The Rise of Shareholder Capi tal ism in Continental Europe?

The Commodi ficat ion of Corporate Cont rol and the Transformat ion of

European Corporate Governance

Bastiaan van Apeldoorn

Max Planck Institute for the Study of Societies Paulstrasse 3

50676 Cologne, Germany

Paper Prepared for the XVI I I World Congress of the International Pol i tical Science Association,

Qubec Ci ty, 1-5 August, 2000 (Panel SS 22, Comparing Corporate Behaviour in Continental Systems )

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Introduction In February of this year, telecommunications giant Mannesmann became the first German company to fall victim to a hostile take-over as the management of British Vodafone Airtouch succeeded in persuading the majority of Mannesmanns shareholders a large part of them being US and American funds - to exchange their shares for those of an enlarged Vodafone in the largest ($125 billion) hostile bid ever. In trying to fend off the bid, Mannesmanns CEO Klaus Esser did not invoke the argument of saving jobs or preserving the Rhineland model even if German trade union leaders and politicians, including Chancellor Schrder, did do so1 but instead time and again stressed that Mannesmann shareholders acting in their interest alone would be the arbiter of this battle for control. A lready before the take-over battle, Esser, in a clear act to please shareholders and the global capital markets, had announced that he would split up the company, selling the old industrial parts in order to concentrate on telecommunications as its core business. Other German conglomerates are restructuring in similar ways, w ith their managers increasingly adopting the discourse of shareholder value. 2 In France, the debate on le gouvernement denterprise probably started already a few years earlier, w ith captains of industry and banking calling to (partially) adopt Anglo-Saxon practices .3 In Italy the successful hostile take-over by Olivetti of its much bigger rival Telecom Italia showed that the stability of the traditional relationships between banks, industry and their owners within the corporate networks of Italian capitalism may no longer be guaranteed.4

The debate on what has come to be called corporate governance, which used to be a mainly US, and later, British, debate on how shareholders could regain control over mangers allegedly squandering their money, has thus also become a continental European debate. This raises the question whether we witness a transformation of established European corporate governance practices, that is, those practices that define the power relations within the company (between owners, managers, creditors, workers, etc.) and the way, and to which purpose, it is run. There is no single regime of corporate governance within Western Europe. Indeed, being shaped in part by national laws, regulations and traditions, we may identify different national varieties of corporate governance systems as a critical constituting element of what in recent political economy literature has been discussed as national varieties of capitalism (see, e.g., A lbert 1993; Crouch and Streeck 1997; Hall and Soskice forthcoming, Rhodes and Van Apeldoorn 1997; 1998, Soskice 1999). Notwithstanding this national variety, we may, using ideal-types, in fact usefully distinguish between two competing regimes of corporate governance (Rhodes and Van Apeldoorn 1998;Albert 1993; De Jong 1996; Jackson 1998).

On the one hand there is the shareholder model of the A tlantic (Anglo-Saxon) capitalist economies that is premised on the sovereignty of shareholders, exercising their power through the stock exchange, constituting a market for corporate control (allowing for hostile take-overs, etc.). The owners here are outsiders having an arms-length, market-based relationship to the firms and its management. The interests of the latter are clearly aligned with those of the share owners, whereas employees have no role in corporate decision-making. In this model, ownership constantly changes as a firms numerous owners buy and sell their shares on the market. As a result, the corporate strategy of the firm is becomes more oriented towards the maximisation of what is now called shareholder

1 As reported inter alia in the Financial Times of 20/ 21 November 1999 ( German chancellor weighs into battle over Mannsmann ). 2 The shareholder value concept has started to become hotly debated w ithin German corporate and financial circles from the late 1990s onwards, see, e.g., Shareholder Value ist in Deutschland noch in der Startphase , Frankfurter Allgemeine Zeitung, 26 August 1997, and, Die Aktie is das Produkt, und der Aktionar der Kunde, Frankfurter Allgemeine Zeitung, 27 March 1997. 3 See, e.g, Claire Blandin, Le debat sur le pouvoir dans lenterprise partage le monde patronal. Jean Peyrelevade: le modele anglo-saxon est irresistible , Pierre Drouin, La revanche des actionnaires. Un ouvrage sur le gouvernement des enterprises , Le Monde, 29 April 1995, 4 See Paul Betts, Olivettis earthquake shakes Italian capitalism , Financial Times, 22 February 1999, and Paul Betts and James Blitz, Italys capitalist renaissance? , Financial Times, 23 February 1999.

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value, which in turn is argued to imply an orientation towards short-term financial gain (see, e.g., A lbert 1993 and De Jong 1996). On the other hand, there is the stakeholder model prevalent in most continental European capitalist economies (and in particular w ithin the so called Rhineland countries), as well as in Japan, in which the firm and its management are more embedded in a network of interests, including those of banks and employees (Rhodes and Van Apeldoorn 1998: 408). Especially banks often play a direct role in corporate governance as finance in these corporate governance regimes is more bank-based than equity-based. Capital markets are relatively underdeveloped and ownership more concentrated than in the Anglo-Saxon countries. Owners, whether banks, industrial corporations or families, are insiders to the firm and maintain stable, long-term relationships with its management. Workers, moreover, often have a formal role in corporate decision-making through works councils and representation on company supervisory boards (again, particularly in Germany and other Rhineland countries). This stable community of interests (albeit stil l an asymmetrical one) is argued to lead to a more long-term orientation in which stable growth is prioritised over short-term profit-maximisation. Whether or not the financial markets are rightly accused of short-termism, it is clear that these models represent different power configurations between the different groups w ithin the firm, or more widely, between different social groups or classes (and segments of classes) w ithin society at large.

Abstracting from otherwise significant national diversity we may thus within Western Europe distinguish a common continental European model in opposition to the model prevalent w ithin the UK. Do the events reported above, then, indicate a shift away from this old model and towards a new shareholder capitalism in continental Europe, and would this imply a convergence on the Anglo-Saxon model? And, if so, what would be the causes and the consequences of such a historic transformation of continental European capitalism? These questions of course tie into the ongoing debate on globalisation and whether or not it challenges the existing national capitalist diversity and forces advanced capitalist countries again on a path of convergence (see, e.g., Berger and Dore 1996). This paper, presenting some preliminary results of an ongoing research project, will address these questions finding preliminary answers - through an analysis of the changing structures of ownership and control of Europes 100 largest non-financial companies. On the one hand, one would expect a considerable diversity in ownership and control pattern within Western Europe given the divergence in established corporate governance regimes discussed above. On the other hand, the ongoing process of European integration makes that the member-states of the EU (as well as, to a degree, associated countries such as Switzerland) increasingly form a single unit, an integrated transnational economic space with an emerging common supranational regulatory framework. It is thus that in this context the question of convergence or continued divergence gains particular relevance. Who owns and who controls Europes largest corporations many of which are transnationals that are the principal actors w ithin a globalising world economy - is a crucial constitutive element of Europes capitalist system(s). Who controls the modern large corporation in Western Europe: the shareholders, i.e., its owners; or, rather, the often non-owning management? And, critical in a European context, to the extent that the owners are in control, who are those owners, what are their interests, and how are their social relations to the firm and its management and workers structured? Structures of ownership and control are key to the constitution of corporate governance practices.5

5 Indeed, the debate on corporate governance if often framed in terms of a debate on ownership and control.

Rules of corporate governance structure the interrelationships between different groups (e.g., shareholders and managers) within the firm, specifying their rights and obligations, but is the structure of ownership and control that defines the identities and interests of the major actors in the first place, and on its turn is likely to shape the corporate governance regime. Indeed, in this paper I interpret changes in corporate governance practices in terms of a shifting balance of power between different groups of capitalists engaged in a struggle over corporate ownership and control. A lthough many recognise the centrality of ownership and control structures to corporate governance practices,

