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Corporate Governance comparison: Germany, Sweden and the USA

Corporate Governance comparison: Germany, Sweden and the USA. Tommy Olsson Benjamin Wenzel Max Riemschneider January 13 th 2014 . Agenda. Introduction Corporate governance in Germany Illustrative example: Generali AG Corporate governance in Sweden

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Corporate Governance comparison: Germany, Sweden and the USA

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  1. Corporate Governance comparison: Germany, Sweden and the USA Tommy Olsson Benjamin Wenzel Max Riemschneider January 13th 2014

  2. Agenda • Introduction • Corporate governance in Germany • Illustrative example: Generali AG • Corporate governance in Sweden • Scandinavian corporate governance scandals • Corporate governance in the USA • Illustrative example: Motorola Solutions Inc. • Conclusion

  3. Introduction • Comparison of Germany, Sweden and the USA in the following areas: • Board system • Corporate ownership • Takeovers • Major legislation

  4. Corporate Governance in Germany

  5. CorporateGovernanceDefinition • The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Source: Investopedia (2013)

  6. Framework in Germany • Rights of Shareholders • Takeovers • Examinationboard • Supervisoryboard • Laws • Regulatory Institutions • Codex

  7. Rights of Shareholders • Participation in annualgeneral meeting • Decisionsregardingsupervisoryboardmembers, choosing of the auditors and use of the annual profit • Stockholders > 5% can set up topicsduring the general meeting Source: Deloitte – CorporateGovernanceDeutschland (2013)

  8. Takeovers • Board has no right to avert a takeover • Exceptions: • Search for a « white knight » • Measures to prevent a takeovergranted by general meeting • Stocklistedcompanies have to disclosetakeover obstacles in annual report Source: Deloitte – CorporateGovernanceDeutschland (2013)

  9. Examinationboard • 9th May 2009 - Bilanzrechtsmodernisierungsgesetz – BilMoG • Capital marketorientedcompaniesneedat least one independantsupervisory or examinationboardmemberwithknowledge in auditing Source: Deloitte – CorporateGovernanceDeutschland (2013)

  10. Supervisoryboard • BilMoG: concretetasks for supervisoryboard: Surveillance of the intern control system, risk management and the annualauditing • >500 employeesproportionalelection by stockholders and employees • Supervisoryboarddecidesboardmembers Source: Deloitte – CorporateGovernanceDeutschland (2013)

  11. Laws • „Gesetz über die Mitbestimmung der Arbeitnehmer(Mitbestimmungsgesetz - MitbestG)“ • „Gesetz über die Drittelbeteiligung der Arbeitnehmer im Aufsichtsrat(Drittelbeteiligungsgesetz - DrittelbG)“ • „Gesetz zur Modernisierung des Bilanzrechts (Bilanzrechtsmodernisierungsgesetz –BilMoG)“ Source: Gesetzeim Internet – Bundesrecht (2013)

  12. Regulatory institutions • German Reporting Standards Committee e.V. (DRSC) • German federal financial supervisory agency(BaFin) • Test Center foraccounting (DPR)

  13. Deutsche Corporate Governance Kodex • system of rules created by the Federal Republic of Germany that contains recommendations and ideas for good conduct, control and management of a company, especially for companies that are listed-on the stock exchange. Source: Corporate Governance Code (2013)

  14. Deutsche Corporate Governance Kodex • Adresses all main critical points of Germancorporategovernancesuch as • Insufficientconsideration of stockholderinterests • The dual corporate structure of board and supervisoryboard • Missing transparence of Germancompanies • Insufficientindependanceof German supervisoryboards • Codex is only recommendation about best practice, no law, not legally binding Source: Corporate Governance Code (2013)

  15. History • Kontrolle – und Transparenzgesetz – first law in Germany regarding Corporate Governance, in 1998 • e.g. accountabilityofsupervisoryboard, boardandauditors was extended • publishing the risk structure of a company in the annual report • 2001 creation of government commission “Deutscher Corporate Governance Kodex” • financed by the economie, independent from the government • free in the decision what should be included in the Codex • members are not politicians • “Corporate Governance Kodex” in 2002 and handed it over to the government Source: Corporate Governance Code (2013)

  16. History • Every year, the commission meets at least once and discusses possible changes of the Codex • e.g. in 2009 more attention to diversity in board, hence more women • limitation of variable salary part of a board manager should have an upper limit – recommendation • application in the economy: Source: Corporate Governance Code (2013)

  17. Examples • Siemens • “Declaration of Conformity by the managing board and the supervisory board of Siemens Aktiengesellschaft with the German Corporate Governance Code” • Telekom • More women in higher positions (at least 30% of management positions) Source: Siemens (2013), Telekom (2013)

  18. Generali AG • Generali Deutschland: • Deutsche CorporateGovernanceKodex • Everystocklistedcompany– yearlycompliancestatement

