Global Investor Opinion Survey on Corporate Governance - 2002Global Investor Opinion Survey on Corporate Governance - 2002

IRBRI SeminarIRBRI Seminar

São Paulo, December 3, 2002São Paulo, December 3, 2002

Copyright 2002

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CONFIDENTIAL

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GLOBAL INVESTOR OPINION SURVEY 2002 – KEY FINDINGS

Corporate governance remains of great concern for institutional investors according to McKinsey's 2002 Global Investor Opinion Survey

• Corporate governance is at the heart of investment decisions

– Investors state that they still put corporate governance on a par with financial indicators when evaluating investment decisions

– An overwhelming majority of investors are prepared to pay a premium for companies exhibiting high governance standards.

– More than 60% of investors state that governance considerations might lead them to avoid individual companies with poor governance

• Reform priorities focus on rebuilding the integrity of the system

– The quality of market regulation and infrastructure is highly significant, along with enforceable property rights and downward pressure on corruption

– Specific policy priorities include strengthening shareholder rights, improving accounting standards, promoting board independence and tighter enforcement of existing regulations

– Shareholder equality (protection of minority shareholders) and accounting disclosure are highly valued by investors

Corporate governance remains of great concern for institutional investors according to McKinsey's 2002 Global Investor Opinion Survey

• Corporate governance is at the heart of investment decisions

– Investors state that they still put corporate governance on a par with financial indicators when evaluating investment decisions

– An overwhelming majority of investors are prepared to pay a premium for companies exhibiting high governance standards.

– More than 60% of investors state that governance considerations might lead them to avoid individual companies with poor governance

• Reform priorities focus on rebuilding the integrity of the system

– The quality of market regulation and infrastructure is highly significant, along with enforceable property rights and downward pressure on corruption

– Specific policy priorities include strengthening shareholder rights, improving accounting standards, promoting board independence and tighter enforcement of existing regulations

– Shareholder equality (protection of minority shareholders) and accounting disclosure are highly valued by investors

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CONTENT

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

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CONTENT

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities should focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities should focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

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RESPONDENTS PROFILE - TYPES OF INVESTING INSTITUTIONS% of respondents

*Investment banks with asset management activities, family offices, holdings, development financing, international financial institutions, proxy agencies

Source: McKinsey global investor opinion survey on corporate governance, 2002

100% =

Asia Latin America

North America and Europe

Overall Africa

179 28 31 117 4

Bank

Mutual funds

Insurance

Brokers/trade

Others*

Pension fundsMoney manager

Private equity/venture capital

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RESPONDENTS PROFILE - SIZE OF ASSETS UNDER MANAGEMENT% respondents; US$ billion

Source:McKinsey global investor opinion survey on corporate governance, 2002

50+

10–50

5–10

1–5

0.1–1

<0.1

Asia Latin America

Overall Africa

N = 177 28 31 114 4

North America and Europe

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RESPONDENTS FUNCTION% of valid responses (N = 181)

*E.g., NED, investor relations, corporate function, investment monitoring and advisersSource: McKinsey global investor opinion survey on corporate governance, 2002

Fund manager

Others*

Corporate governance specialist

Analyst

Investment professionals/ generalmanagement

CEO

CFO

Directors/principals

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CONTENT

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

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CORPORATE GOVERNANCE* IMPORTANCE RELATIVE TO FINANCIAL ISSUES

*Defined as effective boards of directors; broad disclosure, and strong rights and equal treatment for shareholders

Source: McKinsey global investor opinion survey on corporate governance, 2002

Less important

More important

Equally important

Eastern Europe/ Africa

Latin America

Asia North America

Western Europe

100% = 19 41 39 33 54

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CORPORATE GOVERNANCE IMPACT ON INVESTMENT DECISIONS

Source:McKinsey global investor opinion survey on corporate governance, 2002

Decrease/increase holdings in certain companies

Avoidance of certain companies

Avoidance of certain countries

Decrease/increase holdings in certain countries

No impact

% of respondents selecting this option, multiple responses possible, N = 189

• Only 3% think that corporate governance does not affect their investment decision

• More investors take actions on a company level than just on a country level

• Only 3% think that corporate governance does not affect their investment decision

• More investors take actions on a company level than just on a country level

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PERCENTAGE OF RESPONDENTS WILLING TO PAY A PREMIUM Percent saying yes*

*Important note: several investors who ticked "no" added comments that they just would not invest in companies with "bad" governance, hence, "no" answers are in some cases the most radical ones (see quotes and question how corporate governance affects investment decision)Source:McKinsey global investor opinion survey on corporate governance, 2002 and 2000

China (34)

India (29)

Indonesia (26)

Japan (36)

Malaysia (29)

Asia

Philippines (26)

Singapore (30)

South Korea (35)

Taiwan (33)

Thailand (31)

Argentina (26)

Brazil (29)

Chile (21)

Columbia (19)

Mexico (34)

Latin America

Venezuela (19)

East Europe/Africa

Canada (46)

US (75)

France (47)

Germany (51)

Italy (43)

North America/West Europe

Spain (41)

Sweden (41)

Switzerland (41)

UK (49)

Egypt (16)

Morocco (14)

Poland (22)

Russia (23)

South Africa (20)

Turkey (18)

( ) Number of data points

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PREMIUM FOR "GOOD" CORPORATE GOVERNANCEAverage premiums of those saying yes, %

Source:McKinsey global investor opinion survey on corporate governance, 2002

Eastern Europe/Africaaverage 32

Eastern Europe/Africaaverage 32

Eu/North Americaaverage 13Eu/North Americaaverage 13

Asia/Latin Americaaverage 13Asia/Latin Americaaverage 13

80% of investors would be willing to pay a premium for Brazilian companies with "Good Governance"80% of investors would be willing to pay a premium for Brazilian companies with "Good Governance"

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DO YOU BELIEVE THAT THE IMPORTANCE OF CORPORATE GOVERNANCE VARIES BY INDUSTRY/SECTOR?

