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Corporate Governance comparison: Germany, Sweden and the USA
Tommy OlssonBenjamin WenzelMax Riemschneider January 13th 2014
2
Agenda
1. Introduction 2. Corporate governance in Germany3. Illustrative example: Generali AG4. Corporate governance in Sweden5. Scandinavian corporate governance scandals6. Corporate governance in the USA 7. Illustrative example: Motorola Solutions Inc.8. Conclusion
Introduction
Comparison of Germany, Sweden and the USA in the following areas:– Board system– Corporate ownership– Takeovers– Major legislation
Corporate Governance in Germany
Corporate Governance Definition
The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community.
Source: Investopedia (2013)
Framework in Germany
Rights of Shareholders Takeovers Examination board Supervisory board Laws Regulatory Institutions Codex
Rights of Shareholders
Participation in annual general meeting
Decisions regarding supervisory board members, choosing of the auditors and use of the annual profit
Stockholders > 5% can set up topics during the general meeting
Source: Deloitte – Corporate Governance Deutschland (2013)
Takeovers
Board has no right to avert a takeover
Exceptions: Search for a « white knight »
Measures to prevent a takeover granted by general meeting
Stocklisted companies have to disclose takeover obstacles in annual report
Source: Deloitte – Corporate Governance Deutschland (2013)
Examination board
9th May 2009 - Bilanzrechtsmodernisierungsgesetz – BilMoG
Capital market oriented companies need at least one independant supervisory or examination board member with knowledge in auditing
Source: Deloitte – Corporate Governance Deutschland (2013)
Supervisory board
BilMoG: concrete tasks for supervisory board: Surveillance of the intern control system, risk
management and the annual auditing
>500 employees proportional election by stockholders and employees
Supervisory board decides board members
Source: Deloitte – Corporate Governance Deutschland (2013)
Laws
„Gesetz über die Mitbestimmung der Arbeitnehmer(Mitbestimmungsgesetz - MitbestG)“
„Gesetz über die Drittelbeteiligung der Arbeitnehmer im Aufsichtsrat(Drittelbeteiligungsgesetz - DrittelbG)“
„Gesetz zur Modernisierung des Bilanzrechts (Bilanzrechtsmodernisierungsgesetz –BilMoG)“
Source: Gesetze im Internet – Bundesrecht (2013)
Regulatory institutions
German Reporting Standards Committee e.V. (DRSC)
German federal financial supervisory agency (BaFin)
Test Center for accounting (DPR)
Deutsche Corporate Governance Kodex system of rules created by the Federal Republic of
Germany that contains recommendations and ideas for good conduct, control and management of a company, especially for companies that are listed-on the stock exchange.
Source: Corporate Governance Code (2013)
Deutsche Corporate Governance Kodex Adresses all main critical points of German corporate
governance such as
Insufficient consideration of stockholder interests The dual corporate structure of board and supervisory
board Missing transparence of German companies Insufficient independance of German supervisory boards
Codex is only recommendation about best practice, no law, not legally binding
Source: Corporate Governance Code (2013)
History
Kontrolle – und Transparenzgesetz – first law in Germany regarding Corporate Governance, in 1998– e.g. accountability of supervisory board, board and auditors was
extended– publishing the risk structure of a company in the annual report
2001 creation of government commission “Deutscher Corporate Governance Kodex”
financed by the economie, independent from the government
free in the decision what should be included in the Codex members are not politicians “Corporate Governance Kodex” in 2002 and handed it over
to the government
Source: Corporate Governance Code (2013)
History
Every year, the commission meets at least once and discusses possible changes of the Codex– e.g. in 2009 more attention to diversity in board, hence
more women
limitation of variable salary part of a board manager should have an upper limit – recommendation
application in the economy:
Source: Corporate Governance Code (2013)
Examples
Siemens “Declaration of Conformity by the managing
board and the supervisory board of Siemens Aktiengesellschaft with the German Corporate Governance Code”
Telekom More women in higher positions
(at least 30% of management positions)
Source: Siemens (2013), Telekom (2013)
Generali AG
Generali Deutschland:
Deutsche Corporate Governance Kodex
Every stocklisted company– yearly compliance statement
