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EUROPEAN CORPORATE GOVERNANCE

EUROPEAN CORPORATE GOVERNANCE. SESSION 5. Outline. European relationships based approaches The role of equity markets Political and legal structures contrasts of Europe The transformation of the industrial and governance systems of Germany, France and Italy

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EUROPEAN CORPORATE GOVERNANCE

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  1. EUROPEAN CORPORATE GOVERNANCE SESSION 5

  2. Outline • European relationships based approaches • The role of equity markets • Political and legal structures contrasts of Europe • The transformation of the industrial and governance systems of Germany, France and Italy • Failures in European corporate governance • Reforms: institutions and practices • The increasingly international role of Europe

  3. European vs Anglo-Saxon • European Corporate Governance: Emphasis on co-operative relationships and reaching consensus • Anglo-Saxon Corporate Governance: Emphasis on competition and market

  4. Two typical Models of Different Capitalist Cultures Source: Welt, Gotshat and Manges (2002). Eurosif Research 2007

  5. RESPONSIBILITIES PERFORMANCE DRIVERS BACKGROUND POLICY PROCESSES ANALYSIS RESEARCH USE OF SHAREHOLDERS RIGHTS ACTIVITIES OUTCOMES IMPACTS Dynamic View of Share Ownership in Europe Source: Eurosif Research 2007

  6. European Relationships Based Approach • Broader representation of interests on the board of directors, • More diverse groups of stakeholders are actively recognized • Long-term large shareholders • Supervisory board for oversight of management • Banks play an active role • inter-corporate shareholdings are widespread, and often companies have close ties to political elites.

  7. Distribution of Share Ownership in German Publicly Traded Companies Source: Vitols (2005).

  8. Weight of Pension Funds in the Economy and Financial Markets (2001) Source: EUROSIF Active Share Ownership in Europe: 2006 European Handbook

  9. Internationalization of Pension Equity Investments End 2006 Source: Eurosif research 2007

  10. Pre - 1988 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 Belgium Denmark France Belgium Finland Italy France Denmark Austria France Netherlands Ireland Germany France Germany Belgium Norway Italy Greece Germany Denmark Netherlands France OECD OECD Netherlands Italy Germany I France Portugal Germany Spain ICGN Portugal Switzerland I Germany II Spain Belgium Spain Italy Sweden Portugal Sweden Switzerland II Netherlands Netherlands Denmark Sweden UK UK UK UK UK UK UK ICGN UK Recent Flurry of CG Codes in Europe Source: EUROSIF “Active Share Ownership in Europe: 2006 European Handbook” .p 19

  11. 2000 2010 2001 2002 2003 2004 2005 UK Myner’s Review Belgium SIP German SIP EU-wide SIPs? NLTabaksblatt Code Italy Pension Reform & SIP UK Myner’s Review Spanish Pension Reform Swiss Pensions Law Extension Mandatory Proxy Voting Laws? ISCCombined Code UK Sweden AP Rules UK SIP Austria SIP German SIP Laws and Codes Encouraging Active Share Ownership in Europe Source: EUROSIF “Active Share Ownership in Europe: 2007 European Handbook”

  12. Insiders control of a company • Majority ownership of voting shares 2) Owning significant minority holdings and employing a combination of devices to increase their control through: • Arranging pyramid corporate structures • Shareholder agreements • Discriminatory voting rights • Procedures intended to reduce the participation or influence of other minority investors. • Pyramid structures

  13. Different Political, Legal, and Regulatory Structures • Company law • Employee representation • Stakeholders, shareholders • Board structure • Supervisory body independence and leadership • Board committees • Disclosure