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and more generally to different forms of capitalism, little recent empirical research exists on these structures, in particular w ith regard to Europe. By analysing the changing ownership and control structures of Europes large-scale industrial capital this paper w ill argue that in (continental) Europe we are indeed witnessing the rise of a new shareholder capitalism that is changing traditional practices of corporate governance and can be expected to accelerate the erosion of Europes post-war models of nationally embedded capitalisms. However, I will also argue that w ithin continental Europe this shareholder capitalism will be in some significant respects of a different kind than that prevalent in the US and in the UK as some of the old features of European corporate governance systems such as the existence of so called large blockholders (holding a controlling percentage of the companys shares) - w ill be preserved, even if their meaning changes inasmuch as they are inserted into a new context. This new context is one in which corporate control is increasingly mediated by the (stock) market, that is, firms are increasingly subject to the discipline of the stock markets. As a preliminary conclusion I submit that we witness a process of partial convergence in which across Europe corporate control is increasingly exercised through the stock market and thus, I argue, subject to a financial (rather than an industrial) perspective. The remainder of this paper is organised as follows. The first section discusses the debate on ownership and control from both a historical and theoretical perspective. I w ill argue that in order to better understand what is at stake in the current transformation of European ownership and control structures we have to make a distinction between corporate control based on the traditional mechanism of voting power exercised at the meeting of shareholders, and control based on market power. This allows us to distinguish between different types of capitalist owners and ultimately to devise a typology of different forms of capitalism from the vantage point of different patters of ownership and control. The second section presents an analysis of the current ownership and control structures of Europes 100 largest corporations. The analysis shows that w ithin continental Europe concentration of ownership is still high, and takes the form of large blockholders (whether the state, other corporations or families) exercising a large degree of control over corporations. The third section then addresses the question of whether a new shareholder capitalism is indeed in the making in continental Europe, and whether we thus witness a shift away from the old continental stakeholder model. Again, from a perspective focusing on changes in ownership and control I w ill argue that we witness the relative decline of traditional owners and the rise of a new class of owners that is explicitly oriented towards maximising shareholder value. What this boils down to is a marketisation of corporate control as firms themselves become commodities bought and sold on the market. A lthough large blockowners will remain a feature of European corporate governance, they too are under increasing pressure from the growing capital markets. The final section will draw some conclusions from the analysis and outline an agenda for further research. Here I w ill argue in particular that the partial convergence that we can observe is related strongly to globalisation, a process that is crucially aided, however, by the changing role of the state. Ownership and Control in M odern Capi tal i sm: Property and Power Private property, defined and protected by property rights (and thus by the state) is central to any capitalist system. Private property does not only entail a claim over an object, but at the same time through that, also constitutes a claim vis--vis other persons inasmuch as they are excluded from the beneficial use of that object of property in the same way as the holder of that particular property right. In fact, in capitalism, where the most dominant form of property takes the form of capital, or the means of production, property relations are the most fundamental set of social relations, a set of social

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relations in which the relations between persons or groups of persons are expressed in relations between objects, or between claims on objects.6 Private property is thus connected to power, as well as to class.7

A lthough uncontroversial in the 19th century this thesis has been challenged throughout a large part of the 20th century. This challenge has been made on the basis of a thesis first advanced in the Modern Corporation and Private Property, a classic study written in the US of the Great Depression by Berle and Means (1991 [1932]). Their argument was that w ith the rise of the modern corporation, or joint-stock company, ownership has been separated from control due as the former had come into the hands of countless small shareholders unable to overcome their collective action problems, and thus unable to exercise any influence over the affairs of the firm of which they were the nominal owners. Control thus ended up in the ends of management. It has to emphasised that Berle and Means identified this at the time as a far from completed process. Indeed, in their sample of the 200 largest US companies they do identify many cases of so called minority control whereby a single owner holds such a large block of shares that (s)he can dominate decision-making at the Annual General Meeting (AGM) of shareholders inasmuch as the ownership of the remaining shares is so widespread that the (s)he cannot be outvoted. But w ithin the US, the dispersion and fragmentation of ownership was to steadily continue in the following decades, up to the point where in those countries in hardly large corporation did any person or institution hold more than 10 or even five per cent of the shares (Scott 1997). This trend, then, has been interpreted to lead to a separation of power from the property to which it used to be attached.

The classical functions of the capitalist, that of investing money in the production process and managing that production process (or labour process) in order to accumulate more money, were thus argued to have become divided between a passive mass of shareholders and a new class of professional managers whose rise had been bound up with that of the modern corporation. Freed from the constraints of ownership, managers were free to pursue strategies other than that of profit-maximisation, serving either their own material interests or a more public interest in which the corporation was seen less as the instrument of the owners (for the extraction of private gains) and more as a social institution serving the wider interests of the community. This managerial revolution (Burnham 1975 [1941]) has been interpreted by later theorists of industrial society (in contradistinction to capitalist society) to lead to the decomposition of the capitalist class as class domination itself would have ceased to exist with the separation of ownership and control (see, e.g., Dahrendorf 1959, and Bell 1965, and 1973). Managerialism has in fact for a long time been the dominant theory within economic sociology and business history, assumed to be the universal model of 20th century capitalism (see in particular the works of Chandler, e.g., Chandler 1977). The managerialist thesis has been subject to a number of challenging critiques by mostly Marxist writers , particularly in the form of the alternative theory of finance capital (following earlier theories by Lenin and Hilferding). This theory stated that concomitant to the rise the large industrial corporation we have witnessed the rise of large (monopoly) banks financing the expansion of those industrial corporations and playing an important role in the control over those corporations in their role as creditors, sometimes also as stable shareholders. Next to the financial and ownership ties, big banks and industrial corporations were also shown to be linked through personal ties of interlocking directorships (Zeitlin 1974; Fennema 1981), the occupants of which were seen as to form a new class of finance capitalists, of which the core was drawn from the major wealthy families, i.e., the property-owning capitalist class (Zeitlin 1974 and Soref and Zeitlin 1987: 60; see also Scott 1997). A lthough maybe rightly pointing out that the new intimate links between large corporations and big banks, both controlled by the same capitalist elite , I w ill argue below that Marixst and other critiques of managerialism often missed a more fundamental point, and that is, that even in the absence of the ownership of a large block of shares of a single firm, capitalist owners may, under certain institutional 6 This is what Marx referred to as the fetishism of the commodities (Marx, Capital Vol. 1) . 7 Indeed, class can be usefully seen as a historically constructed relationship to the means of production (Roy 1997).

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conditions, still exercise control through the market mechanism that the stock exchange at which the firms shares are traded, provides to them. From Managerial Capitalism to Shareholder Capitalism

Even if the reports on the death of the capitalist class pronounced by managerialists were certainly exaggerated as a clearly capitalist elite could still be identified as controlling US big business, a large degree of separation of ownership and control did indeed take place in the evolution of US capitalism from the 1920s to the 1970s (Scott 1997). The control exercised by the property-owning American capitalist elite was only weakly and often indirectly tied to ownership interests in Americas big corporations and more based on organisational devices such as interlocking directorships. Moreover, their control was indeed substantially limited by the power exercised by an increasingly autonomous managerial class. In the wake of Polanyis Great Transformation (Polanyi 1957) the post-war period became the era of what Kees van der Pijl (1998) has identified as corporate liberalism, or a capitalism in which not only financial capital had been bound to the interests of Fordist industrial capital, but in which also industrial capital had become embedded in a framework of public and semi-public regulation and planning, tasks that were carried out by a (state or private) managerial class separate from the property-owning bourgeoisie.8

This organised and managed capitalism also came to characterise the development of West-European capitalism (see, e.g., Schonfield 1965), such that according to some contemporary writers the 1960s, when the Golden Age reached its highpoint, also came to be the heyday of managerial capitalism (Dore, Lazonick and OSullivan 1999: 109). As we shall argue more explicitly in the next section, the managerial capitalism if indeed it would be the right term of Western (continental) Europe was of a different kind than that of the US as in fact in no European country except the UK could we observe the same dispersion of share ownership as across the Atlantic and large firms continued to be controlled by large blockholders owning a controlling minority (or often even a majority) of the shares (in addition continental Europe counted, and still, counts many large firms that are not even publicly listed at all but completely privately owned). This made for a different constellation of interests and for a different set of social relations between owners, managers and workers within European capital. These differences are often insufficiently appreciated as many have simply assumed that the separation of ownership and control identified by Berle and Means would be universal. In Europe, however, we did observe other institutional developments that did not so much erode the power of owners, but rather gave both mangers and employees a stake in the control of the corporations, w ith each of the three groups often being bound together in a stable set of institutionalised social relations. This, then, is the network-model (Rhodes and Van Apeldoorn 1998) identified in the introduction, which developed in post-war Europe, albeit it with significant national variations (see for a general overview, Rhodes and Van Apeldoorn 1998).

