Changing the world, one vote at a time

Carl RosenAs the International Corporate Governance Network held its annual conference this week, its new
executive director, Carl Rosen, spoke with Amanda White about the challenges for the year ahead, in particular prioritising the changes to shareholder rights in the US.

The board members of the International Corporate Governance Network (ICGN) are feeling pretty pleased with recent events in the US, which have seen major changes to shareholder rights in the US, at least in concept.

For the past 10 years the ICGN has been actively lobbying four key aspects to shareholder rights in the US and that is
now paying off, with the Securities and Exchange Commission and the Obama Administration making real steps towards change.

For the ICGN executive director-elect, Carl Rosen, US shareholder rights remains the most important focus for the network.

“It’s so strange that we have had a situation that as an investor you have to accept you can’t replace
the chairman and it’s a self-nominating system. They even decide how much money they will get, and it’s our company. It’s an extremely strange situation,” he says. “The changes to shareholder rights have been due to engagement, it is proof of the strength of ICGN.”

Rosen identifies four areas to getting shareholder rights in the US on equal footing with the rest of the world.

Changes to proxy access, where there is a proposal from the SEC giving investors the possibility to nominate directors, is a big step forward; changes to the broker votes system from January 1, 2010 where votes registered with a broker will no longer automatically count in favour of the management proposal; say on pay; and the split of responsibilities between the CEO and chairman.

“This is really hopeful for investors all over the world, as the US market is the most important. We are working for a better world, if we can protect shareholder rights and the US is a good example of this, then we are very well  positioned to do this in a responsible way,” he says.

Rosen believes the issue of shareholder rights in the US is also connected with remuneration issues as well.

“What we have seen for the last 20 years is that executive pay has risen, it is the only cost that has gone up in companies worldwide, and it is because investors have had very little influence in the corporate governance system in the US. That is changing and I am very hopeful if these reforms go through then we can at least curb the increase,” he says.

“This is one of the high priorities of ICGN to get these things through – it is not over and there are strong interests that want to keep the old system. So that is my first priority.”

Rosen, who is currently head of corporate governance and communication for the Swedish fund, AP2, but will relocate to London in September, says he is honoured to be named executive director of ICGN.

“ICGN is the most important investor body in the world when it comes to corporate governance and there are some real possibilities here,” he says. “This is a strong group of people working together, intensely, we have members in 45 countries managing $10 trillion, so it’s really a very interesting organisation. I think there will be
a lot of interesting things coming up in the next year.”

The aim of the network is threefold: developing global best practices, advocacy/lobbying, and keeping the
network going.

And through his work at AP2, where he has been for the past seven years, the first two as a consultant, Rosen
has hands on experience as to how pension funds can incorporate ESG factors into their portfolios, and improve performance.

“When I started at AP2 we set up a portfolio structure using the Hermes way of investing, which was really an internal activist portfolio. We outperformed the benchmark index for the first five years by 2 per cent yearly, and it was the best portfolio in the fund. It was proof you can make money out of this, and it sent an extremely strong signal into the organisation, please look at the possibilities,” he says.

“There are a lot of interesting opportunities out there if you think about the issues. For example in the environmental sphere, you can invest in the worst polluters in the world, then engage in the companies. If you can engage they can improve in governance, environmental and social issues and you can add a lot of value to your portfolio.

“Most large institutional investors are index trackers one way or another regardless of what they say, it is obvious that they now run enormous risk in portfolios because the index doesn’t reflect the risks of climate change or CO2 emissions rising. Two years ago investors had high exposures to the financial industry and it was a risk they didn’t see or address. Here we have something we see it coming, we don’t know exactly how it will play out, but it will come. If you are not informed by your own carbon footprint, then you run large risks in your portfolio.”

Rosen believes the best way tackle the issue in terms of organisational structure is to have one person as the central coordinator, but the knowledge must be distributed across the whole organisation, and that takes a long time.

“This industry largely consists of men and women in look-alike suits that are using the same information trying to beat the market. They are not naturally open to new issues, which is really strange, and are reluctant to listen to new
perspectives,” he says.

“But if you can use research and your own ideas and be innovative, then you can actually beat the market; this is an investment opportunity.”

In addition to prioritising US shareholder rights, Rosen sees ICGN as having an important role in preventing over-regulation.

“I have a good example from my own country, where one regulation is trying to ban variable payment, it is
trying to impose on all listed companies [that] they promote fixed salaries. The effect will be everyone will have a higher fixed salary for an indefinite period of time, which is totally counterproductive,” he says.

Rosen says there are many examples in history where over-regulation has disturbed the market, and believes that often politicians are not aware of the “creativity that is in this business when it comes to enriching yourself”.

“Another example is when President Clinton put a cap on CEO pay in the US in the 1990s which was really the start of this explosion in option schemes. As investors we know that it is better to give power to the institutional investors and then they can influence these issues. It is impossible to regulate pay.”

ICGN is also looking to engage more actively with governments, which are the new owners of equities as a result of the global financial crisis.

“What has happened during the GFC is that huge amounts of assets have been transferred from ICGN members
to states which means the largest owners of equities today are not institutional investors but governments. For a lot of them, they didn’t want to be equities owners in the first place and they are not staffed for it. It is a challenge for them, and we can transfer some of the knowledge from our members,” he says.