Conceptions of Ownership structures and the Unresponsive regulation: the case of Swedish corporate governance reform
Karin Jonnergård
[email protected] Växjö University
Ulf Larsson
[email protected] Växjö University
Abstract Since the EC-commission issued the so-called Winter-report a number of corporate governance reforms have been implemented around Europe. International competition over fast moving capital is said to pose great pressure on the corporate governance systems. Therefore, the regulation of the corporate governance systems has to be responsive (Ayres & Braithwaite, 1992) and there is a demand for new rules and new regulation. Sweden, as the empiric focus of this paper is no exception: recently a new Companies Act and a Code of Corporate Governance has been issued. The regulators have argued these changes from the position that the ownership situation of the publicly traded firm has evolved – from domestic and private to internationalised and institutionalised. Given the development pan-national stock markets in Europe this is an issue of common interest. In this paper we argue that the range of the internationalised and institutionalised capital is overstated and that there therefore is a risk that the pressure for new regulation is overstated. Instead other reasons, more connected to political legitimacy of the states included in the common market, than the efficiency of the market lay behind the recent wave of governance reforms. This endanger that regulation might be issued that leaves the corporate governance system worse off than before. Also, as both ownership structures and the agenda for corporate governance reform is similar through out the whole continental EC (La Porta et al, 1999), these observation might pose a threat to the EC idea of creating a level playing field for European corporate governance (Wouster, 2000) and in the long run to the Lissabon strategy. The purpose of this paper is to utilize the Swedish Corporate Governance Code as a case study to detect flawed regulation due to distorted perceptions of e.g. the power of different interest groups or important tendencies in European ownership structures.
1. Background From a normative point of view it has often been stated that issues regarding the regulation of public1 firms’ corporate governance must be viewed from the overall purpose that justifies such regulations, that is, the creation of shareholder value (i.e Bergström & Samuelsson, 2001; Hansmann et al, 2006; Shleifer & Vishny, 1997). This implies that regulators within the area, either they are legislators or self-regulators, in an active manner must adopt to the situation at hand, so that changes in for instance the ownership structure reflects the legal foundations for the firms’ corporate governance. This paper deals with the risk and hazards for the corporate governance system as a whole when new regulation is issued on the basis of simplified conceptions - that is when responsive regulation (Ayres & Braithwaite, 1992) may turn into unresponsive regulation. The changes toward a more dispersed ownership have a rather intricate relationship with regulation. From an academic point of view one might see it either in accordance with La Porta et al blockbusters of 1998 and 1999 where new regulation is prescribed to enhance dispersed ownership, or in accordance with Coffee (2001), where changes is in the ownership structure is followed by new regulation. In this paper we will try to follow Coffee, arguing that regulation is responsive to the situation, which should be even more reasonable in a civil law country as Sweden.
Reformation of the public firms’ corporate governance through legal changes has been at heart of the public agenda both before and after the early twenty century’s scandals of Enron and alike. The EC company directives and the changes therein, the OECD corporate governance code, the US Sarbanes-Oxley Act and the UK Combined code, are all international examples of the wave of new regulation. In Sweden, a new Companies Act and a first formal binding code of corporate governance have recently been issued. Much of the Swedish regulatory discourse in the area departs from that a drastic change in ownership structures of the public firms’ – from individual and local to institutionalised and global – has occurred. The picture given by the regulators is that the Swedish business society has altered from a traditional entrepreneurial private capitalism towards a situation where ownership is dispersed and separated from management; that is the modern corporation (se Bearle & Means, 1932) has finally conquered also Sweden.