The development of post-war German capitalism is probably the proto-typical example of what has also been called managed capitalism (Ltz 2000; see also Streeck 1997). In the ream of corporate finance, this has been the most developed case of bank capitalism, with the banks as Hausbanken not only providing loan capital to firms but also taking large equity stakes and seats on their supervisory boards, thus tying themselves firmly to the long-term interests of the firm. Apart from banks, families also continued to play a role in this particular system of finance capitalism (Deeg 1999). Capital markets remained very underdeveloped and there was no market for corporate control. This allowed not only for a stable relationship between owners and management but also for the post-war institutionalised class compromise between capital and labour to take shape within the German corporate governance

8 In this context, Van der Pijl speaks of a cadre class (1998: chapter 5).

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regime. Thus, co-determination became a key feature of the German system, and a generally a stable coalition between workers and management could be observed. Developments in other major European countries were similar in some respects, and different in others. The statist mode of the development of French capitalism also meant that the state and its managers had a much larger role to play in not only governing the economy, but also governing individual enterprises, including a large role in corporate finance (Zysman 1983). A t the same time, due to ideological fragmentation, French trade unions were institutionally much weaker than their German counterparts, and the evolving French corporate governance regime did not see the emergence of anything like German co-determination. Thus, instead of a capital-labour coalition that characterised the German system, the French system was one of a coalition of state and big business and the amalgamation of the political and economic elites (Schmidt 1996). In Italy, labour was equally weak, but Italy also lacked the statism of French capitalism. In Italy, the typical pattern of ownership and control was that of family controlled corporations, w ith families holding minority stakes through holding or pyramid structures. Italian capitalism Other continental European countries show again other variations. Still a common pattern may also be distinguished. In all continental European countries, stock markets remained underdeveloped as large firms were either wholly or partially in the secure hands of families, banks or other corporations. Corporations, their minority or majority owners, their managers, and their workers thus were shielded from the potential pressures of the capital market. In Germany and other corporatist countries, this insulation from the capital market provided an environment in which an institutionalised class compromise could emerge providing labour with a real measure of control. These coalitions between management and workforce (and owners) could not be observed to the same extent in Latin countries. But still , here too the stability of ownership structures - w ith capital being bound to a particular firm - and of management, did provide for a different set of social relations between capital and labour than one that would obtain under the conditions of a shareholder capitalism. The continental European variety of (semi-)managerial capitalism was thus part and parcel of what Colin Crouch (1999) has called the mid-century social compromise that underpinned post-war European capitalism. The underdeveloped of capital markets contrasted to the US where the corporate revolution had taken place to such an extent that after the war almost all large firms were publicly listed and traded. But at least until the 1980s this trading did not really threaten managerial autonomy as there was not an active market for corporate control. Developments were similar in the UK. Hence, to sum up, in spite of important differences between the Anglo-Saxon and the continental European countries, and in spite of important differences between the latter, the post-war era was indeed one in which capital was bound, bound to nationally embedded and regulated production (even if societies were still clearly capitalist). A ll this may now be in the process of unravelling. What has been identified by some as an owners revolt (Van der Pijl 1998) and could indeed be interpreted as almost an anti-managerial revolution, started in the US in the 1980s, w ith Thatcherite Britain following in it footsteps, and may now be eroding Europes established regimes of corporate governance as well. In US, and to a lesser extent in the UK, the 1980s became the era in which the dormant market for corporate control was re-activated with a flurry of take-over activity and so called leveraged buy-outs that made many managers of underperforming (according to the stock market that is) firms nervous (Jensen 1997). This period also saw the phenomenon of so called shareholder activism, w ith unhappy shareholders clamouring for their rights (basically their right to a good financial return) vis--vis management. This role was later partly picked up by very large investors, whether rich individuals, or, increasingly, so called institutional investors, that is, mutual and pension funds, investment and insurance companies. In fact, the rise of these institutional investors became a distinct feature of the emerging Anglo-Saxon model, in the UK even more so than in the US, and has also led to the partial re-concentration of ownership. Funds, which basically manage assets for other people, now sometimes hold such large equity stakes in individual firms that they are increasingly also capable of exercising

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voice, even if that voice is still based on market-power, and thus the threat of exit. With the re-activating of US and UK capital markets, as reflected in the stock-market boom of the 1980s, and the concomitant rise of shareholder power (Useem 1993), we have also witnessed the rise of the so called shareholder value concept as what is supposed to be the guiding principle for corporate governance and corporate strategy. The concept of shareholder value defines the interests of shareholders not committed to any specific (industrial) enterprise. The value of shareholder value has been defined as financial value,... and more specifically cash (Black et al 1998: 8). A more technical definition of shareholder value is that of future cash flows discounted by the weighted average cost of capital (ibid.: 48). Crucial to the calculation of the cost of capital are the so called opportunity costs. This means concretely that an investment in a firm has to yield at the least the same returns as that capital investment could yield elsewhere plus any risk premiums that may exist for such investment. Investors may for instance also invest their money in bonds, that is in fixed-interest rate bearing securities. The latter is generally considered a much saver investment than buying stocks, hence for the latter a higher rate of return is demanded (which reflects the higher risk, and therefore the higher cost, of that investment). As indicated, there are signs that such a shareholder capitalism is also on the rise in continental Europe, although we still have to determine to which extent and in which form, which I w ill attempt to do in the final section of this paper. The question for now is a theoretical one and related to the following paradox. A lthough shareholder ownership is becoming more widespread, and more and more (for instance formerly state-owned) companies are becoming publicly traded, a re-uniting of ownership and control seems to be taking place as shareholders reclaim the powers attached to their property rights, or, at least, as firms increasingly gear their corporate governance practices towards the interest of (outside) shareholders. A new shareholder capitalism thus appears to go hand in hand with the very phenomenon that Berle and Means identified as the cause of the separation of ownership and control, the dispersal of share ownership. This puzzle can be solved if we keep in mind the principle that even if owners hold too small stakes in individual firms to exercise any significant direct control over that firm, they may still collectively exercise indirect control through the (stock) market, that is through their power to sell their shares. Modes of Corporate Control: Large Blockowners versus the Market In fact, I argue, one can identify two basic modes through which property, in the sense of capital ownership, is linked to power, in the sense of control over the use of that capital. The first refers to voting power as exercised individually by owners of large blocks of shares at the Annual General Meeting (AGM). This first mechanism is in fact the only one identified in the analysis of Berle and Means and later managerialists, as well as in the critiques of most their opponents. If we restrict our analysis to this mechanism, it will mean that given a sufficient dispersion of the share ownership of a particular firm, i.e. the absence of any large blockholders, a large degree of separation of ownership and control is indeed likely to occur. Largely ignored has been a second basic mode of corporate control, that which is constituted by the market power exercised collectively by the numerous (share) owners through their buying and selling on the stock market. As is clear from the argument, this power can be exercised in the absence of any substantial concentration of ownership with respect to individual corporations. Here the stock market functions as a market for corporate control, w ith the stock or share price as the regulating mechanism. A market for corporate control exists when property rights in the form of shares can be traded to such an extent that outsiders can gain control of other firms. This then contrasts with a situation in which the ownership of a corporation is firmly in the hands of insiders in the form of stable large blockholders. In the latter case management has in fact little incentive to care about the share price, whereas in a well-developed market for corporate control management is forced to pay close attention to the share price as an undervalued stock could mean that that firm falls victim to a hostile take-over

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(w ith the management being replaced). As emphasised in much of the business oriented corporate governance literature, the share price may thus function as a disciplining device vis--vis what otherwise would be a too autonomous management. To be sure, the two modes of corporate control are very different in kind. On the one hand, individual small (with respect to the individual firm) shareholders cannot exercise direct individual control. On the other hand, they posses a l iquidity and therefore a freedom that the large shareholders do not posses because their fate is tied up to that individual firm from which they cannot easily exit. In this respect, a useful distinction has been made between committed capital and liquid capital (Jackson 1998). In contrast to the latter, the former is bound to a particular firm and a particular set of institutionalised social relations that make up that firm. This in turn gives managers, and, under certain conditions, workers, some power vis--vis these owners. From the perspective of workers, having stable large blockowners that are insiders to the firm means that one has owners with whom can talk, negotiate, etc.. Here, the social relations between capital and labour are still personal whereas in the case of a pure shareholder capitalism they are completely market-mediated, and the owners of capital have become invisible behind the anonymous face of the market. Committed capital, then, is part of a social institution the firm and thus bound up in set of structures in which market relations are supplemented by, and indeed partly embedded in, non-market social relations. As indicated, it is the second basic mode of control that of control exercised through the market - that has been ignored in the historical debates on ownership and control. Only few writers have acknowledged that w ith the so called corporate revolution the firm itself has become a good that can be traded in the market (the phrase publicly traded already indicates this). The modern corporation is not only a producer of commodities, it is itself a commodity (Fitch 1971: 166), and the stock exchange is the place where this commodity is traded. Much more than a place where capital for new investment is raised, the stock exchange is a market for the circulation of property rights. It is true that the modern corporation has in a way socialised capital (Roy 1997 - as also Marx pointed out, Capital Vol. 3, Ch. 27) but it has socialised it mainly w ithin one class that with this organisational innovation gained a lot more liquidity. Rather than owning whole firms or large parts of them, the rich in the US and in the UK have increasingly come to hold large diversified portfolios instead, free to add pieces of firms of their choosing to their possessions.9

We may now also represent the two mechanisms in a 2x2 matrix combining different degrees of concentration of ownership with different degrees to which a market for corporate control has developed through the stock exchange. We are thus obtaining different ideal-types of forms of capitalism from a perspective that emphasises the centrality of ownership and control structures (property and power) to any capitalist system:

9 Contrary to the managerialist myth now once more at the heart of the popular discourse of shareholder capitalism that w ith the dispersion of share ownership, capitalist ownership is itself spread to such an extent that it leads to the dissolution of the capitalist class (as it is no longer restricted to any particular class), share ownership is in fact very unequally distributed in society (Henwood 1999).

