quarta-feira, 29 de abril de 2015
Corporate power without responsibility on the board
This has not been a salutary week for European corporate governance. At Volkswagen in Germany and at Industrivärden in Sweden, a system intended to encourage stability and long-term growth has instead created self-indulgence.
At VW, Ferdinand Piëch was ejected as chairman of the supervisory board by other members, including union representatives and politicians, after he tried to destabilise Martin Winterkorn, the chief executive. Mr Piëch, a member of one of the families that control VW, had done the same to Bernd Pischetsrieder in 2006. This time, he failed.
At Industrivärden, which along with the Wallenberg family controls more than half the value of the Swedish stock exchange, there was spectacular misbehaviour. Anders Nyrén was fired as chief executive on Monday after a scandal over the misuse of corporate jets by executives at SCA, the forestry and paper group, and their families.
Both companies are unusual and rivals have used power more wisely. The Wallenberg family has shown greater self-discipline in running its industrial empire company than Industrivärden, while BMW has combined familial control with allowing managers to exercise greater professional autonomy than at VW. But both illustrate how the European approach can encourage corporate insiders to behave badly.
Short-termism is the risk of the US and UK approach, of diversified shareholders including hedge funds pressuring companies from the outside. Entrenchment is the risk of the European approach, of “active governance” by a few powerful shareholders that influence board directors and sometimes appoint them. Placing too much power in too few hands is dangerous.
The good news is that, at both Industrivärden and VW, public exposure solved the problem. Mr Piëch, the former chief executive credited with rescuing VW in the 1990s, was used to behaving imperiously and causing trouble in private, but pushed his luck by doing so openly in an interview with Der Spiegel. Wrongdoing at Industrivärden could not survive being reported by the Svenska Dagbladet newspaper.
Germany and Sweden differ on specifics. In Sweden, a few shareholder “spheres” exert influence over an array of companies through investment holding companies and two-tier equity that gives them more votes than their economic stakes would imply. They also appoint company directors by holding seats on board nominating committees.
In Germany, families such as the Quandts, who built BMW, control both Mittelstand small and medium-sized enterprises and many large ones. Management boards are overseen by supervisory boards that include worker representatives (and in VW’s case, the premier of Lower Saxony, which holds a 20 per cent voting stake). Private shareholders are kept largely on the outside.
Yet the effect is similar. The Wallenberg family foundations, for example, hold 23 per cent of the capital of Investor, their industrial holding company, but 50 per cent of the voting rights. Investor in turn wields influence over industrial companies such as Electrolux and ABB, and the bank SEB. Not even the largest fund manager has such a loud voice in the US economy.
At VW, the Porsche and Piëch families control 51 per cent of the voting shares. Foreign pension and hedge funds hold 24 per cent of the subscribed capital, and private shareholders another 12.5 per cent, but largely in preference shares with no voting rights. It took Wolfgang Porsche and Stephan Weil, premier of Lower Saxony, to outvote Mr Piëch on the supervisory board.
At its best, active governance by a few shareholders can achieve results. “You only need look at BMW to see how it can be done in a different way — that family ownership can provide long-term stability,” says Hans-Christoph Hirt, a director of Hermes Equity Ownership Services, an adviser to pension fund investors in companies including VW.
Companies that are protected from short-term pressures, such as having to return cash to shareholders or keep their margins high instead of investing in new products, may benefit. It is a competitive advantage not only for
family-owned companies but those controlled by private equity and venture capital funds in prioritising growth.
In particular, it helps long-cycle companies that need to invest heavily in research and development that may not see results for several years, such as those in advanced manufacturing, pharmaceuticals, and car assembly and components. Germany and Sweden do well in such industries.
But it puts a heavy responsibility on a few individuals. “The system requires the controlling owners to be responsible and competent, and have an enlightened attitude to management,” says Rolf Carlsson, founder of Active Owner Partners, an advisory firm.
Industrivärden blatantly failed this test, and seems to have been failing it for a long time. Sverker Martin-Löf, its former chairman who was forced out in January, was chairman of SCA and chief executive before that. Industrivärden protected the interests of a coterie of executive insiders as keenly as it pursued its long-term strategy.
Mr Piëch’s failure was subtler. He is a brilliant engineer but lacked the wisdom to step back from management and accept that his role had changed. The power he once wielded for VW’s benefit ended up blinding him.