1
In this paper Public is used to denote a ordinary firm from a firm with stock traded on a stock exchange
2
The traditional method of calculating institutionalised ownership is to depart from the proportion of ownership held by physical persons. As the direct ownership stakes held by physical persons has declined during a number of years one may conclude that the ownership has been institutionalised. An alternative method is to define institutional ownership not as non-individual ownership but as an ownership form where an additional layer of principal – agent relations, besides that of management and owners, has been put into use. In other words, defining institutional ownership as those cases where the residual claimants (owners) have handed over the management of their assets to an asset manger, who invests the assets on the capital markets. Institutional ownership thereby includes ownership by pension’s funds, insurance companies and other funds. In Sweden, the ownership stake of these owners has been more or less constant since the 1980-ies. Regarding foreign ownership this is measured as stake held by foreign legal entities deducted from the total ownership stake. After the deregulation of the Swedish financial markets this stake has skyrocketed to about 30 to 40 percent. However, the foreign ownership stake differ strikingly between the about 250 firms of the Stockholm Stock Exchange, making the pressure unevenly divided. Also the foreign owners’ identity varies from pension fund to industrial motivated mergers, making the foreign investors’ span of control to vary from the Wall Street walk to direct intervention in firm management. Finally, due to complex owner control structures - such as pyramid and crossholdings – there is still a clearly identifiable dominant owner in at least 60 % of the listed firms. The existence of such a dominant owner obviously reduces the influence of any international or institutional owner. Consequently, it is argued in this paper, that the importance and magnitude of the internationalisation and the institutionalisation of the Swedish public firms’ ownership has been overstated in the regulatory conversation.
When a regulator constructs new corporate governance rules, the regulator also construct new possibilities and new limitations for the firms’ within the corporate governance system. To be responsive (Ayres & Braithwaite, 1992) the rules are expected to meet the situation or the problems facing the system and its firms. In the preparatory works of the regulation studied here – the Swedish code of Corporate governance – the problem is defined as creating potential for the exercise of “an active ownership role” as the ownership situation of the public firms’ altered from private and local to institutional and international – that is – when the ownership dispersed (see The Commission of Trust, SOU 2004:47, also perfectly in line with The Company Committee, SOU 2001:1). In other words, the regulation is supposed to occur in accordance with Coffee’s (2001) picture, that is, when the ownership disperses there 3
is a demand for new regulation protecting the dispersed ownership from a re-concentration, or what we might call ex ante minority protection.
An easy, and at a same time internationally legitimate, way of regulating firms in a corporate governance system characterised by dispersed ownership, is the introduction of a code of conduct, i.e. regulation stemming from supposedly successful systems (the Anglo-Saxon ones) were the ownership is dispersed. This was also what was done in Sweden as a Code of Corporate Governance was introduced in 2005. This complex relation between corporate governance regulation and the international developments and trends, implies that only a certain set of rules may be on the agenda. Strong international influences leading to vast legal borrowing is not uncommon (Watson, 1974). This is true for the arena of corporate governance regulation and most issued corporate governance codes is strikingly alike regardless of national context. The rules in the Cadbury report were issued to bridge gaps in the British companies act. The Cadbury code, however, became a standard for most corporate governance codes. As a code of corporate governance is issued today, either that be in the common-law country of South Africa or in the civil-law country of Sweden, the set of rules is still defined by the original British code. Thus, the rules in a corporate governance code might not reflect other active regulations, such as the local company’s act, that also governs the firms’. Although, this is actually mirrored in that the rules change meaning to concur with local context and regulation (see Jonnergård & Larsson, 2007), there will always be a risk of collisions with other local regulation and actual needs of the regulated firms’ in the system. If then the rules is issued on false premises – or conceptions – of the situation one should end up in a situation when then the rules respond to the wrong problems, thus leading responsive regulation (Ayres & Braithwaite, 1992) to unresponsive regulation.
In this paper we investigate the perceptions of the public firms’ ownership and its affect on the Swedish corporate governance code. The purpose of this paper is to illustrate how international conceptions of ownership forms local discourses that effects local corporate governance regulation. This is done by making our understanding of the ownership and the control of the public Swedish firms a little more complex and relating that understanding to the stated aim of Swedish corporate governance regulators and the actual regulation steaming thereof.
