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International Collaboration David R. Beatty O.B.E., CFA June 9, 2010.

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Presentation on theme: "International Collaboration David R. Beatty O.B.E., CFA June 9, 2010."— Presentation transcript:

1 International Collaboration David R. Beatty O.B.E., CFA June 9, 2010

2 Source: Masaru Yoshimori, 1995 In my country _______________ a firm exists for the…. Question: Under which of the following assumptions is a large company in your country managed? A firm exists for the interests of the shareholders A firm exists for the interest of other stakeholders Take a piece of paper and write down a number For shareholders : ______ For other stakeholders : ______ TOTAL 100

3 Source: Masaru Yoshimori, 1995 ShareholdersOther stakeholders Stakeholder orientation varies dramatically by country….

4 Source: Masaru Yoshimori, 1995 ShareholdersOther stakeholders Stakeholder orientation varies dramatically by country….

5 Source: Masaru Yoshimori, 1995 ShareholdersOther stakeholders Stakeholder orientation varies dramatically by country….

6 Source: Masaru Yoshimori, 1995 ShareholdersOther stakeholders Stakeholder orientation varies dramatically by country….

7 Source: Masaru Yoshimori, 1995 ShareholdersOther stakeholders Stakeholder orientation varies dramatically by country….

8 Source: Masaru Yoshimori, 1995 Assume there are two main models: the Anglo-American ShareholdersOther stakeholders

9 Source: Masaru Yoshimori, 1995 Assume there are two main models: the Anglo-American & EU ShareholdersOther stakeholders Anglo- American model European model

10 Source: Masaru Yoshimori, 1995 Assume there are two main models: the Anglo-American & EU ShareholdersOther stakeholders Anglo- American model European model

11 North America has Soviet style of elections for directors: VOTE FOR THE SLATE OR DON’T VOTE and it doesn’t really matter if you vote anyhow This WITHHOLD voting arrangement is called PLURALITY VOTING: ONE vote FOR and you are elected.

12 CEO COMPANY BOARD SHAREHOLDER AUDITOR Plurality Voting Chair/CEO SOX is designed to solve an American problem….. … the widely held company and the IMPERIAL CEO Some 65 Enron financial employees were ex-Arthur Anderson

13 CEO COMPANY BOARD SHAREHOLDER Plurality Voting Chair/CEO AUDITOR SOX is designed to solve an American problem….. … the widely held company and the IMPERIAL CEO

14 CEO COMPANY BOARD SHAREHOLDER Plurality Voting Chair/CEO AUDITOR SOX is designed to solve an American problem….. … the widely held company and the IMPERIAL CEO 1. Re-establish an independent audit function

15 Self Regulation of Public Accountants Removed Chairman William McDonagh former Federal Reserve Bank of New York president Audit Standard #1 Audit Standard #2 etc “Management used to own the auditor-client relationship – no longer! ” Senior Audit partner quoted in II May, 2004 THE OUTCOME….

16 ©David R Beatty 2007 The AUDIT function in North America has been re-built Independent audit committees; need for “financial expert” Audit committee hires auditor Auditors can only audit unless consulting contracts pre-approved Audit fees disclosed as well as non-audit fees Auditors can not join audited company for 3 years (“cooling off”) CEO/CFO certification of financial results Whistle blower processes required Chairman William McDonagh former Federal Reserve Bank of New York president

17 CEO COMPANY BOARD SHAREHOLDER Plurality Voting Chair/CEO AUDITOR SOX is designed to solve an American problem….. … the widely held company and the IMPERIAL CEO 2. Make directors independent of management 1. Re-establish an independent audit function 3. Make CEO/CFO sign off on finances

18 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determiantion France, Finland NetherlandsAustriaGermany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg 2 or 3 members 1/350% One-tier board Without co- determination With mandatory co-determination U.S., U.K., Switzerland, Belgium, Italy, Spain SwedenFrance Employee appointees Netherlands European board structures are very diverse….start with one-tier or two-tier variants

19 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determiantion France, Finland NetherlandsAustriaGermany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg 2 or 3 members 1/350% One-tier board Without co- determination With mandatory co-determination U.S., U.K., Switzerland, Belgium, Italy, Spain SwedenFrance Employee appointees Netherlands European board structures are very diverse….start with one-tier or two-tier ….then add co-determination variants

20 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determination France, Finland NetherlandsAustriaGermany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg 2 or 3 members 1/350% One-tier board Without co- determination With mandatory co-determination U.S., U.K., Switzerland, Belgium, Italy, Spain SwedenFrance Employee appointees Netherlands European board structures are very diverse….start with one-tier or two-tier ….then add co-determination variants

21 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determination France, Finland NetherlandsAustriaGermany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg 2 or 3 members 1/350% One-tier board Without co- determination With mandatory co-determination U.S., U.K., Switzerland, Belgium, Italy, Spain SwedenFrance Employee appointees Netherlands European board structures are very diverse….and some countries offer listing companies a choice i.e. France and Netherlands

22 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determination France, Finland NetherlandsAustriaGermany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg 2 or 3 members 1/350% One-tier board Without co- determination With mandatory co-determination U.S., U.K., Switzerland, Belgium, Italy, Spain SwedenFrance Employee appointees Netherlands European board structures are very diverse….and some countries offer listing companies a choice i.e. France and Netherlands