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Degree of concentration of ownership Market for corporate Low High control Weak

Classical Managerial Capitalism (Berle and Means)

Weak owners Strong managers (high degree of separation between

ownership and control)

Post-war European Capitalism

Strong large blockholders & strong managers (plus often workers) in stable consensus oriented coalitions

(ownership and control linked through (minority) ownership)

Anglo-Saxon Shareholder Capitalism

Strong outside owners vulnerable

manages (ownership and control linked through the

market)

???

Strong In the upper-left quadrant, combining a low degree of ownership concentration with a weak market for corporate control, we would find the classical managerial capitalism of Berle and Means. Of course, this matrix ignores other possibilities of control such as that by banks or finance capital (which has been, as we saw, the focus of some Marxist critiques of managerialism). Nevertheless, I would suggest that it is indeed correct to view US capitalism of the Golden Age as indeed representing a limited managerial capitalism. In the upper-right quadrant, combining a high degree of ownership concentration with a weak market for corporate control, we would find the post-war continental European capitalism, that, w ith its different varieties, has been described above. We may argue that this also represents again at least a limited form of managerial capitalism but of a different kind than that of the Anglo-Saxon countries because of the continuing dominance of large blockholders. In the lower-left quadrant, combining a low degree of concentration of ownership with a strong market for corporate control, we would, I argue, find the present shareholder capitalism of the US and the UK. A lthough in recent decades a limited re-concentration of ownership in the form of large holdings by institutional investors has taken place in these countries, ownership of individual firms is still very dispersed and control is exercised collectively through the market. The lower-right quadrant, combining a high degree of concentration of ownership with a strong market for corporate control is still left open. On the face of it, this quadrant seems to represent an impossibility. Certainly, concentration of ownership and the development of a market for corporate control correlate negatively as the former prevents the liquidity that the latter needs. But, I would argue if the concentration of ownership is limited to minority control, the majority of the shares might still be subject to the treat of an outsider taking control. Moreover, there are also, as we shall see, other reasons why a publicly listed firm, even if it has stable dominant shareholders, may increasingly be subject to capital market pressures, i.e. to control exercised through the (stock) market. It is this possibility that we will examine when analysing the current transformation of European corporate governance.

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Money versus Productive Capital The above typology of capitalism by ownership and control structures, may also be related to different fractions of capital, and different, and potentially rival, fractions of the capitalist class. We have already made the distinction between committed capital and liquid capital, and thus between different groups of capitalist owners, w ith different interests and identities. More abstractly, following Marx distinction between productive capital and money capital, or industrial versus financial capital in their concrete manifestations within capitalist class formation (Capital, Vol. 2, see also Van der Pijl 1998), we may argue that committed capital represents productive capital inasmuch as it is bound up with and implicated in the production process itself, a process it can therefore also exercise direct control over (by controlling the management), but from which it at the same time is not free to extract itself. Owners have of liquid capital on the contrary, have diversified their holdings and do have this freedom. They will thus seek to maximise the returns of those holdings inter alia by selling and buying their property titles on the stock market, thus freely moving their investments from one firm to another (moreover they are also free to turn their stock in to other kinds of investments, such as bonds and other purely financial instruments whatever makes more money). In the latter case, then, ownership has come to stand completely outside the production process and assumes the form of money capital. As Marx already wrote, w ith the rise of the join-stock company, the owner of industrial capital, now a shareholder, comes to act as a pure money capitalist (Capital Vol. 3, Ch. 27). The shareholder value ideology of maximising returns (i.e. financial gain) as discussed above, indeed reveals a pure financial or money capital perspective. I would thus argue that what can be seen as the essence of shareholder capitalism, namely the commodification of capitalist ownership through the stock market and the market for corporate control (i.e., the phenomenon whereby firms have themselves become commodities), and thus the marketisation of the social relations between owners on the one hand and managers and workers on the other, w ill be bound up with the dominance of the money capital perspective, and of the financial as opposed to the industrial fraction of the capitalist class. What this may imply is a potential disembedding of industrial capital (which is by definition much more embedded than purely financial capital) as the money capital perspective comes to prevail w ithin industry, and therefore within production, itself. The question that now remains to be dealt with is whether such a rise of money capital vis--vis productive capital can also be observed in continental Europe, where traditionally stock markets have been underdeveloped and capital firmly bound to at least to an extent nationally embedded production. For this we will start by mapping and analysing current ownership and control structures among Europes largest firms, and examine to which extent changes here reveal indeed a shift towards a new shareholder capitalism. Ownership and Control in Contemporary Europe: The Predominance of Large Blockholders Who owns and controls the largest corporations in Western Europe? The answer in part depends whether one only looks at the voting mode of control or also takes into account what I have identified as a second basic mode of corporate, that of market control. In this section we will first look at the first mode only, thus examining Europes ownership and control structures from the perspective of the classical debate that started with Berle and Means. Later on I w ill argue that the picture significantly changes if one incorporates the market mode of control into the analysis as well. Table 1 presents a list of Europes 100 largest (by revenue, and based upon Fortunes Global 500) non-financial companies and their largest and second largest so called ultimate owners at the end of 1998. Based on primary data (mainly from company sources such as annual reports and company websites) I have identified the largest shareholders (in the case of publicly listed companies) of each of

11

the 100 companies in my sample. This gives us a first cut on corporate control but is not sufficient to determine the actual identity of a firms dominant owners. This is so because the largest shareholders have themselves often dominant owners, who, in their turn, also have big controlling shareholders, sometimes in a long chain (a so called pyramid) that ends with a single person who we would then identify as the ultimate owner. It is thus I have for each large shareholder uncovered their ownership structure, and to the extent that one could find dominant owners at that second layer, identified their dominant owners, etc.. The ultimate owner is thus the person or entity who is ultimately in control. Control here, focusing on voting power, is defined as having a certain percentage of the total voting rights of a corporation such that the owner of that large block of shares cannot be outvoted and has the power to appoint and control management at the AGM. Often such a large blockholder would also be represented on the board of directors (or supervisory board in the Germanic system). In order to determine control, then, in this way we need to define a cut-off point, that is a certain percentage at which we say that there is control by a dominant owner. Any such a cut-off point is ultimately arbitrary and does not take into account a number of other relevant factors, such as in particular the degree of dispersion of the remaining shareholdings. It can therefore only be an approximation. Berle and Means had set it at 20 per cent but since share ownership has become more dispersed since their time, most present writers on the subject have accepted 10 per cent as a reasonable threshold for control (Scott 1997, La Porta et al 1998) and this practice has been followed here. So, if a person or entity has 10 per cent or more of the voting rights of a corporation he or she is said to have (minority) control of that corporation.10

Let us now, then, examine the ownership and control structures of Europes 100 largest companies from this vantage point.

10 Not always does the percentage of voting rights equal the percentage of shares held. This would be the normal practice in the US and the UK, but in continental European countries there are deviations to this. For instance, in France more long-term shareholders are often rewarded for their patience by gaining double voting rights after a certain period (usually two or three years). More often discrepancies between voting rights and actual ownership (so called cash flow rights) arise because of the existence of two or more classes of shares, w ith differential voting rights attached to the different types of shares (some carrying no voting rights at all). The most extreme case here is Sweden. For instance, Investor, which is controlled by the Wallenberg family foundations, holds 21.0 % of the voting rights in Swedish company Electrolux but only 3.6 of its capital. As Berle and Means (1991: 71) have argued, such a divergence between voting rights and actual economic interest does represent a kind of separation of ownership and control (by legal device they called it), however the voting rights are still vested in ownership and normally the discrepancies are not as large as in this extreme case.

12

Table 1: Ownership And Control In Europes 100 Largest Non-Financial Companies, Around End 1998: Dominant Owners By Voting Rights

Company Name C o u n t r y

L i s t e d

Type of control l ing

owner

(10% cut-of f )

Fami ly State

Corporate (B, I , C) Other M ixed

Largest ul timate owner by voting rights

% Board Repr.

Second largest ul timate owner

% Board Repr.