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2. Putting the corporate governance regulation on the agenda The basic assumption of the paper is that efficient regulation demands a fit between the national context and the regulation at hand. This assumption implies that the question of how a specific issue gets on the agenda became important as well as how the issue gain a specific content. A classic theory in political science in this area is the so-call agenda setting theory (Kingdon, 1984:1995). Agenda-setting theory is based on the garbage can model (Cohen, March & Olsen, 1972). It is built on the idea that problems and solutions, politics and actors in political processes are partly separated and connected at occasions when windows of opportunities are opening up. In other words, when the different streams of problems, solutions, and actors coincidence, for example when a certain proposal suddenly become elevated on the governmental agenda because thy can be seen as solution to a pressing problem or because politicians find their sponsorship expedient (Kingdom, 1994, p. 172). Politics in this context has to do with the stream of actions made by politicians in order to be perceived as legitimate or to be re-elected. In its simplicity the theory may give the impression that a certain amount of haphazardness is involved in the agenda-setting processes. However, in his original development of the theory Kingdom (1984) emphasis that the political entrepreneurs, which are ”willing to invest their resources in return for future policies they favor” (Kingdon, 1995, p. 204) are important for which issues and in which way different issues enter the political agenda, These entrepreneurs are usually actors a bite offside the centre of the political power, but of course may also people in the centre of political power. O’Malley (2007) for example shows convincingly how Tony Blair most skilfully uses release of information and structuring of issues in order to achieve a decision regarding the UK’s involvement in the war with Iraq. The conclusion is that the influence a person may have on a political process is due to the ability of manage the different streams of ideas and politics in order to get an issue on the agenda.
Agenda-setting theory has of course been criticized among other because its concepts many times are diffuse and difficult to operationalize and because profound qualitative, rather than quantitative studies are needed in order to develop or confirm the theory (Soroka, 1999). Without criticizing the theory as such, recent research has pointed at a substantive complexity in the interactions between actors when different agendas are set (e.g. Hancher & Moran, 1989; Miller & Rose, 1992). In addition one may question if Kindom’s theory is context-
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dependent and less suitable in a neo-liberal European landscape, than an American governmental structure during the 1980’s. However, two aspects of the theory will be applied here: First, the perception of problems and problem-solving models as more or less disconnected streams, i.e. they may exist relatively independent of each other and have to be connected by an occurrence or an entrepreneur. Second, the perception of changes in existing conditions (i.e. a problem) and politics as triggers for a new agenda setting. The first one will we hopefully show by discussing how different streams creates an agenda, the second one we will more or less reject, or at least redefine by stating that it is not changes in existing condition that create agenda-setting and the consecutive regulation, but the perception of problems that retrieve in political entrepreneurs and popular societal discourses.
2.1 Finding problems and problem-solutions models The focus of our paper is, as discussed above, the perception that the ownership structure in Swedish listed companies has change substantially and that this demands a new regulation in order to gain a fit between the new condition and the context in order to achieve efficiency (i.e. maximizing the shareholder value). This problem has been solved through importing a problem-solution, i.e. the code of corporate governance. What we need to do now is to define the stream of problems from which the perception regarding ownership and the stream of solution where the code of corporate governance is a part.
2.1.1. Convergence of corporate governance systems as programming of the agenda Both the problem defined and the solution discussed above may be seen as a part of a larger agenda connected to an international, rather than national programme to converge the different national corporate governance systems. According to Miller and Rose (1992) is the neo-liberal government characterized by on-distance governing. This implies that central legal regulation has been exchange by so-called “programmes”, ideas and solution-models related to different societal problem that are supported by different actors at various organizations simultaneously and lead to different kinds of regulation, not merely laws. New Public Management (NPM; Hood, 1991), the wave of reforms imported to the public sector from the private one during the late 1980’s and the 1990’s may be seen as one such programmes on an overriding level, and quality assurance in the health care as one more specific programme within NPM. In both cases, a manifold of actors and types of regulations were involved.
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Relative the simple agenda-setting model above we may said that even if problems, politics and actions still are partly disconnected, they may be sorted in under different themes or programmes. Through the dissemination of regulation, to different parties in the society at different society level this has also lead to a need of more entrepreneurs playing a coupling role in different organisations.
The neo-liberal programmes are to an increasingly degree international (cf. Meyer, 2003; Meyer et al 1997). In the case of convergence between different national corporate governance systems this is very much the case. The discourse regarding the convergence of corporate governance systems is closely connected to the more general discourse about globalisation of the business society and lively discussed. According to Fligstein (2001) is globalization (together with the neo-liberal discourse) an American programme up to now mostly materialize in the productions- and sale-organizations of the global company. As an addition, one may claim that also the capitals that finance these global companies are internationalized (Oxelheim, 1996). Besides this, Fligstein claims (2001) one should separate between globalisation as an ideology, the idea about and the desire to make the business world global, and globalization as the material effects that really may be deferred to globalization of the businesses.