  19. Generali AG • « Since the publication of last yearcompliancestatementaccording to §161 AktG , the Generali Deutschland Holding AG has agreed to the recommendations of the DeutscherCorporateGovernanceKodexwith exceptions. » Source: Generali Deutschland (2013)

  20. Generali – Examples for exceptions • « An individualpresentation of the remuneration of the supervisoryboardmembers as well as their possible other business relationshipswill not becarried out. » • Structure of remuneration of supervisoryboardisshown in annual report • Showingamount no valuableadditional information Source: Generali Deutschland (2013)

  21. Generali – examples for exeption • « Retrospective changes of the objectives are not excluded » • Possible major changes • Reconsideration of objectives maybeuseful • « Objectives regarding the composition of the supervisoryboardwill not bedetermined » • Best knowledge and competenceshallbecriteria, not social or cultural influence Source: Generali Deutschland (2013)

  22. Generali - remuneration • Remunerationisaimedatsustainablesuccess • Long-termstability of the companyis the objective • No incentives to enter highrisk positions through variable remuneration parts Source: Generali Deutschland (2013)

  23. Generali - remuneration • Salaryboard: 40%-50% variable • Year bonus plus long-term bonus • objective: Succes of the group (85%), individual objectives (15%) Source: Generali Deutschland (2013)

  24. Generali - Compliance • Ethics – codex – correctness, honesty, impartiality, professionalism • Behavioral codex – duties for employees:confidentiality, appraisal interview • Trainings for betterimplementation • Compliance-Officer – contact for compliance questions • Lawyers as ombudsmen– suspicion of complianceirregularities Source: Generali Deutschland (2013)

  25. Alternatives • Additional to Deutscher Corporate Governance Kodex (DCGK): • Public Corporate Governance Codex ofthe Federal State • Governance Codex for familycompanies • CorporateGovernance Codex for Asset Management-companies Source: Bundesfinanzministerium (2013), KodexfürFamilienunternehmen (2013)

  26. Research institutions • Berlin Center of Corporate Governance (BCCG) • Center for Corporate Governance - HHL Leipzig Source: Berlin Center of CorporateGovernance(2013), Center for CorporateGovernance Leipzig (2013)

  27. Summary • Corporate governance in Germany • Dual system • Participation and election – supervisoryboard • No election of board • DCGK – « comply or explain » • Mulitplelaws and institutions • Growing importance • Application of codex

  28. Corporate Governance in Sweden

  29. Stylized governance characteristics of the Nordic countries Source: Thompson & Conyon (2013)

  30. 1990’s – The establishment of Swedish Corporate Governance • The Swedish Shareholders Association published the first Swedish ownership policy in March 1993. • Set of guidelines for the ownership role within listed companies. • Most significant Swedish institutional investors followed and issued similar guidelines. • First Practical implication in the Volvo Renault deal in 1993. • Several new compositions of rules, guidelines and recommendations for Corporate Governance followed, from example: • The Swedish Industry and Commerce Stock Exchange Committee • The Swedish Securities Council • The Stockholm Stock Exchange • The Swedish Academy of Directors (Good Board Practice, 2003) • The Swedish Company Act (2005) Source: Corporate governance board (2013)

  31. The Swedish System of Governance • The four governance bodies • The Shareholders' Meeting • The Board of Directors • The Chief Executive Officer • The Controlling Body: • The Auditor, appointed by the Shareholders' Meeting. Source: Corporate governance board (2013)

  32. The Rights of Shareholders 1/2 • Eachshareholderhas the right to participatein the annualgeneral meeting (AGM) • Anyshareholdercanaddtopics to agenda • Shareswith or withoutvotingrights • Majorityvoting system • Proxy right Source: Corporate governance board (2013)

  33. The Rights of Shareholders 2/2 • Responsibilities: • Electmembers of board, • Electauditors. • Set feesalsoat the AGM. • Extraordinarygeneral meeting • Requested by a shareholderminority of at least 10% Source: Corporate governance board (2013)

  34. Nomination Committee • Elected by the annual general meeting (AGM) • Important link in looking after shareholders interests at AGM. Responsibilities: • Propose candidates for the following positions: • The chairman of the board • Board of directors • Auditors. • Suggests fees and remunerations for each position Nomination Committee Source: Corporate governance board (2013) Deloitte (2013)

  35. Examinationboard 1/2 Under Aktiebolagslagen • The examination board must be made up by directors from the Board of Directors. • Must at least consist of two members from the board, who may not be employees. Eg. CEO • Requirement to have at least one independent and unattached member with experience in accounting or auditing Source: Corporate governance board (2013) Deloitte (2013)

  36. Examinationboard 2/2 • Major areas of responsibilities: • Monitoring financial reporting • Monitor the internal audit controls • Review and monitor the auditor Source: Corporate governance board (2013) Deloitte (2013)

