Presentation on theme: "EUROPEAN CORPORATE GOVERNANCE SESSION 5. Outline European relationships based approaches The role of equity markets Political and legal structures contrasts."— Presentation transcript:
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 CultureConsensus culture Market OrientatedNetwork orientated Relatively more Reliance on Equity Relatively more Reliance on Debt Stock Exchange Relatively LargeStock 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 POLICYPROCESSES RESEARCH ACTIVITIES IMPACTS DRIVERS BACKGROUND ANALYSIS USE OF SHAREHOLDERS RIGHTS 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 Banks Insurance Other Financial Households Non financial companies Government Foreign Source: Vitols (2005).
Weight of Pension Funds in the Economy and Financial Markets (2001) 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 Pre 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 UK SIP Sweden AP Rules Swiss Pensions Law Extension ISC Combined Code UK Italy Pension Reform & SIP Spanish Pension Reform Mandatory Proxy Voting Laws? UK Myners Review German SIP NL Tabaksblatt Code Austria SIP Belgium SIP German SIP UK Myners 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 Reform Processes in Europe Review Findings FRANCE ITALY SPAIN DENMARK Review Findings GERMANY SWITZERLANDSWEEDEN AUSTRIA NETHERLANDSEUROPEAN UNION NORWEGIA BELGIUM Vienot Report Memberships, Powers and Operations of the Boards nd Vienot Report Separation of Powers of the Chairman and CEO And disclosure of executive Remuneration 1999 Boards Report Governance of the Enterprise Draghi Reform Principles of Correct Administration 1998 The Olivencia Report Code of Ethics 1998 UK Cadbury Report 1992 OECD Principles of Corporate Governance The Baums Reports Recommendations that reflect changes in Corporate Law 2001 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 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 Preda Report Code of Conduct The Aldama Report Transparency and Security in the Markets 2003 Corporate Governance Principles International Best Practices 2004 The Norbis Committee Report Recommendations as supplement to existing laws 2001 Corporate Governance Report in Denmark The Cromme Code Regulation Austrian Code of Corporate Governance Framework on shareholder, Board, transparency and Auditing 2002 Source: Clarke T., (2006) UTS Centre for Corporate Governance
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 ofBoM Chair 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 plan 2.Defined transactions 3.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 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)
Activities of Supervisory Board Source: Joachim Heins-Bunde (2006)
Parmalat Source: Compiled from Milan Stock Exchange, Yahoo Finance, various media news sources.
Ahold Share Price Collapse Source: Compiled from Yahoo Finance (2006), various media news sources.
What Shareholders' Democracy? * Companies in the FTS Eurofirst 300 Index Source: Association of British Insurers: Deminor Rating
Dividends Number of Employees and Personnel Expenditure per Employee Source: Beyer and Hassel (2001)
The Distribution of net value added in large German firms, and LabourCreditorsGovernmentDividendsRetained earnings Change in % Source: Beyer J. and Hassel Anke (2001 : 320)
Penetration of Active Share Ownership in Some European Countries STATE OF LOCAL ACTIVISMCOUNTRIES 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 associationsDenmark, France, Germany, Netherlands Rather non-existentOther 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 Screening criterias Ethical Funds : USA Europe 1990 Engagement Engagement Overlay: UK, NL, BE Integration Integration: UK, NL, FR E nvironmental S ocial G overnance S ocial E nvironmental E thical 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.