european corporate governance session 5. outline european relationships based approaches the role of...
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EUROPEAN CORPORATE GOVERNANCE
SESSION 5
Outline
European relationships based approaches The role of equity markets Political and legal structures contrasts of Europe The transformation of the industrial and governance
systems of Germany, France and Italy Failures in European corporate governance Reforms: institutions and practices The increasingly international role of Europe
European vs Anglo-Saxon
European Corporate Governance:
Emphasis on co-operative relationships and reaching consensus
Anglo-Saxon Corporate Governance:
Emphasis on competition and market
Two typical Models of Different Capitalist Cultures
OUTSIDER MODEL (e.g. UK)
INSIDER MODEL (e.g. Netherlands)
Market Culture Consensus culture
Market Orientated Network orientated
Relatively more Reliance on Equity
Relatively more Reliance on Debt
Stock Exchange Relatively Large
Stock Exchange Relatively Small
Relatively less influence of controlling sharerholders
Relatively more influence of controlling shareholders
Source: Welt, Gotshat and Manges (2002). Eurosif Research 2007
Dynamic View of Share Ownership in Europe
PERFORMANCE RESPONSIBILITIES
POLICY PROCESSES
RESEARCH
ACTIVITIES
IMPACTS
DRIVERS
BACKGROUND
ANALYSIS
USE OF SHAREHOLDERSRIGHTS
OUTCOMES
Source: Eurosif Research 2007
European Relationships Based Approach
Broader representation of interests on the board of directors,
More diverse groups of stakeholders are actively recognized
Long-term large shareholders
Supervisory board for oversight of management
Banks play an active role inter-corporate
shareholdings are widespread, and often companies have close ties to political elites.
Distribution of Share Ownership in German Publicly Traded Companies
OWNERS 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Banks 12.8 12.1 12.9 13.4 13.3 12.0 13.0 11.5 11.5 10.9 9.0
Insurance 6.6 6.1 6.3 6.3 7.7 7.2 7.8 8.2 9.3 13.3 13.2
Other Financial
6.0 6.1 6.3 6.3 7.7 7.2 7.8 8.2 9.3 13.3 13.2
Households 19.9 19.4 18.8 18.4 18.1 17.5 16.9 16.5 14.4 13.0 13.9
Non financial companies
42.8 45.2 45.8 44.0 40.0 40.1 34.9 36.2 36.8 32.9 32.5
Government 2.0 2.0 1.8 1.8 2.0 1.3 0.7 0.6 0.6 0.8 0.9
Foreign 10.0 9.0 8.2 9.1 10.1 11.8 14.0 12.5 14.1 14.8 17.1
Source: Vitols (2005).
Weight of Pension Funds in the Economy and Financial Markets (2001)
0%
20%
40%
60%
80%
100%
120%
Italy
Germ
any
Sw
eden
Austr
ia
Belg
ium
Spain
Fin
land
Denm
ark
UK
Neth
erlands
Sw
itzerland
Share of GDP Share of Market Capitalization
Source: EUROSIF Active Share Ownership in Europe: 2006 European Handbook
Internationalization of Pension Equity Investments End 2006
Source:Eurosif research 2007
Recent Flurry of CG Codes in Europe
20052004200320022001200019991998Pre - 1988 20052004200320022001200019991998
France
Spain
Netherlands
UK
Belgium
France
Germany
Italy
UK
Belgium
France
Ireland
Italy
OECD
ICGN
Portugal
UK
Denmark
Germany I
Germany II
Netherlands
UK
Denmark
Germany
Greece
Netherlands
Portugal
Sweden
UK
Austria
France
Germany
Italy
Switzerland I
Switzerland II
UK
Denmark
Finland
France
Germany
Netherlands
Portugal
Spain
Sweden
UK
Belgium
France
Italy
Netherlands
Norway
OECD
Spain
Sweden
UK
Belgium
Denmark
ICGN
Source: EUROSIF “Active Share Ownership in Europe: 2006 European Handbook” .p 19
Laws and Codes Encouraging Active Share Ownership in Europe
Source: EUROSIF “Active Share Ownership in Europe: 2007 European Handbook”
2000 2001 2002 2003 2004 2005 2010
UK SIPSweden AP Rules
Swiss PensionsLaw Extension
ISCCombinedCode UK
ItalyPensionReform & SIP
Spanish PensionReform
Mandatory Proxy Voting Laws?
