Corporate governance

1
Corporate governance

• A comparison between the US and the EU

2
What is corporate governance ?
Shareholders (providers of capital)
Owners
Governing body ( Board(s) )
Elects, reports, delegates
Other parties
Governance
Appoints, reports, delegates
Operations
Executive management
Managers
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Roles and prerogatives of the key players

• Shareholders meetings

Shareholders
Other Stakeholders (employees)
Supervisory board
Unitary / management board

• Governing body
• Unitary board
• Two-tier board

Executive management
4
Factors shaping corporate governance

• Cultural and historical factors
• Control and shareholding structures
• Highly dispersed / fairly concentrated
• role of shareholders
• Economic model
• Consensus driven or market driven
• role of financial and markets forces
• Legal model
• Role and influence of various stakeholders
• Primacy of shareholders interest
• Primacy of the companys interest
• External or exceptional factors
• European integration and convergence
• Recent scandals ( Enron, WorldCom etc.)

5
Influence of economic and legal models on
corporate governance

• Continental/Rhineland
• Continental Europe
• Bank, network oriented
• Consensus driven
• Less developed Financial markets
• Longer term strategy
• Greater reliance on debt
• Stakeholders/ company focus
• Co-determination/ worker councils
• Concentrated ownership control
• Strong blockholders
• weak dispersed owners

• Anglo-Saxon
• US - UK
• Market oriented
• Competition driven winner take all
• More developed Financial Markets
• Shorter term strategy
• Greater reliance on equity
• Shareholder primacy
• No employee involvement
• Dispersed shareholding structure
• Strong managers weak owners

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Whose interests is the board looking after?
The shareholders interest or
The Companys interest
Employees
Employees
shareholders
Customers
Customers
Senior Management
Shareholders
Senior Management
State/ Community
Creditors/ Suppliers
Creditors/ Suppliers
State/ Community
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Ownership and control patterns
of companies having no holder with at least 25
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Separation of ownership and voting power
Voting power
Dispersed
Concentrated
US - UK Management control is likely strong
managers weak owners
US Management thru proxy voting Continental
Europe Devices overriding one share one
vote Other devices separating ownership and
control
Majority of companies
Majority of companies
Dispersed
Ownership

• Companies in countries that
• allow voting right restrictions
• ( voting caps of 5 )

• Continental Europe
• US and the UK

Concentrated
9
(No Transcript)
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The rise of institutional ownership in the US
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Role of the governing body

• Promotes and safeguards the interests of the
  shareholders /the company and balances the
  various interests
• Oversees and monitors of all critical functions
  and exerts full control over the companys
  affairs
• Interacts with shareholders and senior management
• Organizes the functioning of said governing body
• Information flow meetings agendas schedules
• It appoints, removes management and sets its
  compensation
• It determines the strategic direction of the
  company
• capital allocation, lines of business, long range
  financial goals

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Organizational structures
Quasi Two-tier structure
Two-tier structure
Unitary structure
Other board ( board of auditors )

• Supervisory board
• only non-executive members

• Board of directors
• Executive
• non-executive members

• Board of directors
• Executive
• non-executive members

committees
committees
committees
Managing Director
Executive committee

• Management board
• Executive members only

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Unitary governance model variations
Shareholders
Supervisory function
chairman
Lead director
Lead director
chairman

• Board
• Executive non-executive members

ChairmanCEO
CEO other executives
Executive committee
Management function
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Two-tier structure details
Formal two-tier
Quasi-two-tier
Supervisory board

• Larger
• Meets less frequently
• Employee represented

Supervisory board
Management board

• Smaller

Management board
No overlap in membership
some overlap
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Organizational framework
Finland

• Two tier board

• Unitary board
• Separation of Chairman CEO

Sweden
Ireland
Denmark
UK

• Unitary (exec.Committee)
• two tier board

Netherlands
France
Belgium
Germany
Lux

• Unitary board
• Exec.committee

Austria
Italy
Portugal
Spain

• Unitary board
• Other board
• Exec.committee

Greece
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Concentration of power US vs UK
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Board representation the actors
Significant or controlling shareholders
Independent directors (Representing the
shareholders at large)
Employees
Executive directors
18
Board representation the shakers and
movers(Weight and influence of different
stakeholders on the board)
Shareholders
employees
Significant shareholders
employees
Shareholders
employees
Executive Directors ChairmanCEO
Independent Directors Non executive chairman
Independent directors
Executive directors
Executive directors
Independent directors
United Kingdom
US
Continental Europe
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Employee representation
Finland
Sweden
Ireland

• mandatory
• Advisory role,presence but no vote
• contemplated
• No representation

USA
Denmark
UK
Netherlands
France
Belgium
Germany
Lux
Austria
Italy
Portugal
Spain
Greece
20
Shareholders representation who nominates
directors?

• US / UK gt board driven process
• Non executive chairman
• Chairman CEO
• Nominating committee
• Continental Europe gt shareholders and ownership
  driven process
• Shareholders committees
• Controlling or significant shareholders

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Sources of Chairman/CEOs power

• Knowledge of companys affairs
• Presiding over board meeting
• Setting the agenda
• Deciding what information directors receive
• Leading board discussions
• Selecting other board members
• Acting as spokesman for the company
• Interacting with shareholders
• Control of the purse

22
Board committees and alternative governing organs
Audit committee
Remuneration committee
Supervisory

• Board of auditors
• Dual auditorship
• Internal auditor

Unitary board
Executive committee
Governance committee
Nominating committee

• Proportional representation
• Shareholders committee
• Controlling shareholder election list

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Independence impairments

• Former executive appointed director
• CEO is also chairman of the board
• Supplier, advisor, partner of the company also
  director
• Represents or has ties to a shareholder
• Has served on the board more than 10 years
• Holds cross-directorships or has significant
  links with other directors through involvement in
  other companies or bodies
• Has close family ties with any of the companys
  advisors, directors, or senior executives

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Accountability
Shareholders
Financial markets Regulatory bodies
Governing body
Supervision of management And stewardship of the
company

Other stakeholders Employee etc
Management of the company stewardship of its
operations

Executive management
25
Level and mix of CEO compensation 90-99
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Key differences in the governance models

• American model
• Greater emphasis on unfettered leadership
• Watered down distinction and emphasis on managing
  the corporation
• Governing body manages the corporation

• European model(s)
• Greater emphasis on check and balances
• Sharper distinction between oversight and
  management functions
• Governing body as a check and counterweight to
  executive power