Generali AG
« Since the publication of last year compliance statement according to §161 AktG , the Generali Deutschland Holding AG has agreed to the recommendations of the Deutscher Corporate Governance Kodex with exceptions. »
Source: Generali Deutschland (2013)
Generali – Examples for exceptions
« An individual presentation of the remuneration of the supervisory board members as well as their possible other business relationships will not be carried out. »
Structure of remuneration of supervisory board is shown in annual report
Showing amount no valuable additional information
Source: Generali Deutschland (2013)
Generali – examples for exeption
« Retrospective changes of the objectives are not excluded »
Possible major changes
Reconsideration of objectives may be useful
« Objectives regarding the composition of the supervisory board will not be determined »
Best knowledge and competence shall be criteria, not social or cultural influence
Source: Generali Deutschland (2013)
Generali - remuneration
Remuneration is aimed at sustainable success
Long-term stability of the company is the objective
No incentives to enter high risk positions through variable remuneration parts
Source: Generali Deutschland (2013)
Generali - remuneration
Salary board: 40%-50% variable
Year bonus plus long-term bonus
objective: Succes of the group (85%), individual objectives (15%)
Source: Generali Deutschland (2013)
Generali - Compliance
Ethics – codex – correctness, honesty, impartiality, professionalism
Behavioral codex – duties for employees:confidentiality, appraisal interview
Trainings for better implementation
Compliance-Officer – contact for compliance questions
Lawyers as ombudsmen– suspicion of compliance irregularities
Source: Generali Deutschland (2013)
Alternatives
Additional to Deutscher Corporate Governance Kodex (DCGK):
Public Corporate Governance Codex of the Federal State Governance Codex for family companies Corporate Governance Codex for Asset Management-
companies
Source: Bundesfinanzministerium (2013), Kodex für Familienunternehmen (2013)
Research institutions
Berlin Center of Corporate Governance (BCCG)
Center for Corporate Governance - HHL Leipzig
Source: Berlin Center of Corporate Governance(2013), Center for Corporate Governance Leipzig (2013)
Summary
Corporate governance in Germany Dual system Participation and election – supervisory board No election of board DCGK – « comply or explain » Mulitple laws and institutions Growing importance Application of codex
Corporate Governance in Sweden
Stylized governance characteristics of the Nordic countries
Denmark Norway Sweden Finland
Ownership concentration
High Medium Medium Low
Typical Owner FamiliesFoundationsCoops
GovernmentsForeign
Business groups
InstitutionsForeign
Board system Hybrid System (Two Tiers)
Hybrid System (Two Tiers)
Hybrid System (Two Tiers)
One Tier
Mangers on the board No Yes Yes Yes
Employee representation
30% 30% 25% 0%
Gender Quota None 40% None None
Average CEO pay ($) 800,000 500, 000 1, 500, 000
500, 000
Performance based 20 % 30 % 50 % 20 %
Listed firms (2008) 216 209 341 126
Source: Thompson & Conyon (2013)
1990’s – The establishment of Swedish Corporate Governance The Swedish Shareholders Association published the first
Swedish ownership policy in March 1993.– Set of guidelines for the ownership role within listed companies. – Most significant Swedish institutional investors followed and issued
similar guidelines.– First Practical implication in the Volvo Renault deal in 1993.
Several new compositions of rules, guidelines and recommendations for Corporate Governance followed, from example:– The Swedish Industry and Commerce Stock Exchange Committee – The Swedish Securities Council– The Stockholm Stock Exchange – The Swedish Academy of Directors (Good Board Practice, 2003)– The Swedish Company Act (2005)
30Source: Corporate governance board (2013)
The Swedish System of Governance The four governance
bodies1. The Shareholders'
Meeting2. The Board of
Directors3. The Chief Executive
Officer The Controlling
Body:4. The Auditor,
appointed by the Shareholders' Meeting.
31Source: Corporate governance board (2013)
The Rights of Shareholders 1/2
Each shareholder has the right to participate in the annual general meeting (AGM)– Any shareholder can add
topics to agenda– Shares with or without
voting rights – Majority voting system– Proxy right
32Source: Corporate governance board (2013)
The Rights of Shareholders 2/2
Responsibilities:– Elect members of board, – Elect auditors. – Set fees also at the AGM.