  14. Vienot Report Memberships, Powers and Operations of the Boards 1995 FRANCE 2nd Vienot Report Separation of Powers of the Chairman and CEO And disclosure of executive Remuneration 1999 Multiple Corporate Governance ReformProcesses in Europe Review Findings Boards Report Governance of the Enterprise 1998-2004 Preda Report Code of Conduct 1999-2004 Draghi Reform Principles of Correct Administration 1998 ITALY SPAIN The Olivencia Report Code of Ethics 1998 The Aldama Report Transparency and Security in the Markets 2003 Corporate Governance Principles International Best Practices 2004 Source: Clarke T., (2006) UTS Centre for Corporate Governance Review UK Cadbury Report 1992 DENMARK Findings The Norbis Committee Report Recommendations as supplement to existing laws 2001 Corporate Governance Report in Denmark 1992-2002 OECD Principles of Corporate Governance GERMANY AUSTRIA Austrian Code of Corporate Governance Framework on shareholder, Board, transparency and Auditing 2002 The Baums Reports Recommendations that reflect changes in Corporate Law 2001 The Cromme Code Regulation 2002-2003 SWITZERLAND SWEEDEN NORWEGIA Swiss Code of Best Practice Recommendations 2002 Swedish Code of Best Practice Report of the Code Group 2002 Norwegian Corporate Governance Code of Practice 2004 NETHERLANDS EUROPEAN UNION BELGIUM Dutch Corporate Governance Code Principles and Best Practice Provision 2003 European Commission Modernising Company Law and Enhancing Corporate Governance 2003 Belgian Code on Corporate Governance Principles to support long-term value creation 2004

  15. Board of Supervisory Management Board AGM BoM SB Company oversight Company Management of SB CONTROL Supervision of BoM Joint accountability and BoM Chair of Supervisory Chair of Board coordination Board coordination i.e. i.e. i.e.  Election/ remuneration of BoM  Election of S - R  Information, recommendations  Business monitoring/ RMS  Discharge of acts of SB and BoM to SB  Approval of :  Appointment of Auditors  Preparation of SB meetings 1. Business plan  Appropriation of net income  Corporate Governance 2.Defined transactions  Approval of capital increase 3.Annual finalized statements  Proposal of auditors  Corporate Governance The Dual System: Segregation of Duties Source: Joachim Heins-Bunde (2006)

  16. Supervisory Board Employee Representative Shareholder Representative Independent outside expert Social Council members (blue collar) Management Rep (white collar) UNION reps Elected by AGM (5 years) Elected by Employees ( 5 years) Chair of Supervisory Board with casting vote in stalemate situation Vice Chair Supervisory Board The Dual system : Representation of Employees and Shareholders Source: Joachim Heins-Bunde (2006)

  17. Discussion/ meetings Chair of Supervisory Board – Chair Board of Management Pre meetings With Employee Pre meetings Plenary Sessions Representatives With Shareholders External Representatives Auditors • 1 times / year • Audit program • 1 site visit • Financial statements • SOX Audit Committee Personnel Committee Technology Committee Strategy Committee 3 - 4 times/ year 3 - 4 times/ year 1 - 2 times/ year 1 - 2 times/ year Internal ü R&D priorities ü Financial statements/ ü Remuneration ü Corporate Strategy Auditor ü NBD reporting ü Contracts ü BU strategies ü RMS ü Nominations ü Key projects ü SOX • Audit program ü Auditors: • Key results 1. Independence 2. Nomination proposals 3. Fees Activities of Supervisory Board Source: Joachim Heins-Bunde (2006)

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

  19. Ahold Share Price Collapse Source: Compiled from Yahoo Finance (2006), various media news sources.

  20. What Shareholders' Democracy? * Companies in the FTS Eurofirst 300 Index Source: Association of British Insurers: Deminor Rating

  21. Dividends Number of Employees and Personnel Expenditure per Employee Source: Beyer and Hassel (2001)

  22. The Distribution of net value added in large German firms, 1992-4 and 1996-8 Source: Beyer J. and Hassel Anke (2001 : 320)

  23. Penetration of Active Share Ownership in Some European Countries Sources: Deutsche Bank Corporate Governance Research, TUAC, Eurosif,

  24. Responsible Investment Evolution: Growth of ‘ESG’ Environmental Funds : Germany, Northern Europe, Switzerland Environmental Social Governance Integration: UK, NL, FR Engagement Overlay: UK, NL, BE Sustainable Development Funds : France & Belgium Europe Integration Engagement Ethical Funds : USA Environmental criterias Best of class approach Screening criterias Socially responsible funds : USA, Canada, UK, Switzerland, Northern Europe Screening and best of class approach 1928 1970 1980 1990 2006 Social Environmental Ethical Source: Eurosif Research 2007

  25. Conclusions • The distinctiveness of Europe has produced some of the most valued corporations in the world, together with an exceptional quality of life in many communities. • Though Europe has embarked on a process of change in corporate governance and company law in recent years to integrate better into international financial and product markets, there are important signs that the commitment to social democracy will survive this experience.

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