UK Myner’s Review
German SIP
NLTabaksblattCode
Austria SIP
Belgium SIP
German SIP
UK Myner’s Review EU-wide
SIPs?
Insiders control of a company
1) Majority ownership of voting shares
2) Owning significant minority holdings and employing a combination of devices to increase their control through:
– Arranging pyramid corporate structures– Shareholder agreements– Discriminatory voting rights– Procedures intended to reduce the participation or
influence of other minority investors.– Pyramid structures
Different Political, Legal, and Regulatory Structures
Company law Employee representation Stakeholders, shareholders Board structure Supervisory body independence and leadership Board committees Disclosure
Multiple Corporate Governance ReformProcesses in Europe
ReviewFindings
FRANCE
ITALY
SPAIN
DENMARKReviewFindings
GERMANY
SWITZERLAND SWEEDEN
AUSTRIA
NETHERLANDS EUROPEAN UNION
NORWEGIA
BELGIUM
Vienot ReportMemberships, Powers andOperations of the Boards1995
2nd Vienot ReportSeparation of Powers ofthe Chairman and CEOAnd disclosure of executive Remuneration 1999 Boards Report
Governance of the Enterprise1998-2004
Draghi ReformPrinciples of Correct Administration1998
The Olivencia ReportCode of Ethics1998
UK Cadbury Report1992
OECD Principles ofCorporate Governance
The Baums ReportsRecommendations that reflectchanges in Corporate Law2001
Swiss Code of Best PracticeRecommendations 2002
Swedish Code of Best PracticeReport of the Code Group 2002
Norwegian Corporate GovernanceCode of Practice 2004
Dutch Corporate Governance Code Principles and Best Practice Provision 2003
European Commission ModernisingCompany Law and Enhancing Corporate Governance 2003
Belgian Code on Corporate GovernancePrinciples to support long-term value creation 2004
Preda ReportCode of Conduct 1999-2004
The Aldama ReportTransparency and Securityin the Markets 2003
Corporate Governance PrinciplesInternational Best Practices 2004
The Norbis Committee ReportRecommendations as supplementto existing laws 2001
Corporate Governance Report in Denmark1992-2002
The Cromme Code Regulation2002-2003
Austrian Code of Corporate GovernanceFramework on shareholder,Board, transparency and Auditing 2002
Source: Clarke T., (2006)UTS Centre for Corporate Governance
The Dual System: Segregation of Duties
Board of Manageme
nt BoM
Supervisory Boar
dSBAGM
Company Management Joint accountability
Chair of Board coordination
Company oversightSupervision of
BoMChair of Supervisory Board coordination
CONTROL of SB
and BoM
i.e. Information, recommendations
to SB Preparation of SB meetings Corporate Governance
i.e. Election/ remuneration of BoM
Business monitoring/ RMS Approval of :
1. Business plan2.Defined transactions3.Annual finalized statements
Proposal of auditors Corporate Governance
i.e. Election of S-R
Discharge of acts of SB and BoM
Appointment of Auditors Appropriation of net income Approval of capital increase
Source: Joachim Heins-Bunde (2006)
The Dual system : Representation of Employees and Shareholders
Source: Joachim Heins-Bunde (2006)
Supervisory Board
Shareholder Representative Employee Representative
Independent outside expert
Social Councilmembers(blue collar)
UNIONreps
Management Rep(white collar)
Chair of Supervisory Board with casting vote in stalemate situation
Vice Chair Supervisory Board
Elected by AGM (5 years)
Elected by Employees ( 5 years)
Activities of Supervisory Board
Audit Committee3-4 times/ year
Financial statements/ reporting
RMSSOXAuditors:1. Independence2. Nomination proposals3. Fees
Personnel Committee3-4 times/ year
Remuneration ContractsNominations
Strategy Committee1-2 times/ year
Corporate Strategy BU strategiesKey projects
Technology Committee1-2 times/ year
R&D priorities NBD
Internal Auditor
External Auditors
• Audit program•Financial statements• SOX
• Audit program• Key results
Pre meetingsWith ShareholdersRepresentatives
Plenary Sessions
• 1 times / year• 1 site visit
Discussion/ meetingsChair of Supervisory Board
– Chair Board of Management
Pre meetingsWith EmployeeRepresentatives
Source: Joachim Heins-Bunde (2006)
Parmalat
Source: Compiled from Milan Stock Exchange, Yahoo Finance, various media news sources.