Extraordinary general meeting– Requested by a shareholder minority of at least 10%
33Source: Corporate governance board (2013)
Nomination Committee
Elected by the annual general meeting (AGM)
Important link in looking after shareholders interests at AGM.
Responsibilities: Propose candidates for the
following positions:– The chairman of the board– Board of directors – Auditors. – Suggests fees and
remunerations for each position
34
Nomination Committee
Source: Corporate governance board (2013)Deloitte (2013)
Examination board 1/2
Under Aktiebolagslagen The examination board
must be made up by directors from the Board of Directors.– Must at least consist of two
members from the board, who may not be employees. Eg. CEO
– Requirement to have at least one independent and unattached member with experience in accounting or auditing
35
Source: Corporate governance board (2013)Deloitte (2013)
Examination board 2/2
Major areas of responsibilities:– Monitoring financial reporting– Monitor the internal audit controls – Review and monitor the auditor
36
Source: Corporate governance board (2013)Deloitte (2013)
Board of Directors 1/2
Swedish corporate government system:– Third alternative to the unitary and
dual system– Mandatory employee representation
(at more than 35 employees)– Non executive members
Main Responsibilities:– Elect the CEO– Supervise the CEO’s day-to-day
work– Supervise entire management day-
to-day work– Strategic decisions– Carries the ultimate responsibility
37Source: Corporate governance board (2013)Deloitte (2013)
Board of Directors 2/2
Consequences of Swedish system– More power than traditional
supervisory board– Balanced by the absence of
executive power as in unitary boards
38Source: Corporate governance board (2013)Deloitte (2013)
CEO – Chief Operating Officer
Subordinated the Board and AGM
Responsibilities:– Elects executive
management – Reports to the board– Runs the day-to-day activities
Restrictions:– May be member of the Board,
but not as chair– Receives relatively low and
fixed pay
39
Source: Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013)Deloitte (2013)
Laws and guidelines 1/2
Swedish corporate governance rests upon the two following legislations:– The Swedish Companies Act
(Sw: Aktiebolagslagen (ABL)January 2006 ) Involves basic rules of the company's organization
– Eg. Defining the governing bodies, their tasks and the responsibility of each position
– The Swedish Corporate Governance Code (“The Code” 2010) Serves as a complements to the law with rules More demanding “Comply or explain”
Additional guidelines:– “Guidelines for Good Board Practice” (January 2003)
40
Source: Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013)Deloitte (2013)
Regulators
Financial Supervisory Authority (Finansinspektionen)
The Swedish Securities Council (Aktiemarknadsnämnden)
41
Source: Aktienamnden (2013)Finansinspektionen (2013)
Take-over rules
The Swedish Code must follow the standards set up by EC Takeover Directive (2004/25/EG)
Focus of legal rules:– Protection of minority owners– Healthy restructuring processes.
Responsibility of Board:– No right to avert takeover unless decision from the Annual
General Meeting. Rules of defense mechanism:
– “May not take measures which are intended to impair the conditions for making or implementing the takeover bid.”
– Approval from AGM, allows to implement strategy to avert a takeover as long as it do not break the first rule.
– May search for “White Knight”
42
Source: Bolagsstyrning (2013)Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013)
Volvo – Renault Deal 1/2
Volvo Chairman Per Gyllenhammar and Renault General Director Louis Schweitzer worked out deal to merge Volvo and Renault– Planned for three years, however
without the involvement of managers nor shareholders.
– No benefits were proven for the shareholders in Volvo,
– Leaks stated that profit was suffering from the proposed merger.
43
Source: Corporate governance board (2013) Businessweek (1993)
Volvo – Renault Deal 2/2
Shareholder reaction:– Feared merger would depress Volvo shares– Golden Share entitlement of French Government– No guarantees of Renaults privatization– Midlevel-managers disapproved and leaked unbalance in
technology sharing Result:
– Volvo CEO Sören Gyll and other top-managers, ”disposed” Per Gyllenhammar as Chairman through the support of major investors.
