The role and duties of the proxy advisor RiskMetrics Group The role and duties of the proxy advisor CGS Seminar, Seoul 5 December 2008

The role and duties of a proxy advisor Who we are A quick history Our role: Worldwide, in the Asia-Pacific and in Korea The duties of a proxy advisor: Advisors, not activists Some common myths Observations about 2008 Korean season

RiskMetrics Group: Who we are We help investors better understand and manage risk across a broad spectrum RiskMetrics Group offers risk management, corporate governance and financial research & analysis services ISS Governance Services –provides corporate governance and proxy voting services Financial Research & Analysis –provider of forensic accounting, legal, M&A, environmental and social research RiskMetrics –provider of quantitative risk management and portfolio analytics

A quick history Proxy advisors arose to fill an institutional investor need In some markets (US – ERISA) this was driven by regulation and in others by investor demand (often by pension fund clients of funds managers) Demand partly due to: Concentrated voting seasons in most markets Perceived lack of expertise among funds managers Desire for independent advice

Our role: Worldwide We are an intermediary between companies and institutional shareholders We work for and on behalf of institutional shareholders Our role has two components: Information and advice Information has two parts: On agenda items and also on general governance issues

Our role: Asia-Pacific Information provision: Especially on general governance matters Part of our role, especially in Asia-Pacific, is to provide information to issuers on investor expectations Part of our role is to be an advocate of change on behalf of shareholders: Accountability and disclosure key areas of focus eg. Director accountability to shareholders: Hyundai Motors and Samsung Disclosure and accountability: Related party transactions in India

Our role: Korea Provide advice to Korean and international institutional investors: On Korean corporate law generally, shareholder rights and on agenda items Take into account Korean governance landscape in the advice we give to clients eg. Role of chaebols and inter-group transactions Be an advocate for change of benefit to shareholders

Our role: Korea As a change advocate … Korea should be proud of its takeover laws (no poison pills – unlike the US) and the voting limitations for audit committee members But some things could be better: 14 days notice for annual meetings Publication of annual reports prior to AGM Bundled resolutions Disclosure in English Corporate governance ‘culture’ Disclosure of pay for directors (but pay levels not as big a problem as many other markets)

Our duties: Advisors, not advocates Accurate and timely information to clients Be transparent to companies: On approach, policies, recommendations Be open to dialogue with companies and other stakeholders BUT our first duty is to our clients, not to companies

Our duties: Advisors not advocates Some of our clients may be ‘activists’ but we are not paid to be activists Difference between advocating change and activism - Activists: Target companies and management for gain or publicity - Proxy advisor: Advise investors, dialogue with companies - Activists: Try and convince other investors to back them - Proxy advisor: Advise investors but investors make ultimate decision Proxy advisors are NOT shareholders

Some common myths “Funds managers have to follow our recommendations” – FALSE FACTS: No client is bound to follow our recommendations Some institutional investors require funds managers managing money on their behalf to explain why they deviate from advice of proxy firm Many of our clients use proxy advisors as a triage service or advisory input – like they would use a broker

Some common myths “Proxy advisors apply a rigid and hidden set of rules” – FALSE FACTS: Policies are based on discussions with clients and local market criteria Policies are publicly available Proxy advisors should be open to dialogue with companies

Some common myths “Proxy advisors apply one set of rules to all markets” – FALSE FACTS: Our policies are based on client preferences – but it is our role and duty to advise offshore clients on local market characteristics Our policies are based around set of principles but applied differently in different markets As an example: Pay particular attention to director independence and director elections in Korea

Some common myths “Proxy advisors don’t listen to company explanations” – FALSE FACTS: We will try and contact the company ahead of any material ‘Against’ recommendation and put their side of the story in our report to clients – regardless of the recommendation But we would be failing our clients if we always agreed with management

Some common myths “Proxy advisors recommend against everything” – FALSE FACTS: A proxy advisor would not be doing their job if they recommended ‘Against’ everything Against recommendations not made lightly

Observations about 2008 Korean season Demand from institutional investors for Korean research increased: We as a house doubled the number of Korean companies covered for clients (5000 up to 1000, about 100 ‘core’) This demand was often frustrated: One-fifth of our clients could not vote in time during the 2008 season (14 day rule, concentrated meetings) Director accountability issues a key concern (this is a worldwide trend)

Conclusion Role: Mediate between institutional investors and companies and provide information and advice Duties: First duty is to shareholders but owe duty of fairness to companies

Martin Lawrence martin.lawrence@riskmetrics.com OR Martin Chung martin.chung@riskmetrics.com