If we accept the idea that the discourse of globalization and thereby the discourse of convergence of corporate governance as an American programme based on – amongst others – the production of ideology we as academic performs in our daily work, than we may discuss the streams of problems and solutions connected to the programme. One condition that appears as important for this programme is ownership (cf. Gourevitch & Shinn, 2005). In American research the point of departure has been the condition of diffused ownership (Berle & Means, 1932; Alchian & Demsetz, 1972; Fama, 1980; Fama & Jensen, 19832) and the importance of an efficient and transparent capital market. In such a context, the owners’ function as the decision-maker of the company becomes problematic. Diffused ownership implies that the control over the top management team has to be carried out by other mechanisms than by strong owners. This, in turn implies an emphasis on the signals from the market and hostile take-overs as governance mechanisms. In those cases with ownership concentrated to one or a few strong owners, the capital market presents a new problem: How 2
For a discussion about this conditions and it ”americanizing” effects on reserach form other countries see a discssion between Lubatin et al and others in Journal of Organizational Behavior , 2007 Vol 28 (1).
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can minority exploration be avoided? The American programme regarding owners may thereby be said to include problems and solutions related to different conditions of types of owners (private/institutional), market effectiveness and relation between owners (minority/controlling owners)3. For example, as we mentioned in the introduction, La Porta et al (1997; 1999; 2000) has offered us a model whereby “bad regulation” leading to low minority protection is the problem and inefficient capital markets and therefore demanded new regulation protecting the minority owners from expropriation by the majority owner, while Coffee (2001) offers a model by which changes in ownership condition will lead to new regulation. In both cases, or possible changing condition, probable problems and suitable solutions are offered.
2.2 The world models of corporate governance The American programme regarding ownership and market effectiveness might be view as a part of a “worldwide model” (Meyer et al 1997) of corporate governance. Such models are (Meyer, Boli, Thomas, and Ramirez, 1997, p.): ”Worldwide models define and legitimate agendas for local actions, shaping the structures and policies of national-states, and often local actors in virtually all of the domains of rationalized social life – business, politics, education, medicine, science, even the family and religion” Worldwide models are created and diffused by global actors as states, professional organisation, pan-national policy organizations etc. To be international accepted and legitimated and in order to be perceived modern and “good” different nations have to implement (at least formally) some of these models. One may conclude that the streams of world models offer problems and solution as well as legitimacy for the political entrepreneur. This implies that they are more closely connected to the stream of politics, rather than to change in material conditions. The condition for ownership in a specific context will thereby not be the basis for the agenda-setting but will be re-interpreted in the light of the dominant world model at present time.
To the convergence of corporate governance systems are not only programmes for what the problems are and desired states of different condition are coupled, but furthermore a bundle of 3
This is of course an extremely general and sloppy description. We apologize, but need to get on with our arugmuents.
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legitimated way of regulating the corporate governance system. As we mentioned above several of the discourses included in the ownership programme implies regulation. Since the early 1990’s code of conduct has been one dominant solution to such demands for regulation. Especially, the Cadbury code, issued in 1991, has become the standard for codes implemented in other national context. The idea of corporate governance codes has been an enormous international success. The European Corporate Governance Institute (ECGI) lists on its website (www.ecgi.org/codes/all_codes.php) over 140 different codes from all over the world and from different pan-national or international organizations. The initiators of the codes and the status of the codes vary substantially. Many nations have several codes that are issued by different bodies and enforced in different ways. What seems to be similar between the different codes (with a possible exception of the Australian one) is the structure of the codes. The codes include the same issues even if the regulation about the issues may differ. Apparently some issues have to be included in order for making the code legitimate in the eyes of the world society and the foreign investors. In this way the code resemble a world model. It is needed for a nation (and its financial market) to become legitimated and it postulates the kind of issues that should be treated in the code. In this way it is a forceful model for problem-solving in converging different corporate governance systems.