  37. Board of Directors1/2 • Swedish corporate government system: • Third alternative to the unitary and dual system • Mandatory employee representation (at more than 35 employees) • Non executive members • Main Responsibilities: • Elect the CEO • Supervise the CEO’s day-to-day work • Supervise entire management day-to-day work • Strategic decisions • Carries the ultimate responsibility Source: Corporate governance board (2013) Deloitte (2013)

  38. Board of Directors2/2 • Consequences of Swedish system • More power than traditional supervisory board • Balanced by the absence of executive power as in unitary boards Source: Corporate governance board (2013) Deloitte (2013)

  39. CEO – Chief Operating Officer • Subordinated the Board and AGM • Responsibilities: • Elects executive management • Reports to the board • Runs the day-to-day activities • Restrictions: • May be member of the Board, but not as chair • Receives relatively low and fixed pay Source: Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013) Deloitte (2013)

  40. Laws and guidelines 1/2 • Swedish corporate governance rests upon the two following legislations: • The Swedish Companies Act (Sw: Aktiebolagslagen (ABL)January 2006 ) • Involves basic rules of the company's organization • Eg. Defining the governing bodies, their tasks and the responsibility of each position • The Swedish Corporate Governance Code (“The Code” 2010) • Serves as a complements to the law with rules • More demanding • “Comply or explain” • Additional guidelines: • “Guidelines for Good Board Practice” (January 2003) Source: Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013) Deloitte (2013)

  41. Regulators • Financial Supervisory Authority (Finansinspektionen) • The Swedish Securities Council (Aktiemarknadsnämnden) Source: Aktienamnden (2013) Finansinspektionen (2013)

  42. Take-over rules • The Swedish Code must follow the standards set up by EC Takeover Directive (2004/25/EG) • Focus of legal rules: • Protection of minority owners • Healthy restructuring processes. • Responsibility of Board: • No right to avert takeover unless decision from the Annual General Meeting. • Rules of defense mechanism: • “May not take measures which are intended to impair the conditions for making or implementing the takeover bid.” • Approval from AGM, allows to implement strategy to avert a takeover as long as it do not break the first rule. • May search for “White Knight” Source: Bolagsstyrning (2013) Corporate governance board (2013) Davies, Hopt, Nowak, van Soling (2013)

  43. Volvo – Renault Deal 1/2 • Volvo Chairman Per Gyllenhammar and Renault General Director Louis Schweitzer worked out deal to merge Volvo and Renault • Planned for three years, however without the involvement of managers nor shareholders. • No benefits were proven for the shareholders in Volvo, • Leaks stated that profit was suffering from the proposed merger. Source: Corporate governance board (2013) Businessweek (1993)

  44. Volvo – Renault Deal 2/2 • Shareholder reaction: • Feared merger would depress Volvo shares • Golden Share entitlement of French Government • No guarantees of Renaults privatization • Midlevel-managers disapproved and leaked unbalance in technology sharing • Result: • Volvo CEO SörenGyll and other top-managers, ”disposed” Per Gyllenhammar as Chairman through the support of major investors. • Newly created guidelines in Corporate governance helped shareholders pull the hand break for the deal. Source: Corporate governance board (2013) Businessweek (1993)

  45. Skandia Scandal 2003 • At the time he biggest Nordic Insurance Company • Fraud of leadership: • The CEO , L.E. Peterson and board of directors, revealed for shareholders that they lifted salaries for $ 37 million • L.E. Peterson however secretly lifted the double amount. • Acquired luxury apartments for family and friends at the expense of Scandia. • Consequences: • Chairman of Scandia fired for not having monitored the CEO properly. • Scandia already hit by financial crisis, suffered crashing stock prices, and later lowered credit rating. Source: The Economist (2003)

  46. Corporate Governance of Ericsson Source: Ericsson (2013)

  47. Corporate Governance of Ericsson Overview • Biggest shareholders: • Wallenberg group 20% • Handelsbanken 20% • Board: • 12 Members plus Chair • Management: 1 Spot – CEO • Trade Unions: 3 Spots • Wallenberg Group: 2 spots • Handelsbanken: 2 spots • AGM 4 spots (often reserved for foreigners) • Members receives a fixed fee • 4 Women on board Source: Ericsson (2013) Ericsson History (2011) Norden (2009)

  48. Ericsson Remuneration • Remuneration at Ericsson is based on the principles of • Performance • Competitiveness • Fairness • For senior management the total remuneration consists of: • Fixed salary • Short-term variable remuneration • Long-term variable remuneration • Pension • Other benefits Source: Ericsson (2013)

  49. Corporate Governance in the USA

  50. Corporate governance in the USA • The board of directors - Introduction • Primary mechanism of control in US firms • Ensures firm follows the shareholders best interests • Elected by the shareholders • Variable size (average of about 10) • CEO almost always part of the board Source: Thomsen, Conyon (2012)

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