ABB Sw/ S Y None Martin Ebner (P) 9.5 BD Wallenberg family (P) 6.7 C Ahold Neth. Y None AMEV/ VSB 1990 8.0 No ING Group 7.4 No Akzo Nobel Neth. Y None (none above 10%) - - - - - A lcatel Fra. Y (None) Socit Gnrale 5.5 BD Employees Trust 3.2. No Alstom Fra. Y Corporate (C) Alcatel (J) 24.0 BD GEC (J) 24.0 BD Arbed Lux. Y State Luxembourg state 29.7 BD Suez Lyonnaise des E. 9.4 No ASDA UK Y Corporate (I ) Schroders IM 13.8 No Mercury AM 8.9 No Auchan Fra. N Fami ly Mulll iez family 85.0 CSB - - - BASF Ger. Y Corporate (B) Allianz 10.4 SB - - - Bayer Ger. Y None Allianz 5.0. No - - - Bertelsmann Ger. N Fami ly Reinhard Mohn 90.0 HCSB Zeit Foundation 10.0 No BM W Ger. Y Fami ly Quandt family 45.6 SB Automobilwerte 10.0 No Bouygues Fra. Y Fami ly M. & O. Bouygues (J) 18.3 CEO Franois Pinault (J) 13.8 BD BP Amoco UK Y None State of Kuwait 3.8 No Fidelity 3.7. Br. Aerospace UK Y None (none above 5%) - - - - - Br. A i rways UK Y None Franklin Resources 6.3. No Schroder IM 5.3 No Br. Am. Tobacco UK Y None (none above 3%) - - - - Br. Post Of f ice UK N State Br. Government 100.0 No - - BT UK Y None (none above 3%) - - - - - Cable & Wireless UK Y None Prudential Corp. 3.4 No Nat. City Nominees 3.2 No Carrefour Fra. Y Fami ly Defforey family (J) 14.3 BD J. and C. March (P) (J) 6.2 BD Casino Fra. Y Fami ly Jean-Charles Naouri (P) 59.4 SB Guichard family CSB Centrica UK Y None Prudential Corporation 3.7 No - - DaimlerChrysler Ger. Y Corporate (B) Deutsche Bank 12.0 CSB State of Kuwait 7.4 No Danone Fra. Y None M. David Weil (P) 8.6 BD Agnelli family 6.4 BD Delhaize Bel. Y Fami ly Delhaize family 38.0 No - - Deutsche Bahn Ger. N State German federal state 100.0 SB - - Deutsche Post Ger. N State German federal state 100.0 SB - - Deut. Telekom Ger. Y State German federal state 73.0 SB France Telecom 2.0 D iageo UK Y Fami ly Bernard Arnault 10.9 BD - - - Electrici t de Fra. Fra. N State French state 100.0 BD - - - Electrolux Sw. Y Fami ly Wallenberg family (P) 21.0 BD 4th Nat. Pension ... 5.8 BD El f Acqui taine Fra. Y None (none above 1.25%) - - - - - ENEL Italy N State Italian state 100.0 BD - - - ENI Italy Y State Italian state 36.3 BD - - - Ericsson Sw. Y Fami ly Wallenberg family (P) 38.8 VC AB Industrivrden 26.4 BD Fiat It. Y Fami ly Agnelli family (P) 30.1 HC Mediobanca 3.0 No France Telecom Fra. Y State French state 63.6 BD Deutsche Telekom 2.0 BD Franz Haniel Ger. N Fami ly Haniel family 99.0 CSB - - - GEC UK Y None Prudential Corporation 3.7 No - -

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Glaxo Wel lcome UK Y None Wellcome Trust 5.5. No Prudential Corporation 3.1. No Henkel Ger. Y Fami ly Henkel family 85.0 HCSB Jahr family 5.0 Hoechst Ger. Y Corporate (C)1 State of Kuwait 24.5 SB Chemiewerte 10.2 No ICI UK Y None Capital Group 6.9 No Prudential Corporation 3.3. No IRI It. N State Italian state 100.0 BD - - - Ivensys UK Y None Franklin Resources Inc. 6.0 No Capital Group 5.0 No J Sainsbury UK Y Fami ly Sainsbury family 39.0 Yes - - K ingf isher UK Y None Prudential Corporation 4.0 No - - - Kvaerner Nor. Y Corporate (I ) Chase Manhattan2 19.8 No Begesen d.y. ASA 19.6 No La Poste Fra. N State French state 100.0 BD - - Lagardre Fra. Y Fami ly J. Lagardre & son 5.83 MP (supporting block) - BD LOral Fra. Y M ixed (F/C) L. Bettencourt & fam. (J) 35.9 BD Nestl (J) 4 34.5 BD Luf thansa Ger. Y Corporate (B) 2 German banks (J)5 10.1 SB - - - M an Ger. Y Corporate (B.) A llianz (& partners) (J) 36.0 VCSB - - - M annesmann Ger. Y None (none above 5%) - - - - - M arks & Spencer UK Y None Prudential Corporation 5.9 - - - - M etal lgesel lsch. Ger. Y Corporate (B) Dresdner Bank 11.8 SB Deutsche Bank 11.3 CSB M etro Ger. Y Fami ly Metro Holding(J)6 60.0 SB - - - M ichel in Fra. Y Fami ly F. & E. Michelin & fam. 35.07 MP - - - M igros Swi. N None Co-operative - - - - - M ontedison Italy Y Corporate (B) Bloc Italian banks (J) (P) 37.4 CM Meril l Lynch Asset M/ 2.3 No Nestl Swi. Y None - - - - - - Nok ia Fin. Y None Pohjola Insurance Co. 4.7 BD UPM-Kymmene Corp. 3.6 BD Norsk Hydro Nor. Y State Norwegian state 51.0 No - - - Novartis Swi. Y None Sandoz family 4.2 BD - - - Otto Versand Ger. N Fami ly Otto family 50.0 CEO Brost & Funke family 25.0 No Pechiney Fra. Y Corporate (I ) Franklin Resources Inc. 14.5 No Capital Group Cos. 12.0 No Petrof ina Bel. Y Fami ly A. Frre (& P. Desmarais) 39.9 CB - - - Peugeot Fra. Y Fami ly Peugeot family 38.1 CSB Michelin 5.3 No Pinaul t-P.-R. Fra. Y Fami ly Franois Pinault 58.5 CEO Guillbert family 2.9 No Phi l ips Electron. Neth. Y None (none above 10%) - - - - - Preussag Ger Y State North Rhine-Westphalia

(WestLB) 33.0 SB - - -

Promods Fra. Y Fami ly Halley family 53.9 CEO Banco Bilbao Vizcaya 5.2 - RAG Ger. N Corporate (C) VEBA (J) 37.1 CSB VEW (J) 30.2 SB Renaul t Fra. Y State French state 44.2 BD Corporate bloc 7.2 BD Repsol Spain Y None Banco Bilbao Vizcaya 9.5 VC La Caixa 7.6 BD Rhone-Poulenc Fra. Y None Socit Gnrale 2.8 BD BNP 2.5 BD Robert Bosch Ger. N Other Bosch Foundation8 93.0 Yes Bosch family 7.0 No Roche Holding Swi. Y Fami ly Founding families 50.0 BD Martin Ebner (P) 16.5 No Royal Dutch/ Shel l

Neth./ UK

Y None Prudential Corporation 1.4 No - - -

RWE Ger. Y M ixed (C/S) Allianz 13.3 CSB Group of municipalities 12.1 SB Safeway UK Y None Franklin Resources 9.4 No Capital Group 4.3 No Saint-Gobain Fra. Y None Vivendi 9.3 BD BNP 5.7 BD Siemens Ger. Y None Siemens family 6.9 SB - - - SmithKl ine Beecham

UK Y None Mercury Asset Mngmnt 3.8 No Prudential Portfolio 3.0 No

SNCF Fra. N State French state 100.0 BD - - - Statoi l Nor. N State Norwegian state 100.0 No - - - Stora Enso Fin. Y M ixed (S/F) Finnish state 21.6 No Wallenberg family 10.9 C/ BD Suez Lyonnaise des Eaux

Fra. Y Fami ly A. Frre & P. Desmarais 12.6 SB Credit Agricole 10.5 SB

Telecom I tal ia Italy Y None Italian state 4.0 BD Bank of Italy 2.3 No Telefonica Sp. Y None Banca Argentaria 5.0 BD La Caixa 5.0 BD Tesco UK Y None (none above 3%) - - - - - Thyssen Krupp Ger. Y Other Krupp Foundation 16.8 HCSB Republic of Iran 7.7 SB

14

Total Fra. Y Other COGEMA9 10.3 BD Paribas 2.5 BD Uni lever Neth.

/ UK Y None Leverhulme Trust 2.7 BD - - -

VEBA Ger. Y Corporate (B) Allianz 11.5 SB - -- - VIAG Ger. Y State State of Bavaria 32.6 No Bayerische Hypo. Bank 20.6 BD Vivendi Fra. Y Corporate (C) Saint-Gobain 11.5 VC Alcatel 7.7 BD Volkswagen Ger. Y State State of Lower Saxony 20.0 SB - - - Volvo Sw. Y Corporate (I ) ForeningsSparbanken 11.2 No 4th Nat. Pension Fund 5.0 BD