– Newly created guidelines in Corporate governance helped shareholders pull the hand break for the deal.
44
Source: Corporate governance board (2013) Businessweek (1993)
Skandia Scandal 2003
At the time he biggest Nordic Insurance Company
Fraud of leadership:– The CEO , L.E. Peterson and board of directors,
revealed for shareholders that they lifted salaries for $ 37 million
– L.E. Peterson however secretly lifted the double amount.
– Acquired luxury apartments for family and friends at the expense of Scandia.
Consequences:– Chairman of Scandia fired for not having monitored
the CEO properly. – Scandia already hit by financial crisis, suffered
crashing stock prices, and later lowered credit rating.
45Source: The Economist (2003)
46
Corporate Governance of Ericsson
Source: Ericsson (2013)
Corporate Governance of Ericsson Overview Biggest shareholders:
– Wallenberg group 20%– Handelsbanken 20%
Board:– 12 Members plus Chair
Management: 1 Spot – CEO Trade Unions: 3 Spots Wallenberg Group: 2 spots Handelsbanken: 2 spots AGM 4 spots (often reserved for
foreigners)
– Members receives a fixed fee– 4 Women on board
47
Source: Ericsson (2013)Ericsson History (2011)Norden (2009)
Ericsson Remuneration
Remuneration at Ericsson is based on the principles of– Performance– Competitiveness – Fairness
For senior management the total remuneration consists of:– Fixed salary– Short-term variable remuneration– Long-term variable remuneration– Pension– Other benefits
48Source:Ericsson (2013)
Corporate Governance in the USA
Corporate governance in the USA
1. The board of directors - Introduction – Primary mechanism of control in US firms
Ensures firm follows the shareholders best interests
– Elected by the shareholders– Variable size (average of about 10)– CEO almost always part of the board
50Source: Thomsen, Conyon (2012)
Corporate governance in the USA
1. The board of directors - Roles – Hire, fire and compensate
CEO– Recruitment of future board
members– Evaluation of management– Ensures company operates
lawfully
51Source: Thomsen, Conyon (2012)
Corporate governance in the USA
1. The board of directors - Structure– Executive and non-executive directors
Executive directors (≈ 20%):– Decision making regarding company strategy– Plans for implementing strategies– Typically CEO and CFO
Non-executive directors (≈ 80%):– Chief focus on shareholder interest– Ratify large financial decisions– Typically also work in management of other entities
Meant to create checks and balances– CEO cannot set own salary
52Source: Thomsen, Conyon (2012)
Corporate governance in the USA
1. The board of directors - Structure– Committees
Mostly made up of non-executive directors Examples: Audit, compensation, governance, etc.
– Chairperson Duality Good or bad?
– Quicker decision making– Conflict of interest
53Source: Thomsen, Conyon (2012)
Corporate governance in the USA
2. Corporate Ownership– Many small owners
All owners above 5% must be reported
Number of shares held by board of directors is reported
Leads to agency theory problems
– Weak owners and strong managers
– Low level of motivation for shareholders to act
54Source: Thomsen, Conyon (2012)
Corporate governance in the USA
2. Corporate Ownership– Who owns US publicly trade
firms? Historically individuals and
households Role of institutional investors
– 1950 – 6.1% of equity– 2009 – 50% of equity
Example: GE– As of 2009: 10,672,871,990
shares– Largest shareholder: BlackRock
Inc. 573,904,247 (5.4%)
55Source: GE, Thomsen, Conyon (2012)
Corporate governance in the USA
3. Executive compensation– High overall level of pay
Typically 50% or more based on stock options 350x more than average worker in 2012 SEC considering adding CEO-average worker ratio in annual
reports
– Largely incentive based compensation as means of motivation
CEO’s in theory increasingly acting in shareholder interests
– Exponential growth since the 80’s…reasons for increase? Increased board influence Executive labor market
56Source: Forbes (2013), AFL CIO (2014), Thomsen, Conyon (2012)
Corporate governance in the USA
3. Executive compensation– Forbes – Two Decades of CEO Compensation– 1989 – 2,5 Mill USD– 2007 – 17 Mill USD– 2012 – 10,5 Mill USD
