Christian Strenger * Best Practices for Dealing with Non-Controlling Shareholders An Institutional Investor’s Perspective Delhi, 16 th February 2006 * Chairman, International Corporate Governance Network (ICGN) Member of the ‘German Government Commission on Corporate Governance’ Member of the Supervisory Board, DWS Investment GmbH, Frankfurt OECD Policy Dialogue – Corporate Governance in India

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 2 Profile: DWS Investments Superior performance and track record in innovation Expertise in all capital markets More than 500 funds No. 1 mutual fund company in Germany Ranked “Best Mutual Fund Company“ in Germany by S&P 11 consecutive years Strong presence in Asia Pacific: EUR 4.7 bn (of which India 613 mn) EUR 110 bn fund assets for more than 4 million clients Leading across Europe, within the top 10 globally* *) by AuM

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 3 I.The value proposition and main ingredients of good corporate governance -Harvard Law School: disregard of shareholder right causes lower firm valuation and is associated with 7.4% p.a. negative abnormal returns during the 1990 – 2003 period -Deutsche Bank Research: a portfolio of European companies with improving governance standards outperformed a portfolio of deteriorating companies by 4.4 % per annum -Governance-focused Hermes UK Focus Fund outperformed its benchmark by an average 4.8 % each year from 1999 through CLSA Governance Scoring (including India) confirms higher stock markets valuation of firms with better governance practices  Empirical studies confirm the value relevance of good corporate governance

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 4 I.The value proposition and main ingredients of good corporate governance I.The value proposition and main ingredients of good corporate governance (cont‘d)  Establishment of good governance not only important for companies but also for institutional shareholders in the face of increasing competition  India – a long term winner through better corporate governance  Transparency, independence and absence of conflicts of interest are the main ingredients of good governance

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 5 II.Key prerequisites for success with non-controlling shareholders (1/4) 1)Transparency standards in line with international requirements  Comprehensive disclosure of all relevant financial and non-financial information  High compliance with international accounting standards (IFRS)  Timely disclosure of share-dealings by insiders and controlling shareholders  Low disclosure thresholds for share positions  Clarity and comprehensiveness of the information  Equal distribution of information to all shareholders

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 6 II.Key prerequisites for success with non-controlling shareholders (2/4) 2) Convincing independence and quality of boards and auditors  Sufficiently independent non-executive directors with high qualifications  Board committees with at least a majority of independent members  Particular relevance for listed state-controlled companies  Sufficient auditor independence and high work quality

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 7 II.Key prerequisites for success with non-controlling shareholders (3/4) 3) Equitable treatment of shareholders  Super- and non-voting shares a deterrent to investors (one share – one vote principle a must)  Enable unrestricted cross-border voting and eliminate other voting barriers by electronic and legal means  Shareholder access to all relevant financial and non-financial information  Holders of depository receipts to enjoy the same voting rights  Fair treatment in merger transactions

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 8 4) Satisfactory control and enforcement of good governance through independent regulators and other bodies  Effective enforcement essential  Sanction mechanisms must bite  Efficient protection against insider-trading and abusive self-dealing  Centralise competencies in one market supervisory authority  Independent arbitration panel for market-related solutions II.Key prerequisites for success with non-controlling shareholders (4/4)

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 9 III.Institutional investors have a fiduciary duty to act convincingly in the interest of their clients  Convincing external governance actions a must  Internal responsibilities as important prerequisites -Institutional investors must be exemplary in comprehensive and educated exercise of voting rights -Development and disclosure of comprehensive corporate governance and voting policies encouraged by the regulators -Pursuit of critical, yet constructive dialogue with companies -Compliance with high standards of transparency -Sufficient independence of the supervisory body -Clear separation of functions -Process to manage potential conflicts of interest should be explained -Disclosure of the internal governance policy  ICGN Statement on Shareholders Responsibilities as guidance

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 10 IV.A good governance framework is essential but only sufficient quality convinces institutions to be long- term shareholders -Company executives and their supervisory directors must accept that an active pursuit of good governance is paramount for longer-term success -Investors must play their part by an active engagement with the companies they invest in  Better governance quality cannot be achieved by prescription of good laws and proper enforcement only  International guidelines and regulations a good basis for better governance practices (OECD, World Bank, and the ICGN)  Vital to use practical tools (rating and scoring systems) to achieve better understanding and implementation of good governance  Both the companies and their shareholders have to play their active part

Christian Strenger Best Practices for Dealing with Non-Controlling Shareholders 11 IV.A good governance framework is essential but only sufficient quality convinces institutions to be long- term shareholders The motivation to pursue good, even better corporate governance is simply the self-interest of all concerned: outperformance for the investors, better financing for the companies and more efficient systems for the countries and their governments

Christian Strenger * Best Practices for Dealing with Non-Controlling Shareholders An Institutional Investor’s Perspective Delhi, 16 th February 2006 * Chairman, International Corporate Governance Network (ICGN) Member of the ‘German Government Commission on Corporate Governance’ Member of the Supervisory Board, DWS Investment GmbH, Frankfurt OECD Policy Dialogue – Corporate Governance in India