If we summarize the discussion this far, we have define the convergence of national corporate governance system as an American programme that includes several programmes in different areas, where the ownership diffusion and the financial markets as control markets are one. These programmes include a number of perceptions, problems and solutions kept together by some common assumption of the world (for example the important of diffused ownership and capital markets for economic growth). Some of them, for example, the programme regarding ownership may be viewed as worldwide models, e.g. they have gained a status that makes them appear as the legitimate way of doing thing irrespectively of context. This implies that they are most powerful forces for agenda-setting, irrespectively if the conditions on national level are in accordance with the basic assumptions of the model. The discussion above leave us with two world-models, both connected to the programme of convergence between the different corporate governance systems: the norm of diffused (institutionalized) ownership and the need for a corporate governance code. Put in the language of agenda-setting theory we may say that the existence of a programme for convergence between national is a part of the stream of politics that may arise an issue on the agenda. The world model of diffused ownership here offers a suitable description of a problem (and/or solution), while the 9
convergence and the diffused ownership-discourses calls for a problem-solving model for regulation. Code of conduct offer such a model and prescribe at the same time the item that ought to be included in the code. On the other side, the problem defined in these world models are not connected to material condition of the national contexts, but to the discourses around the models and the model’s origin. This implies an agenda not in accordance with (or at least not conscious in accordance with) the condition in the local context and a pre-determine structure of a solution, not formulated in accordance with the need of the nation.
3. Ownership of the Swedish public firms’ The ownership and control of the Swedish industry is a much debated topic. A sharp line can be drawn from the pre-1989 discussion on industrial democracy and socialism and the post1989 discussion on privatisation, liberalisation and de-regulations. The pre-1989 discourse could be found in the communist party chief secretary CH Hermansson’s book on the “Fifteen Families” (1971) and in the political turmoil surrounding the wage-earner funds and the socialist firm in the 1970/80-ies (see Henrekson & Jacobsson, 2003 for a more thoroughly discussion). It could be claimed that politically there has been a huge climb to the “right”, however the pension system reforms turning the entire working population to residual claimants makes the wage-earner funds discussions relevant even today, even if we today rarely see public political discussion on the role of private ownership. An illustration of the shift in the Swedish ownership discourse could be found in the governmental “Ownership commission” from the late 1980-ies.
The Ownership commission, that started its work in1985, is the latest governmental commission established on the political concern on the ownership of the Swedish business. Its mere existence points to the pre-1989 discourses, that is, the fear for the concentrated financial power in private hands. The commissions conclusions, however, points to the shift as it proposes strong support for private ownership by tax deductions, both for direct private ownership and for the judicially constructed vehicles of control used by traditional dominant owners. This path can be followed in other governmental commissions focusing on the role of active owners (se the Companies Committee and the Commission of Trust) in a well functioning industry. The Ownership commission also follows path of “national interests” firms, as the dangers of foreign ownership is analysed and more restrictions are proposed. This path, however, was made impossible by the Swedish EC membership in 1995. The 10
lasting impressions from the Ownership Commissions final report in 1988 that continuously is repeated in the discussions on the public firms’ ownership is the two trends of increasing institutionalisation and internationalisation at the expense of private and national ownership. These discussions have been mostly prevailing when new regulation for the public firms is proposed. This is illustrated by the following quote:
“Another aspect worth mentioning at this point is the large changes in the ownership structure amongst Swedish public firms’ that has occurred during the second half of the 1990ies. A great deal of our largest firms is of today more than half owned by foreign legal entities. These foreign owners are often pension funds and institutions alike, that invests a fraction of its assets in stock, which very rarely interfere with the company management, but rather more likely sell their stock when displeased with management. However, it is not only the category foreign owners which to a great portion consist of institutions. Also the Swedish owners consists of a great portion of funds, insurance companies, and other institutions, while the physical persons that just a few decades ago held a majority of our quoted firms today has seen their positions greatly reduced” (our translation) - The Company Committee (SOU 2001:1, Slutbetänkande från Aktiebolagskommittén) in the preparatory works for the new Companies Act issued in 2005.