57Source: Forbes (2013)
Corporate governance in the USA
3. Executive compensation– Example:
Highest paid CEO of 2012 – John Hammergren Total compensation of $131,019,000
58Source: Forbes (2013)
Million $USD
Base Salary 1.66
Bonus 4.65
Other 12.76
Stock Gains 112.12
Total 131.19
Corporate governance in the USA
4. Takeovers– Fairly common in the US– Most firms utilize takeover deterrents
Example: poison pill, golden parachute
– Recent takeover examples: Motorola Mobility taken over by Google
– 12.5 Billion $USD Attempted Netflix takeover
– Poison pill deterrent preventedtakeover
59Source: Time (2012), CNN Money (2012), Thomsen, Conyon (2012)
Corporate governance in the USA
5. Legal aspects of corporate governance– The US Securities and Exchange Commission (SEC)
Created in 1934 Responsible for regulating publicly trade firms Steep fines for banks following crisis
– Example: Insider trading Operation Perfect Hedge
– Hedge fund managers and a Dell employee– Inside contact fed information to the hedge funds– Multi-million dollar fines and/or prison sentences
60Source: Reuters (2012), Thomsen, Conyon (2012)
Corporate governance in the USA
5. Legal aspects of corporate governance– The Sarbanes-Oxley Act, 2002
Law for publicly traded companies Increased transparency and compliance CEO and CFO certify financial reports
– The Dodd-Frank Act, 2010 Reaction to financial crisis Promotes financial stability, consumer
welfare Increased transparency Examples of major changes:
– Establishment of risk committees for non-financial companies
– Additional disclosures regarding organizational structures
– Shareholders vote on executive pay (at least every three years)
61Source: Thomsen, Conyon (2012)
Illustrative example: Motorola Solutions Inc. Board Governance Guidelines
– Sets guidelines for all things related to the board and corporate governance including:
Number of members: Less than 16 Share of managers: 66% non-executive members Number of meetings: 6 board meetings per year Number of committees and how they are elected Stocks of Members: need to own at least 5x their board
salary in shares at all times while members
62Source: Motorola Solutions Inc. (2013)
Illustrative example: Motorola Solutions Inc. Committee
Structure– 4 committees:
Audit Governance Compensation Executive
63Source: Motorola Solutions Inc. (2013)
Conclusion
Conclusion
Germany Sweden USA
Ownership concentration
High Medium Low
Typical Owner Institutional Investors, Banks
Business groups Individuals, Institutional investors
Board system Dualistic Hybrid System (Two Tiers)
Single
Managers on the board
Yes Yes Yes
Employee representation
Up to 50% 25% Up to 33%
Average CEO pay ($) 6 000 000 1,500,000 10,500,000
Performance based 50% 50 % 66%
Source: Forbes (2012), Thomsen, Conyon (2012)
Fragen?Frågor? Questions?
References
1. http://www.forbes.com/lists/2012/12/ceo-compensation-12_John-H-Hammergren_ESV7.html
2. http://www.forbes.com/lists/2012/12/ceo-compensation-12-historical-pay-chart.html
3. http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-You/CEO-to-Worker-Pay-Gap-in-the-United-States/Pay-Gaps-in-the-World
4. http://money.cnn.com/2012/05/22/technology/google-motorola/
5. http://business.time.com/2012/11/07/corporate-raiders-beware-a-short-history-of-the-poison-pill-takeover-defense/
6. http://www.reuters.com/article/2012/01/18/us-insidertrading-arrests-idUSTRE80H18920120118
7. http://www.motorolasolutions.com/US-EN/Home
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http://www.aktiemarknadsnamnden.se/in-english/about-the-swedish-securities-council__10
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http://www.bolagsstyrning.se/media/58398/to-regler%20f%C3%B6r%20vissa%20handelsplattformar%202012%20(ren)%20(final%20120327).pdf
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http://www.economist.com/node/2273049
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http://www.ericsson.com/thecompany/corporate_governance/remuneration
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http://www.ericssonhistory.com/company/ericsson-as-business/Ericsson-and-ownership-control-1990-2011/
References
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