Sources: Own research (company reports, internet, and miscellaneous). A more detailed table, including the control chains that lead from the ultimate owner to the controlled firm (that is, if the largest shareholder is not itself w idely held), w ill be made available in a later table. Notes: Type of controlling owner: this categorises the largest ultimate owner w ith more than 10% of the voting rights. In case control may be deemed to be exercised jointly by two or more shareholders, and if these shareholders fall into different categories, the firm is classified as mixed. Ownership by foreign states (which is the case mainly in few German companies) is here classified as corporate ownership. B= Banks and insurance companies; I= Investment companies incl. quoted holding companies, pension funds, mutual funds and other funds; C= Other companies, mainly industrial firms. Largest/ second largest ultimate owner: In identifying the ultimate owner I follow La Porta et al (1998; see also Berle and Means 1991) in adding the direct and indirect voting rights controlled by a shareholder. Direct holding are shares registered in the shareholders name. Indirect holding are shares held by companies that that shareholder ultimately controls. Although a a 10% cut-off criterion has been used to identify the ultimate owner with respect to the first layer of ownership (direct holding), a 20% cut-off has been applied to identify any ultimate owners at higher ownership tiers. According to this definition the ultimate control exists if there is continuous chain of holdings (of voting rights) of at least 20%, or 10% at the end of the chain, w ith at each time no rival shareholders w ith large stakes. Thus if person A holds a personal (direct) stake of 5% in a company X, but also owns >20% of the voting rights in entity C, which in turn controls >20% in entity B, which in turn has >10% of the voting rights in company X (a pyramid, see below) than person A is said to control (directly and indirectly) 15% of the voting rights. - = not applicable (no first or second largest owner w ith a significant holding). (P)= in case the (second) largest owner stands on the top of a pyramid structure, defined as a structure in which at least one quoted company stands in between the owner and the company (s)he ultimately controls. (J)= Joint control, which is defined as control exercised by two or more dominant shareholders who are independent but have agreed to co-ordinate and partially pool their interests by way of a shareholder agreement. In the case of joint control, the two or more partners do not have to be of equal weight, i.e., one of them may very well be regarded as the dominant owner (e.g., Bouygues which is minority owned and managed by the two Bouygues brothers). Board representation: BD= Member of the Board of Directors; C= Chairman of the Board of Directors; VC= Vice-Chairman of the Board of Directors; HC= Honorary Chairman of the Board.; CEO= Chief Executive Officer; SB= Supervisory Board member; CSB= Chairman of the Supervisory Board; VCSB= Vice-Chairman of the Supervisory Board; HCSB: Honorary Chairman of the Supervisory Board; MP= Managing Partner. In case in italics, the board member is not the ultimate owner him or herself but someone who is an inside director (or chairman of the supervisory board) of an intermediate company. 1 The Kuwaiti state owns this stake via the Kuwait Petroleum Corporation. 2 As a custodian for a number of different shareholders. 3 Lagardere, like Michelin, is a limited partnership w ith shares (SCA), which means that i t consists of general partners w ith unlimited liability and the right to appoint the management, on the one hand, and of l imited partners, or ordinary shareholders on the other (the latter elect the supervisory board). In a limited partnership with shares, the managing partners may be deemed to be in full control of the company even if their shareholding is below the 10% level. 4 Nestl and Lilil iane Bettencourt jointly exercise control over 70.4 % of the voting rights through the holding company Gesparal. 5 Dresdner Bank and Bayerische Landesbank together in a holding called Munchener Gesellschaft fur Luftfahrtwerte. 6 Metro Holding is jointly owned and controlled by Otto Beisheim, the Schmidt-Ruthenbeck family and the Haniel family. Of these, Metro founder Beisheim maybe regarded the dominant shareholder. 7 Estimate. See further note 3. 8 Voting rights for the Bosch foundation are in fact exercised by a trust (Treuhand) controlled by Bosch management. 9 COGEMA is owned by CEA, (French atomic energy commission), which is a French government agency, but w ith full financial and management autonomy. Total also holds a stake in COGEMA. It is here classified as other. ______________________________________________________________________________________________________________ Of the 100 companies, 84 are publicly listed corporations, whereas 16 are fully owned either privately or by the state. The great majority of Europes big companies therefore now have their capital (shares) traded on the stock exchange. Of these, however, a substantial majority (48) do still have substantial

15

owners holding blocks of 10 per cent or more. Indeed, using the 10 per cent cut-off in total 64, or almost two thirds, of Europes 100 largest companies are controlled by a dominant owner. In 9 other cases the largest shareholder controls less than 10 per cent but through board representation can still be said to exercise a predominant influence (sometimes even outright control) so that in only 27 cases could we find no dominant (ownership) interest at all (w ith the largest shareholders holding no more than a few per cent, which is still significant in money terms but not with regard to voting power). Of these 27 w idely-held corporations representing the classical case of the managerialist theory 19 can be found in the UK (incl. two Anglo-Dutch companies), out of a total of 22 British companies. Restricting our analysis, then, to continental Europe we find that 61 out of the total of 78, or almost 80 per cent, of continental European companies are subject to direct owner control (with a further 10 per cent subject to predominant influence). Hence examining ownership and control structures from the vantage point of concentration of voting power, it appears that we can indeed distinguish between an Anglo-Saxon and a continental European model, w ith the latter continuing to be dominated by large blockholders. The first important conclusion, then, that we can draw is that the process identified by Berle and Means 70 years ago, and often assumed to have been universal, has apparently never fully taken place within continental Europe.11

11 This conclusion is in line w ith some of the other (very limited) recent research on ownership and control structures, in particular that of La Porta et al 1998. Contrasting the UK as a representative of the Anglo-Saxon model w ith the rest of Europe here representing a continental model of course glosses over important differences between the different continental European countries. Although certainly important, it falls outside the scope of this paper to engage in such a comparison. Here we are mainly interested in the changes pertaining to what the continental European systems have in common, namely underdeveloped capital markets (markets for corporate control) and relatively high concentration of ownership.

The dispersal of share ownership has been limited, and there are still large blockholders in almost all continental European countries, owners who can (partially) control management through their voting power and are indeed as such in almost all cases (56 out of 64) represented on the board. Even if , as we argued above, some kind of managerial capitalism did arise in Europe, it was not of the kind in which owners lost all control (which probably would not be the right way of understanding the American managerial capitalism of the Golden Age either, but across the Atlantic we have witnessed a much wider dispersal of ownership). On the concentration of ownership dimension, then, continental European capitalism would still be on the right-hand side of our earlier 2x2 matrix.

16

Table 2: Control of European Non-Financial Top 100 by Type of Controller and Mode of Control (End of 1998)

Type of Control ler Family/

Personal Corporate State Other None Totals

M ode of Control Banks & Insuranc

e Cos.

Funds Other Corpora-

tions

Full ownership

1 0 0 1 9 1 - 12

Majority control (>50%)

9 0 0 0 3 1 - 13

Joint majority control

3 0 0 0 0 0 - 3

Minority control 20 < 50%

7 0 0 0 5 1 - 13

Joint minority control 20 < 50%

3 2 0 1 0 0 - 6

Minority control 10 < 20%

1 4 2 2 0 0 - 9

Relative minority control

2 2 1 0 2 1 - 8

Predominant influence

4 3 0 0 2 0 - 9

No dominant interest

- - - - - - 27 27

Totals 30 11 3 4 21 4 27 100 Source: Own research, see Table 1. Notes: Cases where the ultimate owners are of the mixed category (see Table 1) e.g., cases where control is exercised jointly by a family and a corporation have here been allocated to the category of the dominant partner. Other includes ownership by foundations that are no longer controlled by their founding families. Relative majority control is intended to describe those cases where a minority controller is subject to a significant countervailing influence of one ore more other shareholders. This is here operationalised as follows. If there are two independent and unassociated (through an agreement) shareholders with each 10% or more of the votes, and w ith the difference between the largest and the second largest shareholder being no more than 10%, or 15% in case the second largest shareholder is represented on the board whereas the largest is not, we see that minority control is relative. Cases of relative minority control are allocated by largest shareholder (by voting rights), even if in some cases control may be distributed about equally between the different dominant owners (however, if we would split companies on this basis, the distribution would be practically the same). Predominant influence refers to a situation where the largest shareholder holds between 3 and 10% of the voting rights and is represented on the board. __________________________________________________________________________________________ Examining the distribution of different types of ultimate owners we see in Table 2 that family or personal ownership still dominates with 30 out of 73 firms in which there is either owner control or predominant owner influence (or 30 per cent of the total), with 23 of these being controlled by stakes of 20 per cent or more. This is followed by state ownership (21) and ownership by banks and insurance companies (11). With almost one third of Europes largest companies being (partially) controlled by families or individuals, the rise of the modern corporation has in continental Europe clearly not led to the full demise of family capitalism that has often been associated with it. A lthough I w ill later argue, that family ownership is nevertheless in relative decline, and moreover that its nature is being transformed for now it is important to note that in this respect continental European capitalism is still different from the shareholder capitalism said to prevail in the US and the UK (as well as from classical managerial capitalism!). Ownership and control in continental Europe continues

17

to be characterised by a relatively high degree of concentration of ownership (thus within one of the two right-hand quadrants of our 2x2 matrix). What then about the alleged rise of shareholder capitalism in continental Europe? This is where we have to extend our analysis to include the second basic mode of corporate control, that of control through the (stock) market. Below, I w ill argue that taking this into account we can, on the basis of the evidence available, in fact observe the emerge of a new shareholder capitalism in continental Europe, but still of a different kind than that prevalent in the Anglo-Saxon countries. A European Shareholder Capi tal ism in the M aking? On the basis of evidence gathered for this research, and on what has been found by others, it is possible to observe to observe a number of trends in the ownership and control of Europes large companies that together indicate a relative decline of the traditional large blockholders and a rise of new class of investors, who are outside shareholders operating in globalising capital markets and thus oriented exclusively to maximising their financial return, operating as pure money capitalists.12

The decline of traditional blockholders takes two forms. First, although ownership concentration is still high in continental Europe (compared to the US and the UK) it has been decreasing and probably will continue to do so in the foreseeable future, even if only to a certain point. But, this decline primarily concerns traditional blockholders that formed the core of the ownership structure of managed capitalism, such as banks, founding families of old companies, and the state. For the foreseeable future, large blockholders will continue to dominate the European corporate landscape. In fact as important as their quantitative is the transformation of the role they play in corporate governance. I w ill argue that large blockowners will increasingly become themselves subject to the pressures and the temptations of the capital market.

