USA: the predictive qualities of corporate governance ratings

Recent research published by academics at Stanford University's Rock Center for Corporate Governance has considered the predictive ability of corporate governance ratings. The authors report:

"The providers of the ratings make strong claims regarding the ratings’ value in predicting future bad outcomes (such as accounting restatements or shareholder suits) and firm performance. These ratings, often provided by proxy advisors, are also used in formulating recommendations that can be influential in shareholder voting. We provide the first independent assessment of four prominent commercial corporate governance ratings. Prior evidence on individual ratings has generally been backward-looking, raising the distinct possibility that the ratings reflect past firm performance but are unable to predict  accounting restatements, litigation, and future performance. We examine the ability of ratings produced by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library to predict future performance. With the possible exception of ratings by Audit Integrity, we find that most ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders".

For further information see:
Research article | Abstract | Rock Center home page |

Europe: European Works Councils reform

In the Renewed Social Agenda adopted today by the European Commission there are proposals for the reform of the legislation governing European Works Councils. A draft directive has been published and in its press release the Commission provides the following information:

The 1994 Directive (94/45/EC) requires Member States to provide for the right to establish European Works Councils in companies or groups of companies employing at least 1000 people in the European Union and the other countries of the European Economic Area (Norway, Iceland and Liechtenstein), with at least 150 employees in each of two Member States.

While European Works Councils have been successful in many areas, they cannot fully play their role in anticipating and properly managing change and in developing genuine cross-border social dialogue. Indeed, European Works Councils are not properly informed and consulted in half of the transnational restructuring cases and the take-up of European Works Councils needs to be increased.

The 1994 legal framework on European Works Councils therefore needs to be adapted to changes in the legislative, economic and social context, where the cross-border dimension proves more and more important, and to be clarified on different aspects".

Note: The 1994 Directive did not apply to the UK because of its opt-out from the Social Chapter.  When the opt out ended, Directive 97/74/EC extended the Works Councils framework to the UK.

For further information see:

Works Councils press release | Draft directive | Renewed Social Agenda website | Directive 94/45/EC | Directive 97/74/EC | 

UK: contracts for difference - general disclosure regime proposed by the FSA in respect of long positions

In November 2007 the FSA published a consultation paper titled "Disclosure of Contracts for Difference", which discussed the possible market failures (inefficient price formation, distorted market for takeovers and diminished market confidence) arising from non-disclosure of Contracts for Difference (CfDs) and the regulatory options available to address those failures. In this paper the FSA noted (at para. 1.8):

Despite the growth in the market, CfDs mostly remain outside the regulatory framework governing disclosure. This framework exists primarily to provide to the public accurate, comprehensive and timely information about changes in major shareholdings in companies issuing shares. The current disclosure requirements are therefore referenced to direct and indirect control of voting rights attaching to a share".

The FSA has today published a statement explaining its position following the end of the consultation period. In this statement the FSA explains:

We have concluded that our objective of addressing the market failures the [consultation paper] identified in relation to voting rights and corporate control can best be addressed through a general disclosure regime. Therefore we have decided to implement a general disclosure regime of long CfD positions, based on Option 3 in the consultation paper, but with two significant modifications: [1] in relation to aggregation and disclosure thresholds; and [2] in relation to an exemption for CfD intermediaries".

The FSA proposes setting the disclosure threshold at 3%., which is in line with the existing requirement with regard to voting rights in listed securities found within DTR Rule 5.1.2 (part of the Vote Holder and Issuer Notification Rules (DTR 5) within the FSA Handbook). A further consultation period has begun - on the technicalities of the proposals - and the FSA plans to publish a further statement and draft rules in September. The final rules will be published in February 2009.

For further information see:
FSA press release | FSA policy statement | November 2007 consultation paper | November 2007 consultation newsletter | FSA Handbook: DTR5 | Financial Times newspaper article | Times newspaper article | 

UK: Tripartite authorities publish "financial stability and depositor protection" consultation paper

The Tripartite authorities - the Bank of England, Financial Services Authority and HM Treasury - have today published a consultation paper titled "Financial Stability and Depositor Protection". This consultation paper builds on the Authorities' earlier consultation and the responses thereto. It also outlines the Government's proposals, including:

Providing the Bank of England with a statutory responsibility for contributing to the maintenance of financial stability.

Improving the policy instruments available to the Bank of England in support of financial stability.

Legislating for the creation of a Financial Stability Committee to support the Governor and Bank of England, drawing upon external expertise.

Giving the Court of the Bank of England a formal role in overseeing the Bank of England’s performance on financial stability.

Legislating to facilitate the FSA obtaining and sharing information that the Bank of England and the Treasury require for purposes related to financial stability.

Providing the Bank of England with statutory immunity from liabilities in damages arising from acts or omissions in carrying out its responsibilities in relation to financial stability and other central bank functions.

Legislating to formalise the Bank of England’s role in the oversight of payment systems to ensure the robustness of payment systems which, if a disruption in the operation of the system were to occur, would be likely to lead to systemic and system-wide consequences.

Legislating to introduce a 'special resolution regime', comprising a set of new, and existing, tools to permit the Authorities to take control when a bank is judged to be failing, and all other options have been deemed insufficient.

Denmark: private equity and transparency

The Danish Venture Capital and Private Equity Association has published "Active ownership and transparency in private equity funds: guidelines for responsible ownership and good corporate governance". The guidelines, which operate on the 'comply or explain' basis, contain rules governing the disclosure of information to supplement the requirements, where relevant, of the Danish Financial Statements Act.  In the report it is stated:

...it has to be recognised that today’s private equity funds own companies that may be of broad interest to society. These may be companies that are important for infrastructure or play a major role in the local area. They may also be companies that employ large numbers of people. In addition, many investors in private equity funds are pension funds, whose most important stakeholders are pension savers – typically ordinary salary earners. The general public may therefore have an interest in gaining insight into how a private equity fund works and creates value. This is the background to why these guidelines specify a number of areas where private equity funds and their portfolio companies should publish information.

According to a report in the Financial Times newspaper:

Denmark has leapfrogged the UK and adopted the most far-reaching guidelines to improve the transparency of private equity funds. The new voluntary code ... is designed to rehabilitate the reputation of private equity in Denmark, but will also increase pressure on the industry in the rest of Europe to follow suit to avert the threat of national or EU imposed rules. The UK and Sweden have already published voluntary guidelines to try to head off such rules but the DVCA's proposals go much further by covering 80 per cent of private equity-owned companies - compared to just the 100 largest under the UK guidelines - and requiring a far higher level of disclosure."

For further information see:

DVCPEA | Guidelines | Financial Times report |