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 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

Dynamic View of Share Ownership in Europe

PERFORMANCE RESPONSIBILITIES

POLICY PROCESSES

RESEARCH

ACTIVITIES

IMPACTS

DRIVERS

BACKGROUND

ANALYSIS

USE OF SHAREHOLDERSRIGHTS

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 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 11.5 10.9 9.0

Insurance 6.6 6.1 6.3 6.3 7.7 7.2 7.8 8.2 9.3 13.3 13.2

Other Financial

6.0 6.1 6.3 6.3 7.7 7.2 7.8 8.2 9.3 13.3 13.2

Households 19.9 19.4 18.8 18.4 18.1 17.5 16.9 16.5 14.4 13.0 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 2.0 1.8 1.8 2.0 1.3 0.7 0.6 0.6 0.8 0.9

Foreign 10.0 9.0 8.2 9.1 10.1 11.8 14.0 12.5 14.1 14.8 17.1

Source: Vitols (2005).

Weight of Pension Funds in the Economy and Financial Markets (2001)

0%

20%

40%

60%

80%

100%

120%

Italy

Germ

any

Sw

eden

Austr

ia

Belg

ium

Spain

Fin

land

Denm

ark

UK

Neth

erlands

Sw

itzerland

Share of GDP Share of Market Capitalization

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

20052004200320022001200019991998Pre - 1988 20052004200320022001200019991998

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”

2000 2001 2002 2003 2004 2005 2010

UK SIPSweden AP Rules

Swiss PensionsLaw Extension

ISCCombinedCode UK

ItalyPensionReform & SIP

Spanish PensionReform

Mandatory Proxy Voting Laws?

UK Myner’s Review

German SIP

NLTabaksblattCode

Austria SIP

Belgium SIP

German SIP

UK Myner’s 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 ReformProcesses in Europe

ReviewFindings

FRANCE

ITALY

SPAIN

DENMARKReviewFindings

GERMANY

SWITZERLAND SWEEDEN

AUSTRIA

NETHERLANDS EUROPEAN UNION

NORWEGIA

BELGIUM

Vienot ReportMemberships, Powers andOperations of the Boards1995

2nd Vienot ReportSeparation of Powers ofthe Chairman and CEOAnd disclosure of executive Remuneration 1999 Boards Report

Governance of the Enterprise1998-2004

Draghi ReformPrinciples of Correct Administration1998

The Olivencia ReportCode of Ethics1998

UK Cadbury Report1992

OECD Principles ofCorporate Governance

The Baums ReportsRecommendations that reflectchanges in Corporate Law2001

Swiss Code of Best PracticeRecommendations 2002

Swedish Code of Best PracticeReport of the Code Group 2002

Norwegian Corporate GovernanceCode of Practice 2004

Dutch Corporate Governance Code Principles and Best Practice Provision 2003

European Commission ModernisingCompany Law and Enhancing Corporate Governance 2003

Belgian Code on Corporate GovernancePrinciples to support long-term value creation 2004

Preda ReportCode of Conduct 1999-2004

The Aldama ReportTransparency and Securityin the Markets 2003

Corporate Governance PrinciplesInternational Best Practices 2004

The Norbis Committee ReportRecommendations as supplementto existing laws 2001

Corporate Governance Report in Denmark1992-2002

The Cromme Code Regulation2002-2003

Austrian Code of Corporate GovernanceFramework on shareholder,Board, transparency and Auditing 2002

Source: Clarke T., (2006)UTS Centre for Corporate Governance

The Dual System: Segregation of Duties

Board of Manageme

nt BoM

Supervisory Boar

dSBAGM

Company Management Joint accountability

Chair of Board coordination

Company oversightSupervision of

BoMChair 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 plan2.Defined transactions3.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 Councilmembers(blue collar)

UNIONreps

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

Audit Committee3-4 times/ year

Financial statements/ reporting

RMSSOXAuditors:1. Independence2. Nomination proposals3. Fees

Personnel Committee3-4 times/ year

Remuneration ContractsNominations

Strategy Committee1-2 times/ year

Corporate Strategy BU strategiesKey projects

Technology Committee1-2 times/ year

R&D priorities NBD

Internal Auditor

External Auditors

• Audit program•Financial statements• SOX

• Audit program• Key results

Pre meetingsWith ShareholdersRepresentatives

Plenary Sessions

• 1 times / year• 1 site visit

Discussion/ meetingsChair of Supervisory Board

– Chair Board of Management

Pre meetingsWith EmployeeRepresentatives

Source: Joachim Heins-Bunde (2006)

Parmalat

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

Ahold Share Price Collapse

Ahold Share Price Collapse

$0

$5

$10

$15

$20

$25

$30

$35

$40

2/01/2001 2/01/2002 2/01/2003 2/01/2004 2/01/2005 2/01/2006

Aug 2002: Ahold reports its first quarterly loss in 29 years.

February 2003: Ahold announces“significant accounting irregularities”at its US Foodservice, and questionable

consolidation of five 50/50 joint ventures. Release of 2002 accounts postponed. Van der Hoeven and Meurs resign

March-Dec 2003: Dutch gov. convenes a committee, to create a national code of corporate governance

Source: Compiled from Yahoo Finance (2006), various media news sources.

What Shareholders' Democracy?

0 20 40 60 80 100

Netherlands

Sweden

France

Spain

Switzerland

Average

Italy

Britain

Germany

Netherlands

Sweden

France

Spain

Switzerland

Average

Italy

Britain

Germany

* Companies in the FTS Eurofirst 300 IndexSource: Association of Brithish Insurers: Deminor Rating. * Companies in the FTS Eurofirst 300 Index

Source: Association of British Insurers: Deminor Rating

Dividends Number of Employees and Personnel Expenditure per Employee

0

20

40

60

80

100

120

140

160

180

200

1992 1993 1994 1995 1996 1997 1998

Expenditure per Employee

Employees

Dividends

Net Value Added

Source: Beyer and Hassel (2001)

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)

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,

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

1928 1980 20061970

Screening criterias

Ethical Funds :USA Europe

1990

EngagementEngagement Overlay:UK, NL, BE

IntegrationIntegration:UK, NL, FREnvironmental

SocialGovernance

SocialEnvironmentalEthical

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.