The Decline of Traditional Owners The most dramatic, and most consequential, decline of traditional ownership concerns that of the state. The state has in fact in most cases not been a blockholder in the usual sense as it often owned a 100 per cent of a firms capital. Even if the state is still the second largest type of controller, state ownership among European big capital has declined spectacularly over the past 10 to 20 years. As we can see in table 3, of Europes 100 largest corporations 30 have once been in full state ownership and three in majority state ownership. Of these 33, 15 have now been completely privatised (w ith the state holding no shares at all), whereas in a further nine cases the state has sold off a substantial part of its holding. As is well known, the privatisation wave in Western Europe started in the UK in the early to mid-1908s under Thatcher, then expanded to France in the second half of the 1980s under the new centre-right government (to an extent involving companies that had only been nationalised a few years before), as well as to Germany (where state ownership had always been limited) and to Italy (where state ownership has been extensive) again a bit later. This process is set to continue. Indeed, apart from the UK, the privatisation process has not been completed in most European countries, and several large companies are expected to have their first Initial Public Offering (IPO) very soon or in fact have already gone to the market just recently. In other companies where the state still holds a large stake, further sell-offs are expected (see Table). 12 I put the term investor here between quotations marks as it could be argued that shareholders in fact do no so much invest in the sense of providing new capital to firms as just make money by trading existing shares. As Henwood (1999) points out only in the case of formerly private firms going public (or state-owned firms being privatised) or in the rarer cases that firms issue new share capital, does the stock exchange in fact perform the kind of investment function it claims to perform. In the majority of cases all that happens is that property titles pertaining to existing capital change hands (at a handsome profit).

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Table 3: Decl ining State Ownership amongst Europes 100 Largest Companies (End of 1998)

Company Name C o u n t r y

Year of foundation

(national isa-

tion)

Year(s) of privi ti - sation

Highest %

of state ownership

Remaining state

sharehol -ding

%

Board Repr.

Changes since end 98/ planned future privatisation?

A lcatel Fra. 1898 (1982) 1987 100.0 0.0 - - Arbed Lux. 1882 - n.a. 29.7 BD no plans known BP Amoco UK 1909 1987 68.0 0.0 - - Br. Aerospace UK 1977 1981 100.0 0.0 - - Br. A i rways UK 1939 1987 100.0 0.0 - - Br. Post Of f ice UK n.a. - 100.0 100.0 No no plans/ deregulatory pressure EU Bri tish Telecom UK n.a. 1984-93 100.0 0.0 - - Cable & Wireless UK 1860s (1947) 1981 100.0 0.0 - - Centrica (f rmr. Bri tish Gas) UK n.a. 1986 100.0 0.0 - -

Deutsche Bahn Ger. n.a. - 100.0 100.0 SB partial privatisation planned Deutsche Post Ger. n.a. 2000 100.0 100.0 SB IPO of 35% planned for Autumn 00 Deut. Telekom Ger. n.a. 1995/ 6- 100.0 73.0 SB further public offering planned Electrici t de Fra. Fra. 1946 - 100.0 100.0 BD no plans known El f Acqui taine Fra. 1941 -1994 100.0 GS - - ENEL Italy 1962 1999- 100.0 100.0 BD IPO in Nov. 99 (34.5% sold) ENI Italy 1953 1995- 100.0 36.3 BD no plans known France Telecom Fra. n.a. 1997- 100.0 63.6 BD IRI It. 1933 2000 100.0 100.0 BD to be dissolved in June 00 La Poste Fra. n.a. - 100.0 100.0 BD no plans/ deregulatory pressure EU Luf thansa Ger. 1926 1965-97 100.0 0.0 - - Norsk Hydro Nor. n.a. (1945) - 51.0 51.0 No no plans known Pechiney Fra. 19th cent. (1982) 1995-98 100.0 0.0 - - Preussag Ger 1923 1959? 100.0 (33.0)13 (SB) - Renaul t Fra. 1898 (1945) 1994- 100.0 44.2 BD no plans known Repsol Spain 18th cent. (1985) 1989-97 100.0 0.0 GS - Rhone-Poulenc Fra. 1860s (1982) -1993 100.0 0.0 - - RWE Ger. 1898 - c. 60.0 c. 30.014 CSB merger with VEW Saint-Gobain Fra. 1665 (1982) 1986- 100.0 0.0 - - SNCF Fra. n.a. - 100.0 BD Statoi l Nor. 1972 - 100.0 100.0 No no plans known Telefonica Sp. n.a. 1987-97 100.0 GS - - Total Fra. 1924 - c. 40.0 0.0 - - VEBA Ger. 1929 1965-87 100.0 0.0 - (merger with VIAG) VIAG Ger. 1923 1986-1988 100.0 32.6 No (merger with VEBA) Volkswagen Ger. 1938 1960 100.0 20.0 SB no plans known

Sources: Own research (information gather company Internet sources and other sources), see also Table 1. Notes: The years of privatisation give if known - respectively the year in which the privatisation process started and the year in which it was completed (before and after the hyphen). Family ownership, by which I mean the ownership of (often founding) families passing on their firm from one generation to the next less so personal ownership in general - is also in a relative, long-term decline, even if it is still a major feature of continental ownership and control structures. Many of the companies in my sample or their predecessors have a history going back a century or more, that is to the era of competitive family capitalism. In fact, the overwhelming majority of the 100 13 Stake held by Westdeutsche Landesbank, which is controlled by the State of North Rhine-Westphalia. 14 This is not a single holding but the holdings of different municipalities and other local authorities added together.

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companies (the most important exceptions being those that were state-owned from the start, mainly national PTTs and other monopolies) were at one time family firms, founded by a particular owner-entrepreneur. Now there are 21 companies left in which the founder or his (never her) descendent(s) still hold five per cent or more of the shares, 19 of which hold a controlling stake of more than 10 per cent. There is one UK company among these, all other 18 are from various continental countries. These are partly indeed old companies, such as Fiat (founded in 1899) and Franz Haniel (founded in 1756!), spanning several generations of family ownership as well as younger companies in which the founder is still in control (such as Pinault-Printemps Redoute of Frances richest man, Franois Pinault). In addition there are four cases of continental companies that were not founded by the presently controlling families but of which the ownership has already passed through more than one generation and still amounts to more than 10 per cent. The total of 22 cases out of 78 continental European companies in which their has been controlling family (or personal) ownership since foundation or at least across more than one generation, is still very high in comparison to what we find in the UK or in US, but low compared to what we would have found a century or also several decades ago. Moreover, family ownership is still in the process of further dilution, mainly because of the continuing merger and acquisition wave. Family (controlled) firms too have to grow in order to compete in an increasingly global product market and this almost in all sectors necessitates merging or a large take-over (or indeed, being taken-over).15

Ownership by other corporations, whether of a cross-shareholding kind or not, has been a feature of the traditional ownership and control patterns in in particular France and Germany, w ith the latter showing a large degree of ownership by banks (basically the big three: Deutsche, Dresdner, and Commerzbank, as well as the insurance company A llianz), and the former showing more complex networks of cross-holdings involving both industrial companies and financial institutions. However, these corporate blockholders are also in decline. In France, the 1990s have seen a spectacular unwinding of its complex system of cross-shareholdings, w ith inter-corporate ownership declining from 59 per cent to less than 20 per cent of total market capitalisation from 1993 to 1997 (Nestor and Thompson 1999: 11). In Germany, financial institutions have so far been prevented from selling off (or reducing) the stakes they hold in many of the countrys largest industrial corporations (see Table 1) because of the punitive tax imposed upon such sales. At the end of 1999, however, the new German Finance Minister, Eichel, unexpectedly announced the complete abolition by January 2002 - of this particular capital gains tax, a news to which the global financial community has reacted with delight as it is expected to lead to large sales of these stakes of formerly committed capital, thus boosting the stock market by providing it w ith new liquidity and promoting the development of an equity culture in Germany .

16 Indeed, it has been argued that this could possibly spell the end of what has been called Deutschland AG (Hpner 1999), and powerhouses of that Germany Inc. such as Deutsche Bank and A llianz have already announced that they intend to at least significantly reduce their holdings.17

In sum, traditional owners, whether the state, families, corporations or other insiders that provided committed capital bound in a set of stable and long-term relationships to the firm, its management and its workers, have been, and continue to be in decline. Below I w ill argue, that at the same time, however, a new type of blockowners is emerging.

