SRI English

Observations from the proxy voting season

by Michael Herskovich

While executive pay was a key issue for many shareholders in 2009, this year they paid closer attention to the work of the board of directors and its composition, as well as to how their interests are represented.

The financial crisis has revealed the important role of the board of directors in determining corporate strategy, overseeing its implementation by senior management and monitoring risks. It has also shown how important it is to have independent and qualified directors.

CapitalCom's fifth annual study reveals that three quarters of individual shareholders feel that the board of directors does not fulfil its role. In some countries, such as France, the chairman/CEO is making a comeback, reuniting the separate roles of chairman of the board and chief executive officer.

To limit this concentration of power, some companies have appointed a lead independent director responsible for overseeing good governance and relations with minority and institutional shareholders. Although a step in the right direction, this is no substitute for a clear separation of roles and a truly independent board of directors capable of overseeing senior management effectively to prevent the abuse of power or conflict of interests. Over and above the issue of independence, directors’ qualifications and diversity were also subjects of much debate at annual shareholder meetings this year.

Now that the European Union member states are completing the transposition of the 2007 Shareholder Rights Directive, concrete measures are being implemented, such as establishing the record date system and preventing share-blocking. The transposition should ensure that shareholders are better informed about meetings and can exercise their voting rights more effectively.

There has also been progress in the field of remuneration practices. More and more companies in Germany, Switzerland and the United States are allowing their shareholders to express their opinion via "say-on-pay" resolutions. Shareholders will be careful to ensure that remuneration is aligned with financial results and based on real and explicit performance criteria.

Environmental and social issues are arising more frequently in the United States, and more than 300 shareholder resolutions have been submitted in the first quarter of 2010. A significant proportion of these resolutions were about climate change (oil shale mining in Canada, for example) or about companies’ and their suppliers’ respect for human rights. We are also seeing a significant increase in shareholder resolutions to abolish anti-takeover defences.

Conversely, there is a resurgence of takeover deterrents in Japan, with more cross-shareholdings and the development of ’poison pills‘. The same is happening in South Korea, where a new law will probably enable anti-takeover defences similar to those allowed under a French law adopted in 2006.

We are emphasizing the following principles through our voting policy:

• Having a majority of independent directors, so that the board can assert its oversight over management and protect the rights of minority shareholders
• Ensuring that remuneration practices are aligned with the company’s long-term interests and those of its shareholders
• Preventing excessive measures to protect share capital
• Making sure corporate strategy, disclosure and risk control take environmental, sustainable development and social issues into account

Microfinance weathers the financial storm

by Alvaro Ruiz-Navajas

Much has been said about the resilience of the microfinance sector during the crisis on account of well known companies like Mexico’s Banco Compartamos, whose share price gained 170% in 2009. However, the environment in which microfinance institutions (MFIs) operated during the financial crisis was among the most challenging ever faced by the industry. In early 2009, loans past due over 30 days reached a median of 4.7%, up from 2.2% at the end of 2008 and profitability dropped dramatically.

However, a closer examination shows that these effects were not as extreme as it may appear. First, most of this decline in asset quality took place in the first half of the year. It is interesting to note that most of it was short-term delinquency, with only a minority of loans in need of rescheduling. Rescheduling loans is a very important tool for microfinance institutions, as they have been known to use it without undermining the repayment incentive for their borrowers. 

Also, these effects have not been uniform. Countries like Bolivia and India stood their ground firmly, while others, like Nicaragua and Morocco, experienced severe delinquencies, which were not necessarily caused by the crisis. These differences can be explained by the fact that countries like Bolivia and India have much more competitive markets that have led to faster product innovation and client screening methodologies. 

So, while the microfinance industry experienced a tumultuous year in 2009, it came out relatively unscathed, and its drive to keep on improving the quality of its assets gives us an upbeat outlook on the sector.