Ahold Share Price Collapse
Ahold Share Price Collapse
$0
$5
$10
$15
$20
$25
$30
$35
$40
2/01/2001 2/01/2002 2/01/2003 2/01/2004 2/01/2005 2/01/2006
Aug 2002: Ahold reports its first quarterly loss in 29 years.
February 2003: Ahold announces“significant accounting irregularities”at its US Foodservice, and questionable
consolidation of five 50/50 joint ventures. Release of 2002 accounts postponed. Van der Hoeven and Meurs resign
March-Dec 2003: Dutch gov. convenes a committee, to create a national code of corporate governance
Source: Compiled from Yahoo Finance (2006), various media news sources.
What Shareholders' Democracy?
0 20 40 60 80 100
Netherlands
Sweden
France
Spain
Switzerland
Average
Italy
Britain
Germany
Netherlands
Sweden
France
Spain
Switzerland
Average
Italy
Britain
Germany
* Companies in the FTS Eurofirst 300 IndexSource: Association of Brithish Insurers: Deminor Rating. * Companies in the FTS Eurofirst 300 Index
Source: Association of British Insurers: Deminor Rating
Dividends Number of Employees and Personnel Expenditure per Employee
0
20
40
60
80
100
120
140
160
180
200
1992 1993 1994 1995 1996 1997 1998
Expenditure per Employee
Employees
Dividends
Net Value Added
Source: Beyer and Hassel (2001)
The Distribution of net value added in large German firms, 1992-4 and 1996-8
Labour Creditors Government Dividends Retained earnings
1992-4 85.3 5.4 5.2 2.0 2.2
1996-8 78.4 4.3 6.8 2.8 7.8
Change in % -81 -20.4 +30.8 +40.0 +254.5
Source: Beyer J. and Hassel Anke (2001 : 320)
Penetration of Active Share Ownership in Some European Countries
STATE OF LOCAL ACTIVISM COUNTRIES
Established market culture for institutional Investors and many fund managers
Ireland, UK
Driven by a limited number of (but nonetheless powerful) activist players
Denmark, Netherlands, Sweden, Switzerland (Pension funds or institutional investors)
Austria, France, Germany, Italy(Research organisations or fund managers)Greece(Institutional investors)
Driven by strong small shareholder associations Denmark, France, Germany, Netherlands
Rather non-existent Other countries
Sources: Deutsche Bank Corporate Governance Research, TUAC, Eurosif,
Screening and best of class approach
Socially responsible funds :USA, Canada, UK, Switzerland, Northern Europe
Sustainable Development Funds :France & Belgium
Best of class approach
Environmental Funds :Germany, Northern Europe, Switzerland Environmental
criterias
1928 1980 20061970
Screening criterias
Ethical Funds :USA Europe
1990
EngagementEngagement Overlay:UK, NL, BE
IntegrationIntegration:UK, NL, FREnvironmental
SocialGovernance
SocialEnvironmentalEthical
Responsible Investment Evolution: Growth of ‘ESG’
Source: Eurosif Research 2007
Conclusions
The distinctiveness of Europe has produced some of the most valued corporations in the world, together with an exceptional quality of life in many communities.
Though Europe has embarked on a process of change in corporate governance and company law in recent years to integrate better into international financial and product markets, there are important signs that the commitment to social democracy will survive this experience.