15 Thus, for instance, the Wallenbergs have seen their controlling stakes diluted when their companies Astra and Stora merged with respectively British and Finish competitors (Zeneca and Enso). Other family owned firms are under pressure to merge (rumours of which regularly appear in the financial press) and some controlling families may even consider to just sell their stake to a competitor (liquidifying their assets). 16 Charles Pretzlik, Germany companies ready for wholesale restructuring , Financial Times, 14 July 2000. 17 Thus, Deutsche Bank (which is for instance the largest shareholder of DaimlerChrysler) has stated - after the tax reform plan had been adopted by parliament on July 14 - that We are pleased with the tax reform. It doesnt mean that we will sell everything immediately but it means a w idening of the room for manoeuvre (Pretzlik, see note above). Allianz had already earlier declared that it no longer regarded many of its holdings as strategic and thus, if the tax would be abolished, as up for sale (see Ute Harnischfeger, Alllianz aims to continue overseas growth , Financial Times, 21 May 1999.

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The Transformation of Large Blockholders into Money Capitalists

There is evidence that remaining large blockholders are increasingly adopting a financial rather than a strategic perspective, i.e. they come to demand shareholder value as well.18

The in the German case largely prospective decline in inter-corporate ownership noted above is another indication that ownership stakes formerly regarded as strategic, and again in the German case certainly providing committed capital, are now longer regarded as such. Thus, the CEO of A llianz has indicated that the equity stakes his company which is in many ways the spider in the German corporate web holds, and indeed, the whole post-war German system of banks and insurance companies holding large blocks in German corporations, served a useful purpose in the past providing the system with a stability that it needed in the era of post-war reconstruction but that it has now outlived its usefulness and that they might thus be up for sale.

This applies to all main owner categories, the state, corporations, and not in the last place, families and individuals. In the case of the state and of some corporate owners, particularly banks and insurance companies in the Germanic systems, this is in fact more of a transitional phenomenon, in anticipation of the (further) sale of the equity holdings of these owners. In many cases where the state has only partially privatised companies, that is, has kept a controlling majority or minority of the shares, it has become a passive shareholder, not taking any active role vis--vis management. A lthough not maybe adopting an explicit financial perspective, it does so by default inasmuch as it allows the other shareholders operating through the market to exercise their control through the market (sometimes supplemented by voice mechanisms) without making use of its voting power as a counterweight. Thus for instance, Deutsche Telekom, of which the German state still holds 73 per cent, belongs to one of the more capital-market and shareholder value oriented corporations of Germany (Hpner 2000)

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Another important transformation of blockholders concerns that of families and individuals. Here, we may again deal in part here with a transitional phenomenon as families maybe become more focused on financial performance as a prelude to the selling of their business. But we also observe the rise of a new type of personal owners who are in it for the long-run, i.e. do not hold equity stakes in order to sell them again at a higher price, but do tend to have a more pure financial perspective. The case of the Wallenberg family may be an illustration of both developments.

In the meantime, as long as they are not sold, Allianz will look much more critically at the financial performance of these assets and is likely to expect higher returns than in the past. Indicating a similar change in strategy, Deutsche and Dresdner Bank have put their equity holdings into separate companies that are supposed to manage these holdings independently (Nestor and Thompson 1999: 12).

The Wallenbergs have dominated Swedish industry for a large part of this century and still control about 40 per cent of the market capitalisation of the Swedish stock market.20 Within my sample, the Wallenbergs are (indirectly) the largest (and controlling) shareholder of Electrolux and Ericsson, and the second largest of StoraEnso and ABB. They are represented on the board of all four companies and are thus in this sense clearly insiders. Their main vehicle for control is the publicly quoted industrial holding company Investor, of which the Wallenberg family foundations control 41 per cent of the votes (and 19 per cent of the capital). Investor describes its task as to create value for its shareholders through long-term active ownership and active investment operations 21

18 The distinction between financial and strategic is one that is commonly made by financial analysts and partly overlaps w ith our earlier distinction between committed and productive capital. If a stake is seen as strategic than it represents an interest beyond that of pure financial return, i.e. because it implies the control of a company that otherwise might be a competitor.

19 Ute Harnischfeger, Alllianz aims to continue overseas growth , Financial Times, 21 May 1999. 20 Busting Up Sweden Inc. , Business Week (intl edition), February 22, 1999. 21 http:/ / www.investorab.com/ lang3/ m1-2/ m1-2.asp.

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Traditionally, the family considered this long-term ownership to imply the provision of committed and thus stability to Swedish productive capital. Financial press reports indicate that Investor is increasingly under pressure from other shareholders (that those 58 per cent not controlled by the family) to improve its financial performance and to this aim accelerate the restructuring including foreign relocation of their operations - of the industrial companies it controls.22 According to one fund manager, if the Wallenbergs do not deliver on improving shareholder value, they will have shareholders chasing them and it wont be very pleasant .23 One of these new outside shareholders is the US mutual fund Franklin Mutual Advisors which has become the second largest shareholder of Investor by taking up a stake of 8.5 per cent. 24

One of main problems for the Wallenberg family, then, and this is a critical point, is that even if they control over 40 per cent of the voting rights, which is more than sufficient to exercise control at the AGM, it does not own a majority of the companys capital, and is therefore subject to the influence of other shareholders who are exercising their control through the market as well as through voice on the basis of their market power. Here we thus see a clear example of a growing discrepancy between voting control and market control and why we have to take into account both in order to determine by whom and how a firm is subject to owner control. Large blockowners thus become themselves subject to the market-based power of other, smaller, shareholders and they may either resists their pressures or succumb to them by embracing the shareholder value ideology themselves. Let us finally look at some examples of first-generation owners who seem to have taken this perspective already at a much earlier point, billionaire financiers who are taking up increasingly central positions in the ownership and control networks of parts of European big capital.

The pressures exercised by the capital market on Investor seem to pay of as two observers from the OECD write that [t]he Swedish Wallenberg family is restructuring its whole portfolio [..] w ith the aim of becoming an arms length investor with a purely financial perspective in Sweden and more active in international portfolio diversification (Nestor and Thompson 1999: 11).

A clear example is that of Martin Ebner, one of Switzerlands richest men who is now (indirectly) the largest shareholder of Swiss-Swedish engineering giant ABB, and also holds 16.5 per cent of Swiss global drug company Roche (see Table 1, he also has large stakes in A lgroup and Credit Suisse). Ebner gained notoriety in the 1990s as one of continental Europes still rare shareholder activists and as a US-style corporate raider. He has now transformed himself more into an insider by becoming a board member of most of the companies in which he has invested, but his perspective is still an explicitly financial one, and he has certainly not lost any of his reputation as a campaigner for shareholder value and a foe of entrenched management.25

Another financier playing a significant role in restructuring part of European industry, is Belgiums richest man, A lbert Frre, considered to be one of Europes more important behind-the-scenes dealmakers.

Adopting a strategy that we have hitherto known only from US funds, Ebners 75 per cent owned BZ Group (bank plus associated holding companies) aims to acquire if possible controlling stakes of equity in companies it deems to underperform financially and then, through active ownership, i.e. putting management under pressure, seeks to push up that companys profits and share price.

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22 See, e.g., Busting Up Sweden Inc. , Business Week (intl edition), February 22, 1999, and Barbarians at the Wallenbergs Gate, . , Business Week (intl edition), May 3, 1999.

Within my European Top 100, Frre, together w ith his Canadian partner Paul Desmarais, is through a complex pyramid structure - the ultimate controlling owner of French

23 Busting Up Sweden Inc. , Business Week (intl edition), February 22, 1999. 24 Ibid. 25 William Hall, Ebner turns to gatekeeper: Swiss fund manager to become an insider , Financial Times,14 February, 1999; William Hall, Ebner raises Swiss stake , Financial Times, 12 November 1999; Andreas Nlting, Schrecken der Company , Managermagazin, December 1999. 26 See David Owen and Neil Buckley, Profile Albert Frre: The reclusive capitalist , Financial Times, 12 July 1999; See Neil Buckley, Belgium agog as Baron Frre pulls the strings: recent moves by one of Europes most powerful tycoons have set markets buzzing , Financial Times, 8 May 1998.

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utilities giant Suez as well as of Belgiums Petrofina, which has now merged into TotalFina Elf, of which Frre is still the largest shareholder (his big portfolio also includes half of CTL-UFA, the pan-European commercial TV company). The publicly listed holding company at the top of the Frre pyramid, CNP, states as its long-term objective [..] to maximize shareholders' value 27

It is important to note that in all three cases above, the respective individuals and families control their firms through a (very long in the case of Frre) pyramid or chain of control in which one or more intermediate companies are publicly quoted companies of which part of the share capital is owned by a dispersed gr