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This month, Robeco Global Equities team analyst Masja Zandbergen looks at corporate governance’s onward march.
Those of us with gray hair – or who dye it, like me – can still remember the famous (infamous?) Dutch discount from the 1990s. Dutch stocks were trading at lower valuations than their counterparts in other countries. Why? Because barriers were put in place, for example by placing shares with a ‘Stichting Administratiekantoor’ – a trust office – and thereby decoupling economic and voting rights. Such strategies made corporate takeovers less likely to occur. They also often undermined the all-important ‘one-share-one-vote’ principle, considered a best practice of corporate governance policies.
Based on this anecdotal evidence, it is clear that corporate governance is one of the most financially material Environmental, Social and Governance (ESG) factors. This has been confirmed by scientific research1. Gompers et al were the first to discover that firms with stronger shareholder rights are worth more and report higher profits, higher sales growth and lower capital expenditures. They also tend to make fewer corporate acquisitions. This has also been revealed in our fundamental research, as corporate governance is deemed a material issue in about 30% of all our investment cases.
For this reason, we keep a close eye on corporate governance developments across the globe. For example, in Japan there has been a clear push to improve corporate governance since the introduction of the Japanese stewardship code and the corporate governance code as part of ‘Abenomics’ governance reforms. Institutional investors have become more active and are starting to vote on their shareholdings. We have noted an increase in the number of independent members on Japanese corporate boards (from zero to two in most cases). This is good news, although we feel that more must be done. Having the right knowledge and skillset is just as, if not more, important. And even though there have been a record numbers of share buybacks and dividend pay-outs, Japanese companies still have more cash than their US or European counterparts and their returns are, on average, lower. As a result, finding companies that fit our investment criteria is a challenge in this market, as the return on invested capital must either be high or on the rise.
The Netherlands is ahead of Japan in implementing a principles based corporate governance code. Since the introduction of the first Dutch Corporate Governance Code in 2004, active ownership in the Netherlands has increased dramatically. Whereas in 2005 the participation in shareholder meetings of Dutch companies was below 35% (excluding the ‘Administratiekantoren’), by 2016 it was over 70%2.
Last December the revised Dutch Corporate Governance Code was published. The most important change compared to the previous version is the central role assigned to long-term value creation, and the introduction of ‘culture’ as a component of effective corporate governance. In this respect, we believe that from an international perspective, the Dutch corporate governance code is quite advanced. As the code has a ‘comply or explain’ approach and ‘culture’ is a relatively difficult concept to define, it remains to be seen how companies and investors will implement these new aspects. What is clear is that even though many Dutch companies still have defense mechanisms in place, thanks to increased active ownership, different structures and greater transparency on these mechanisms – i.e. better governance − the Dutch discount has certainly disappeared, making corporate governance a force to be reckoned with for investors.
1See (among others) Gompers et al, Corporate Governance and Equity prices, The Quarterly Journal of Economics, 2003
2Eumedion Best Practices voor Betrokken Aandeelhouderschap, Monitoring rapportage 2016