23 220101LNZXL492TSMW-P1 Two-tier board Without co- determination With mandatory co-determination Germany <1/31/350% Employee appointees Source: Corporate law statutes; McKinsey analysis Luxembourg And now there is an EU choice of great interest to large German companies 1. Smaller Supervisory Board (Germany requires 20) to Global co-determination 10 German trade unionists to 4 3. Appointment of the Management Board requires 2/3rds in Germany vs a majority vote

24 European and Anglo-American board structures, ownership, systems and staffing are significantly different…. Anglo/American model One tier boardsOne tier boards Dispersed ownershipDispersed ownership Few defencesFew defences Strong shareholder rightsStrong shareholder rights High use of market incentivesHigh use of market incentives ‘Independent’ boards‘Independent’ boards U.K. U.S. Source: McKinsey European model Two tier or one tier boardsTwo tier or one tier boards Dominant shareholdingsDominant shareholdings Multiple takeover defencesMultiple takeover defences Weak shareholder rightsWeak shareholder rights Low use of market incentivesLow use of market incentives ‘Insider’ boards‘Insider’ boards Denmark Germany France Belgium Sweden Netherlands Austria Finland

25 220101LNZXL492TSMW-P1 The Anglo/American model of governance has dispersed ownership Other investorsInstitutional Investors Board Management Other investors Stakeholders

26 220101LNZXL492TSMW-P1 The European model of governance has a significant controlling block Controlling Block Holders Institutional Investors Board Management Other investors Stakeholders

27 220101LNZXL492TSMW-P1 In the EU there are usually dominant block shareholders of the largest companies Average controlling block Source: Déminor; McKinsey analysis SwedenNetherlandsGermanyFranceBelgium Control Number of co.s: Sample based on: BEL20CAC40DAX30AEX25SX18

28 220101LNZXL492TSMW-P1 Source: Déminor; McKinsey analysis UK Market 3 29 FT30 SwedenNetherlandsGermanyFranceBelgium Control Number of co.s: Sample based on: BEL20CAC40DAX30AEX25SX18 In the Anglo-American model there is widely dispersed share ownership Average controlling block

29 European or ‘control’ model has ‘insider’ boards…. Anglo/American or ‘market’ model has ‘independent’ boards…. MARKET MODEL One tier boardsOne tier boards Dispersed ownershipDispersed ownership Few defencesFew defences Strong shareholder rightsStrong shareholder rights High use of market incentivesHigh use of market incentives ‘Independent’ boards‘Independent’ boards U.K. U.S. Source: McKinsey CONTROL MODEL Two tier or one tier boardsTwo tier or one tier boards Dominant shareholdingsDominant shareholdings Multiple takeover defencesMultiple takeover defences Weak shareholder rightsWeak shareholder rights Low use of market incentivesLow use of market incentives ‘Insider’ boards‘Insider’ boards Denmark Germany France Belgium Sweden Netherlands Austria Finland

30 220101LNZXL492TSMW-P2 JapanFranceGermanyUKU.S. 100%  Independent 'Insider' or unclassified 1 ControlMarket Number of co.s: Samples based on 100 Top CAC40 38 DAX30 29 FT S&P500 Source:Déminor; IRRC; Nippon Life; McKinsey analysis In the control model boards are largely insiders….

31 220101LNZXL492TSMW-P2 JapanFranceGermanyUKU.S. 100%  Independent 'Insider' or unclassified 1 ControlMarket Number of co.s: Samples based on 100 Top CAC40 38 DAX30 29 FT S&P500 Source:Déminor; IRRC; Nippon Life; McKinsey analysis In the market model boards are largely independent….

32 220101LNZXL492TSMW-P2 JapanFranceGermanyUKU.S. 100%  Independent 'Insider' or unclassified 1 ControlMarket Number of co.s: Samples based on 100 Top CAC40 38 DAX30 29 FT S&P500 Source:Déminor; IRRC; Nippon Life; McKinsey analysis In the market model boards are largely independent….

33 220101LNZXL492TSMW-P2 Stakeholder orientation varies dramatically by country…. Which would you have rather owned? Japanese companies: 1.Primacy of JOB SECURITY 2.Insider board – NO outside directors 3.No committees

34 ©David R Beatty 2002 Extraordinary diversity within English speaking nations…. SAME Board size Board diversity 10% female 9% female 17% female 6% female DIFFERENT Board terms 80% annual 100% annual 100% annual 100% staggered Director elections WITHOLD WITHOLD AGAINST AGAINST Chair vs CEO 80% combined 80% separate 90% separate 90% separate EDs vs NEDs only CEO only CEO 40% EDs only CEO Senior Independent Director X X YES X Term limits X TD Bank 9 year review X CIBC 12 year indep’t Precatory compensation Voting at AGM X X YES YES Accounts Quarterly Quarterly Half Yearly Half Yearly

35 35 Owner(s) Stakeholders The Board Hire CEO PAST Ensure accounts accurate Report to shareholders PRESENT Oversight of company FUTURE Involved with strategy Involved with talent pool The Fundamental Tasks of a Corporate Board Management

36 International Collaboration David R. Beatty O.B.E., CFA June 9, 2010


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