This revolution is just beginning. Sprawling boards dominated by insiders are being broken up. Incestuous relations between companies, banks, and suppliers are being untangled. But big institutional investors are still wary of leaning too heavily on management. In Europe, where almost every major capital market has reformed and strengthened corporate-governance codes over the past two years, there are still no common European Union governance standards. And since self-regulation is traditional in Europe -- in contrast to the American emphasis on legally regulating standards for accounting and disclosure -- enforcement is still a problem.
Until now, much of the pressure for reform around the world has come from powerful U.S. and British-based institutional investors. It's time for Continental institutional investors to become another driving force for corporate reform. As private retirement systems become more common, this force is bound to grow. Most pensions on the Continent still come from public pay-as-you-go schemes, unlike in the U.S., where more than half the population holds shares through private plans. But Europe's public retirement systems are strapped for cash, and governments are moving to allow more private savings vehicles. A study last year by Deloitte Research and Goldman, Sachs & Co. estimated that such savings in the region would grow by more than $4 trillion over the next decade, greatly increasing the potential clout of pension funds.
That's why European and Asian pension and mutual funds have to wake up. In recent months, U.S., British, and Continental funds have teamed up to press for reforms at companies such as Vivendi Universal in France and Volkswagen in Germany. The more corporate governance is improved, the more incentive there is for investors to put their confidence back in the markets. That's why all of society's stakeholders, not just shareholders, are winners as corporate- governance standards improve. Long live the revolution.