Risk & Compliance

In 2002, Disclosure In, Employee Ownership Out

Survey says institutional investors likely to demand better governance, less dilution.
Stephen TaubDecember 26, 2001

Warning to CFOs: Institutional investors are most concerned about corporate governance and disclosure issues.

That’s the clear message coming from a survey of U.S. institutional investors conducted recently by Broadgate Consultants, Inc., an international corporate and capital markets communications advisory firm. More than 76 percent of the 89 survey participants, which included leading U.S. fund managers, said they expect institutional investors to put more pressure on corporations to improve corporate governance in the coming months. Among the top concerns of the respondents: stock option grants and pension fund accounting.

Indeed, more than 70 percent of the institutional investors said they are unhappy about the rising number of stock options being issued to employees–and the potential dilutive effect of those options.

And in fact, the SEC voted last week to require greater disclosure of corporate stock options plans. Specifically, companies must disclose details of their options plans that haven’t been approved by shareholders.

Eight out of ten of the respondents in the Broadgate survey said they are also deeply concerned about overly optimistic assumptions used by corporations for returns related to their pension funds. That practice often boosts earnings expectations.

According to Broadgate, many corporations are now reviewing their assumptions about pension assets in light of current stock market conditions. GE, for example, recently announced that it lowered its forecasts for the long-term returns on the company’s pension assets.

The survey participants also said they expect an increase in takeover activity in a number of industries, including technology, telecommunications, financial institutions and health-care. The housing sector is the least likely industry to see sizeable takeover activity, according to the respondents.

“The survey results indicate that many sophisticated U.S. market participants believe that the indiscriminate nature of the stock market decline may yield exceedingly attractive buying opportunities in the New Year, even in the absence of bull market conditions,” said Thomas Franco, CEO of Broadgate, in a statement. “This conviction is buttressed by the widely held view that there will be increased takeover activity in 2002, particularly with many companies selling for less than the cash they have on hand.”