Or put swifter by the Commission of Trust (SOU 2004:47 Förtroendekommissionen) who is the issuer of the corporate governance code scrutinized here:
“The ownership of the public firms’ has to a great deal been institutionalised and internationalised” (our translation)
3.1 International ownership of the Swedish public firms’ It should be clear that the Ownership Commission only shallowly treated the internationalisation of the ownership. The commission noted that it rose from 4 to 8 %, but as it fell back to 6 % during the period surveyed, they only noted it as a trend that hade to be taken into account in the future and mostly, as pointed out above, by restrictions. As the financial markets in Sweden were deregulated in the 1990-ies, the foreign ownership stake almost skyrocketed to somewhere between 30 and 40 % (Statistics Sweden) and the importance of foreign ownership for the industry development was highlighted in both
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academia (i.e. Henreksen & Jacobsson, 2003; Jonnergård & Kärreman, 2004; Agnblad et al, 2001) and in the public commissions (i.e. Companies Commission and The Commission of Trust). The figures from Statistic Sweden4, the official statistics bureau, do not give us any lead on the identity of these owners. Fristedt & Sundqvists annual book “Owners and Power in Sweden’s Listed Companies” however does. From their figures a third of the foreign owners are identified and it is clear only from the list of the largest foreign owners that it is not a very homogenous group; there are other firms (such as Renault, Volkswagen and MAN), foreign states (as Finland and Singapore) and large international institutions investors (as Fidelity and Franklin-Templeton). Although the identities of the foreign owners, as we can see mostly are uncertain, one would not be surprised if a global truck manufacturer, participation in the global consolidation of the truck market, has a different view of their shareholdings in Volvo5 than a New York index fund manager.
As we do not know the identity of smaller foreign owners we could not be sure of the foreign owners’ connections to Sweden. For instance there are financial products aimed only at Swedish residents that for tax purpose use a middle country (all Swedish banks has so called Luxemburg-funds in their offers) when investing in the Swedish stock market. There are also certain holdings from Dutch foundations with connections to former Swedish citizens indicating that money that left Sweden for tax purposes is being reinvested in Swedish firms’6. These persons, may they be actual Swedish citizens or former Swedish citizens, acting behind legal tax constructions will probably relate to their ownership in a markedly different way than, for instance, a foreign government.
Finally, foreign ownership does not affect all public firms’ the same. On the contrary there is a tendency for many foreign owners to invest in only the largest firms. This is illustrated in table 1 where we can see the foreign ownership of the firms, as mean, median and deviation for both capital and votes in the firms listed on the Stockholm Stock Exchange in 2007. From table 1 it becomes clear that not all public firms are affected equally by the foreign ownership. 4
It should be noted that Statistic Sweden’s figures for the ownership of the public firms’ can be downloaded at www.SCB.se and it is free of charge. 5 Merely Renaults 20 % stake in Volvo corresponds to 3,5 % of the total foreign ownership of the Stockholm Stock Exchange (Fristedt & Sundqvist, 2007). 6 The Rausing family controlled Tetra Laval BV ownership in Alfa Laval makes up 0,4 % of all foreign ownership on the Stockholm Stock Exchange (Fristedt & Sundqvist, 2007).
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Number of firms:
252
Foreign ownership of 25 %
Foreign ownership of 23 %
equity, mean
votes, mean
Foreign ownership of 20,5 %
Foreign ownership of 18 %
equity, median
votes, median
Standard deviation
0,5 % - 80,5 %
Standard deviation
0,1 % - 88,5 %
Table 1. Forein ownership on the Stockholm Stock Exchange 2007 (Source: Fristedt & Sundqvist, 2007)
3.2 Institutional ownership of the public Swedish firms’ The concept of institutional ownership has been at heart of the Swedish political discussions since the 1970-ies. On one hand, it could be considered as a socially optimal, in an efficiency sense, that the firms’ are owned and controlled by “professional” owners, with no disparate feelings for the family name, emotional connections to the manufacturing municipality or other topics related to the building of dynasties. On the other hand, when the social consequences of fast moving capital been noticed – at plant closing, labour lay-offs or the sale of “national interest firms” – the lack of flesh and blood owners been painted as a hazard for the long-term development of the society. These standpoints can be viewed in politics (without any right-left implications), from the business society itself and in media; all in all, this is always a topic of interest.
