Governance lessons from abroad.

• Author: Sherman, Howard D.
• Position: Chairman's Agenda: Balancing Shareholder Interests

Governance Lessons From Abroad

Questions regarding corporate governance in non-U.S. markets are growing as fast as U.S. investors' non-U.S. portfolios. Help is already here for the most fundamental task - helping U.S. investors vote their non-U.S. proxies. Within the last two years, our firm, along with Global Proxy Research Corp., the Investor Responsibility Research Center, Georgeson & Co., Morrow & Co., Fidelity Investments, the Independent Election Corporation of America, Citibank, and others, through a variety of services, has begun to help U.S. investors obtain, translate, analyze, and vote their non-U.S. proxies and attend foreign annual meetings.

On a higher level, U.S. investors, along with corporate attorneys, securities lawyers, and other interested parties, are looking at corporate governance systems overseas to see whether there are any lessons for the U.S. What they have learned so far is that as bad as it seems here, the U.S. corporate governance system is more balanced than most non-U.S. markets. In fact, at two industry conferences in the fall and winter of 1990, experts from the U.K., Germany, and Japan said they were looking at the recent changes in U.S. institutional voting patterns and corporate governance initiatives to see whether there were any lessons applicable for their own countries.

This article addresses the other side of the equation: Are there lessons from abroad for U.S. corporate governance? This article is by no means a comprehensive examination of all non-U.S. markets. Instead, it looks at some of the more intriguing examples from abroad: Canada's poison pill, Germany's two-tier board, and the U.K.'s Promotion of Non-Executive Directors (PRO NED).

Canada

Shareholder rights plans, as they are politely known, or poison pills, a more realistic appellation, are among the most controversial securities ever devised. The plans give a board of directors targeted with a hostile tender offer almost unlimited power to negotiate for a higher price, gain time to find a better offer from another party, and/or implement an internal restructuring with greater value than the tender offer. In practice, this is how most pills have been used in the U.S.

But pills also give a target's board the power to resist any hostile tender offer, even one that has the support of a large majority of shareholders. This is so because in most pills, only the board has the power to cancel the pill. If the board refuses to do so, no rational bidder would dare trigger the pill, for it would truly poison the value of his investment.

It defies common sense that such a powerful weapon would be given away without approval of the owners of a company. But ever since the ruling in Household International, boards have been given legal authority to adopt poison pills without shareholder approval. It also defies common sense that a board can refuse to redeem a pill and defeat a takeover attempt, even when a majority of company shares have tendered to a hostile bidder. Yet, this too has been allowed by the U.S. courts, with certain modifications.

Shareholders receive far greater consideration in Canada. The Ontario Securities Commission and the Canadian stock exchanges require that shareholders approve poison pills before their initial adoption. In contrast to the U.S., this clearly is preferential from the point of view of the shareholders. And most Canadian pills include a special provision that gives shareholders the right to bypass the board if it refuses to redeem a pill in the face of a hostile tender offer by approving the bid and redeeming the pill themselves.

The Canadian model provides an important lesson. There is not one iota of evidence that the shareholder vote requirement has limited management powers: Every...