become more constructive over the last three years,” said Mr. Deane, speaking in a June 7 conference call discussing the survey results. Investors, particularly those who vote proxies, are often agents for change, helped along by the expansion of cross-border proxy voting and governance standards.
Investors in the United States were the most likely to vote proxies across borders, with 73% voting at least half of the shares held outside their home market. Sixty-seven percent of Canadian investors and 60% of U.K. investors reported that they did the same.
Globally, 71% of investors surveyed said that corporate governance has become more important over the last three years, with scandals (45%) and compliance (40%) viewed as the biggest drivers during that time. Of the 63% of investors predicting corporate governance to increase in importance over the next three years, however, only 37% listed compliance as a driving factor, while enhanced investment returns (33%), client demands (32%) and risk management (21%) were seen as bigger issues than scandals.
Points of perspective
There were differences along with the shared themes, Mr. Deane noted. For example, different investor types approach corporate governance from different points of view. Pension funds were the most likely to say that enhanced returns were the biggest advantage to corporate governance involvement, and also tended to be very long-term investors.
Hedge funds, meanwhile, showed the most willingness to take on management and were the least likely to say that the tone of interaction with issuers had improved–no surprise to anyone following the actions of activist funds in recent years. Mutual funds remained reluctant activists but were the most likely to say that corporate governance was important to them, according to Mr. Deane.
Hedge funds, perhaps searching for an edge after 2005′s somewhat flat returns, were also the most likely to cite corporate governance as a competitive advantage in their equity investments.
Regional context also brought out contrasting opinions. While most markets picked enhanced returns as the biggest benefit of corporate governance, 80% of Chinese investors said that increased risk management was the main advantage. “It really stresses how important portfolio value is to them,” said Randy Hancock, executive vice president of global research for ISS.
