Comments in Response to OECD Consultation on Corporate Governance and the Financial Crisis

The Network for Sustainable Financial Markets (“NSFM”) is an international, non-partisan network of finance sector professionals, academics and others dedicated to improving financial market integrity and efficiency.  The NSFM Coordinating Team submits the attached NSFM Consultation Paper No. 2, written by Keith L. Johnson and Frank Jan de Graaf, in response to the OECD Consultation questions regarding Exercise of Shareholder Rights and Closing the Implementation Gap.  We applaud the OECD's effort to discuss the role of corporate governance in the financial crisis, before addressing needed revisions to the OECD Principles of Corporate Governance, and believe that NSFM Consultation Paper No. 2 is relevant to this exercise.

A November 2008 international survey of finance industry professionals that was done by the NSFM and AQ Research on causes of the financial crisis found that shareholders and fund managers were identified as the second most blameworthy group, ranking below bank leaders but above politicians, regulators, central bankers and investment analysts.   These survey results reinforce our strong belief that corporate governance without effective and engaged shareowners is inherently unstable and is doomed to repetitive cycles of destructive crises.  Accordingly, this Comment recommends that the OECD make institutional investor governance reform a central focus when revising the OECD Principles of Corporate Governance.

The critical point in NSFM Consultation Paper No. 2 is that pension fund governance and corporate governance have been treated as separate arenas by the OECD. However, in most developed countries more than 60 percent of financial market assets are associated with pension savings. How pension fund money management is governed strongly influences how financial markets and individual companies perform.  Pension fund governance guidelines and corporate governance guidelines are inter-related and should be closely coordinated.

NSFM Consultation Paper No. 2 also cites academic evidence that the ineffective governance of pension funds and their investment managers has led to poor financial performance and created dangerous agency problems in the financial markets. There is little alignment of interests between the fund beneficiary (with a long-term perspective of 30 years or more), the asset manager (often with a one-year perspective) and company management, which is pressured to consistently meet quarterly earnings expectations. Furthermore, many asset managers are incented to act as asset renters and eschew ownership responsibilities for portfolio companies. When this short-term view is combined with an extremely dispersed ownership model and many poorly-governed pension investment organizations, the prospects for robust and sustainable value creation suffer.

We recommend that the OECD tackle these governance and agency problems throughout the pension fund supply chain as part of its project on revision of the Corporate Governance Principles. Only when fund managers act as long-term investors who impartially represent the interests of their fund beneficiaries - and act as responsible owners of the companies in their investment portfolio - will effective corporate governance practices and sustainable financial markets be promoted.

Respectfully submitted by the NSFM Coordinating Team,

Cecile Churet, Keith Johnson, Sean Kidney, Frank Jan de Graaf, Ebba Schmidt, Raj Thamotheram, Helen Wildsmith and Cynthia Williams

ATTACHED: Modernizing Pension Fund Legal Standards for the 21st Century,  Network for Sustainable Financial Markets: Consultation Paper No. 2