corporate governance comparison: germany, sweden and the usa tommy olsson benjamin wenzel max...

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


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


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


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


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


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:


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


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


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


Generali - remuneration

Salary board: 40%-50% variable

Year bonus plus long-term bonus

objective: Succes of the group (85%), individual objectives (15%)


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


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.


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


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%


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


Examination board 2/2

Major areas of responsibilities:– Monitoring financial reporting– Monitor the internal audit controls – Review and monitor the auditor

36


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)


1. The board of directors - Roles – Hire, fire and compensate

CEO– Recruitment of future board

members– Evaluation of management– Ensures company operates

lawfully



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



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



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



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)


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)


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)


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


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)


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)


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)


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

8. Aktiemarknadsnamnden (2013) Retrieved under:

http://www.aktiemarknadsnamnden.se/in-english/about-the-swedish-securities-council__10

9. Bolagsstyrning (2013) Retrieved under:

http://www.bolagsstyrning.se/media/58398/to-regler%20f%C3%B6r%20vissa%20handelsplattformar%202012%20(ren)%20(final%20120327).pdf

10. Businessweek (1993) Retrieved under:

http://www.businessweek.com/stories/1993-12-19/why-volvo-kissed-renault-goodbye

11. Corporate Governance Board (2013) Retrieved under:

http://www.corporategovernanceboard.se/corporate-governance/history;

http://www.corporategovernanceboard.se/corporate-governance/swedish-corporate-governance/swedish-corporate-governance-model;

http://www.corporategovernanceboard.se/corporate-governance/swedish-corporate-governance/swedish-corporate-governance-model/ceo

http:www.corporategovernanceboard.se/corporate-governance/swedish-corporate-governance/swedish-corporate-governance-model/shareholders'-meeting;

12. Deloitte (2013) Retrieved under:

http://www.corpgov.deloitte.com/site/SweEng/nomination-committee-sweng/ http://www.corpgov.deloitte.com/site/SweSe/revisionsutskott

http://www.corpgov.deloitte.com/site/SweEng/audit-committee/

http://www.corpgov.deloitte.com/site/SweEng/responsibility-of-the-board/

13. The Economist (2003) Retrieved under:

http://www.economist.com/node/2273049

14. Ericsson (2013) Retrieved under:

http://www.ericsson.com/thecompany/corporate_governance

http://www.ericsson.com/thecompany/investors/financial_reports/2012/annual12/governance/regulation-and-compliance

http://www.ericsson.com/thecompany/corporate_governance/remuneration

15. Ericsson History (2011) Retrieved under:

http://www.ericssonhistory.com/company/ericsson-as-business/Ericsson-and-ownership-control-1990-2011/

References

16. Finansinspektionen (2013) Retrieved under:

http://www.fi.se/

17. Norden (2009) Corporate governance as a source of competitiveness for Nordic firms Pp. 22 & 30 Retrieved under:

http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1514217&fileOId=1517220

18. Davies, Hopt, Nowak,van Soling (2013) Corporate Boards in Law and Practice: A Comparative Analysis in Europe Pp. 623-24

19. Thompson & Conyon. Pp. 290. & 298. Corporate governance + Mechanisms & Systems.

20. Investopedia (2013), retrieved under : http://www.investopedia.com/terms/c/corporategovernance.asp

21. Deloitte (2013), retrieved under http://www.corpgov.deloitte.com/site/gerde/corporate-governance-in-Deutschland/

22. Gesetze im Internet, Bundesrecht (2013), retrieved under

http://www.gesetze-im-internet.de/bundesrecht/mitbestg/gesamt.pdf

http://www.gesetze-im-internet.de/bundesrecht/drittelbg/gesamt.pdf http://www.bmj.de/SharedDocs/Downloads/DE/pdfs/Gesetz_zur_Modernisierung_des_Bilanzrechts.pdf?__blob=publicationFile

23. Corporate Governance code (2013), retrieved under: http://www.corporate-governance-code.de/index.html

24. Siemens (2013), retrieved under http://www.siemens.com/investor/pool/en/investor_relations/corporate_governance/declaration_of_conformity_2013_en.pdf

25. Telekom (2013), retrieved under http://www.telekom.com/konzern/mitarbeiter/diversity-frauenquote/5186

26. Generali (2013), retrieved under www.generali-deutschland.de/online/portal/gdinternet/de/content/311198/979130

27. Bundesfinanzministerium (2013), retireved under http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/

28. Kodex für Familienunternehmen (2013), retrieved under http://www.kodex-fuer-familienunternehmen.de/index.html

29. Codes (2013), retrieved under: http://www.ecgi.org/codes/documents/code_am_companies_apr2005_de.pdf

corporate governance comparison: germany, sweden and the usa tommy olsson benjamin wenzel max...

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