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EUROPEAN CORPORATE GOVERNANCE

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Presentation on theme: "EUROPEAN CORPORATE GOVERNANCE"— Presentation transcript:

1 EUROPEAN CORPORATE GOVERNANCE
SESSION 5 EUROPEAN CORPORATE GOVERNANCE

2 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

3 European vs Anglo-Saxon
European Corporate Governance: Emphasis on co-operative relationships and reaching consensus Anglo-Saxon Corporate Governance: Emphasis on competition and market

4 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

5 Dynamic View of Share Ownership in Europe
PERFORMANCE RESPONSIBILITIES POLICY PROCESSES RESEARCH ACTIVITIES IMPACTS DRIVERS BACKGROUND ANALYSIS USE OF SHAREHOLDERS RIGHTS OUTCOMES Source: Eurosif Research 2007

6 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.

7 Distribution of Share Ownership in German Publicly Traded Companies
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 10.9 9.0 Insurance 6.6 6.1 6.3 7.7 7.2 7.8 8.2 9.3 13.2 Other Financial 6.0 Households 19.9 19.4 18.8 18.4 18.1 17.5 16.9 16.5 14.4 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 1.8 1.3 0.7 0.6 0.8 0.9 Foreign 10.0 9.1 10.1 11.8 14.0 12.5 14.1 14.8 17.1 Source: Vitols (2005).

8 Weight of Pension Funds in the Economy and Financial Markets (2001)
Source: EUROSIF Active Share Ownership in Europe: 2006 European Handbook

9 Internationalization of Pension Equity Investments End 2006
Source: Eurosif research 2007

10 Recent Flurry of CG Codes in Europe
2005 2004 2003 2002 2001 2000 1999 1998 Pre France Spain Netherlands UK Belgium Germany Italy Ireland OECD ICGN Portugal Denmark Germany I Germany II Greece Sweden Austria Switzerland I Switzerland II Finland Norway Source: EUROSIF “Active Share Ownership in Europe: 2006 European Handbook” .p 19

11 Laws and Codes Encouraging Active Share Ownership in Europe
2000 2001 2002 2003 2004 2005 2010 UK SIP Sweden AP Rules Swiss Pensions Law Extension ISC Combined Code UK Italy Pension Reform & SIP Spanish Reform Mandatory Proxy Voting Laws? UK Myner’s Review German SIP NL Tabaksblatt Code Austria SIP Belgium SIP EU-wide SIPs? Source: EUROSIF “Active Share Ownership in Europe: 2007 European Handbook”

12 Insiders control of a company
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

13 Different Political, Legal, and Regulatory Structures
Company law Employee representation Stakeholders, shareholders Board structure Supervisory body independence and leadership Board committees Disclosure

14 Multiple Corporate Governance Reform Processes in Europe
Vienot Report Memberships, Powers and Operations of the Boards 1995 FRANCE 2nd Vienot Report Separation of Powers of the Chairman and CEO And disclosure of executive Remuneration 1999 Review Findings Boards Report Governance of the Enterprise Multiple Corporate Governance Reform Processes in Europe Preda Report Code of Conduct Draghi Reform Principles of Correct Administration 1998 ITALY SPAIN The Olivencia Report Code of Ethics 1998 The Aldama Report Transparency and Security in the Markets 2003 Corporate Governance Principles International Best Practices 2004 Source: Clarke T., (2006) UTS Centre for Corporate Governance Review UK Cadbury Report 1992 DENMARK Findings The Norbis Committee Report Recommendations as supplement to existing laws 2001 Corporate Governance Report in Denmark OECD Principles of Corporate Governance GERMANY AUSTRIA Austrian Code of Corporate Governance Framework on shareholder, Board, transparency and Auditing 2002 The Baums Reports Recommendations that reflect changes in Corporate Law 2001 The Cromme Code Regulation SWITZERLAND SWEEDEN NORWEGIA Swiss Code of Best Practice Recommendations 2002 Swedish Code of Best Practice Report of the Code Group 2002 Norwegian Corporate Governance Code of Practice 2004 NETHERLANDS EUROPEAN UNION BELGIUM Dutch Corporate Governance Code Principles and Best Practice Provision 2003 European Commission Modernising Company Law and Enhancing Corporate Governance 2003 Belgian Code on Corporate Governance Principles to support long-term value creation 2004

15 The Dual System: Segregation of Duties
Board of Management BoM Supervisory Board SB AGM Company Management Joint accountability Chair of Board coordination Company oversight Supervision of Chair of Supervisory Board coordination CONTROL of SB and BoM i.e. Information, recommendations to SB Preparation of SB meetings Corporate Governance Election/ remuneration of Business monitoring/ RMS Approval of : 1. Business plan 2.Defined transactions 3.Annual finalized statements Proposal of auditors Election of S - R Discharge of acts of SB and Appointment of Auditors Appropriation of net income Approval of capital increase Source: Joachim Heins-Bunde (2006)

16 The Dual system : Representation of Employees and Shareholders
Supervisory Board Shareholder Representative Employee Representative Independent outside expert Social Council members (blue collar) UNION reps 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) Source: Joachim Heins-Bunde (2006)

17 Activities of Supervisory Board
Audit Committee 3 - 4 times/ year ü Financial statements/ reporting RMS SOX Auditors: 1. Independence 2. Nomination proposals 3. Fees Personnel Committee Remuneration Contracts Nominations Strategy Committee 1 2 times/ year Corporate Strategy BU strategies Key projects Technology Committee R&D priorities NBD Internal Auditor External Auditors Audit program Financial statements Key results Pre meetings With Shareholders Representatives Plenary Sessions 1 times / year 1 site visit Discussion/ meetings Chair of Supervisory Board Chair Board of Management With Employee Source: Joachim Heins-Bunde (2006)

18 Parmalat Source: Compiled from Milan Stock Exchange, Yahoo Finance, various media news sources.

19 Ahold Share Price Collapse
Source: Compiled from Yahoo Finance (2006), various media news sources.

20 What Shareholders' Democracy?
* Companies in the FTS Eurofirst 300 Index Source: Association of British Insurers: Deminor Rating

21 Dividends Number of Employees and Personnel Expenditure per Employee
Source: Beyer and Hassel (2001)

22 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)

23 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,

24 Responsible Investment Evolution: Growth of ‘ESG’
Integration Integration: UK, NL, FR Environmental Social Governance Ethical Engagement Engagement Overlay: UK, NL, BE Sustainable Development Funds : France & Belgium Best of class approach Environmental Funds : Germany, Northern Europe, Switzerland Environmental criterias Screening and best of class approach Socially responsible funds : USA, Canada, UK, Switzerland, Northern Europe 1928 1980 2006 1970 Screening criterias Ethical Funds : USA Europe 1990 Source: Eurosif Research 2007

25 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.


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