Source:McKinsey global investor opinion survey on corporate governance, 2002

Percent of respondents, N = 154

Asia

Latin America

Eastern Europe/Africa

North America

Western Europe

Average 38%RegionRegion

"… It depends on the industry structure (such as openness and competition), more than the industry itself. If it is dominated by a few family owned conglomerates, for example, the importance of corporate governance increases"

– CIO, US $5 billion AuM

Latin America Trader

"… It depends on the industry structure (such as openness and competition), more than the industry itself. If it is dominated by a few family owned conglomerates, for example, the importance of corporate governance increases"

– CIO, US $5 billion AuM

Latin America Trader

Yes

No

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CONTENT

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

• Respondents to the investor opinion survey come from a wide range of types and size of investing institutions and are in most cases key investment decision markers

• Corporate governance remains a great concern for institutional investors and still is at the heart of investments decisions

• Reform priorities focus on rebuilding the integrity of the system with policy priorities such as strengthening shareholder rights, improving accounting standards, and enforcing regulations

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IMPORTANCE OF CORPORATE FACTORS IN INVESTMENT DECISIONS

Developed markets

N = 56

Emerging markets

N = 93

Brazil

N = 38

Percentage of investors who think that factor is very important for investment decision

Accounting disclosure

Board practices

Independent board

Aligned incentives

Shareholder equality

Prudent debt/equity ratio

Non financial disclosure

Stakeholder participation

Source:McKinsey global investor opinion survey on corporate governance, 2002

Average 26% Average 33% Average 28%

Top 10 factors

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IMPORTANCE OF CAPITAL MARKET FACTORS IN INVESTMENT DECISION

Developed markets

N = 56

Emerging markets

N = 93

Brazil

N = 38

Percentage of investors who think that factor is very important for investment decision

Source:McKinsey global investor opinion survey on corporate governance, 2002

Take-over market

International acco-unting standards

Private equity market

Strong investor community

Market regulation and infrastructure

Market Liquidity

Average 26% Average 33% Average 28%

Top 10 factors

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IMPORTANCE OF BROAD COUNTRY LEVEL FACTORS IN INVESTMENT DECISION

Developed markets

N = 56

Emerging markets

N = 93

Brazil

N = 38

Percentage of investors who think that factor is very important for investment decision

Source:McKinsey global investor opinion survey on corporate governance, 2002

Top 10 factors

Average 26% Average 33% Average 28%

Credit information

Banking system

Insolvency and bankruptcy regulation

Competitive intensity

Fiscal environment

Efficient government

Property rights

Pressure on corruption

SW-ZXK895-2002-05-15-MIH-GS

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TOP CORPORATE GOVERNANCE CHANGES THAT COMPANIES SHOULD PURSUE

Source:McKinsey global investor opinion survey on corporate governance, 2002

Percent of those highlighting change by region

Top 5

More timely, broad disclosure

1.

More independent boards

2.

More effective board practices

3.

Adopt performance- related director/management compensation

4.

Protect minority shareholder rights

5.

Asia

North America

Europe

Latin America

Brazil

N= 2828 3030 4545 2626 2929

Most significant change by region

SW-ZXK895-2002-05-15-MIH-GS

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TOP CHANGES THAT POLICYMAKERS SHOULD IMPLEMENT TO IMPROVE CORPORATE GOVERNANCEPercent of those highlighting change by region Most significant change by

region

Top 5

Strengthen shareholderrights

1.

Improve accounting standards

2.

Mandate greater disclosure

3.

Stronger enforcement4.

Promote/mandate independent directors

5.

Asia

North America

Europe

Latin America

Brazil

N= 2828 3131 4545 2727 3030

*Highlighted as most significant as more marked this factor in the "most important" categorySource:McKinsey global investor opinion survey on corporate governance, 2002

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WOULD YOU BE WILLING TO PAY A PREMIUM FOR "GOOD" CORPORATE GOVERNANCE AND IF YES, WHAT PERCENTAGE PREMIUM WOULD YOU BE WILLING TO PAY?

Source:McKinsey global investor opinion survey on corporate governance, 2002

Suppose you are considering investing in the following companies, A and B, in the same country. Past performance has been virtually identical and future market potential appears to be similar for both companies. However, they differ in board governance practices. B has put in place "good" board governance practices

Suppose you are considering investing in the following companies, A and B, in the same country. Past performance has been virtually identical and future market potential appears to be similar for both companies. However, they differ in board governance practices. B has put in place "good" board governance practices

• Minority of outside directors• Outside directors have financial ties

with management• Directors own little or no stock• Directors compensated only with cash

• No formal director evaluation process• Very unresponsive to investor requests for

information on governance issues

• Minority of outside directors• Outside directors have financial ties

with management• Directors own little or no stock• Directors compensated only with cash

• No formal director evaluation process• Very unresponsive to investor requests for

information on governance issues

Company A "Poor" governanceCompany A "Poor" governance

• Majority of outside directors• Outside directors are truly independent;

no ties with management• Directors have significant shareholdings• Material proportion of directors' pay is

stock-related• Formal director evaluation in place• Very responsive to investor requests for

information on governance issues

• Majority of outside directors• Outside directors are truly independent;

no ties with management• Directors have significant shareholdings• Material proportion of directors' pay is

stock-related• Formal director evaluation in place• Very responsive to investor requests for

information on governance issues

Company B "Good" governanceCompany B "Good" governance