The Swedish Ownership Commission put great emphasis on the constant decline of physical persons direct holdings of listed stock in public firms’. In Statistic Sweden’s figures the stake held by physical persons started to level out short after the Commissions final report in 1988 and all since 1991 it been more or less constant between 10-15 % of total stock value. Physical persons direct holdings are of course affected by a great deal of different considerations, most importantly however, taxation. Shareholdings by physical persons, foundations or closely held firms, will be treated differently by the Swedish taxation system, certainly affecting the ownership patterns. The question than, does it make a difference if a share is held direct by a physical person or by a additional firm held by the same physical person? In this paper we argue that it does not make any difference, that is, at least in corporate governance terms. We base this on the notion that this kind of ownership solutions does not distort any incentives for control and it does not create any new agency costs.
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Thereby, it is the families, or the spheres of interest, that owns and controls the public firms’, not the tax-purpose constructs or the vehicle of control that actually holds the shares.
What about the institutional ownership than? In this paper institutional ownership is considered when an additional layer of agents is placed between the public firm and its owner. That is, when person A hands over cash to person B at her discretion and the cash is used to buy shares in a firm controlled by person C. Corporate governance usually focus on the relation between the person B and the person C, but that would only be half of the problem if one did not expect the person B to act in total alignment with the interests of person A. Thus, it is the double layer agency problems that makes institutional ownership differ from physical ownership. The size of what we consider institutional ownership is found in table 2. The figures are summarises the Statistic Sweden categories “Banks, financial institutes and more”, “Funds”, “Insurance companies, pension institutes” and “Social security funds”. What is clear from table 2 is that this ownership form has been constant between 25-30 % since the 1980ies.
Non-
Institutions Investment State Private Non-
financial
companies
Foreign
profit
2006
9
25
5
5
14
5
37
2003
9
27
6
6
14
5
33
2000
7
25
6
5
13
5
39
1998
7
27
6
3
15
7
35
1993
17
28
7
4
17
7
21
1988
21
27
11
5
20
9
7
1983
16
18
16
1
30
11
8
Table 2. Ownership of the public Swedish firms’, (Source: SCB, 2007)
The data in Table 2 does not give the full picture as it only presents ownership to the cashflow rights of the firms. In Sweden the political preference for large physical owners (se Bergström & Samuelsson, 2001; Collin, 1998; Högfelt, 2004) provides for number of possibilities to separate voting rights from cash-flow rights. These possibilities have made way for clearly identifiable dominant owners in many firms. This is possibilities not only used by traditional families or so called spheres of interest, but also by other firms and by foreigners. In table 3 the control of the firms of the Stockholm Stock Exchange in 2007 is
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presented ranging from dispersed ownership (or management control) to foreign owner control. However the largest group is still private or sphere control.
Number of firms
252
Dispersed ownership
85
Controlling owner, 20
60
– 29 % of votes Controlling owner, 30-
58
49 % of votes Controlling owner, 50-
49
% of votes Controlling owners
167
-
Private family/ sphere
126
-
Swedish industrial
17
-
Foreign
24
Table 3. The control of the firms listed on the Stockholm Stock Exchange 2007 (Source: Fristedt & Sundqvist, 2007)
3.3 Ownership of the Swedish public firms’ – revisited The public discourse – and specially the one used in politics and regulations - on the ownership of the public firms’ has focused much on institutionalisation and internationalisation, when much of the ownership, remained local and private. This observation specifically relates to those that actually act as if they own the firms’ – that is – those owners exercising control of incumbent management. It is obviously true that not all the fifteen families that Hermansson point out are still active, but other families and other constellations have taken their places. Likewise, it is obviously true that the foreign ownership as increased sharply since foreign stock ownership was allowed, but the heterogeneity of this group turns some of them to act as owners and others not. The one acting as owners – be they reinvesting emigrants or industry motivated acquires – do not need corporate governance reform to control the firms and the ones not acting as owners would probably favour minority protection over possibilities to get involved in actual control. Before we can go on and discuss what effects these conceptions have on the responsiveness of regulation, we need to turn to what kind of regulation these conceptions of ownership actually produced in Sweden.
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4. The Swedish corporate governance code and its rules A corporate governance code, wherever it may be issued, will contain certain structure and also certain rules. For example, it is very rare to see corporate governance codes with rules on insider trading, as it is vary rare to see corporate governance codes without rules on board sub-committees. This implies that a corporate governance code, more or less, contains a package of rules, and this package is defined by the rules in the British Cadbury report. This leads to a basic point that the rules in a corporate governance code might be the solution to a British governance problem, constituted by the British ownership structures and in relation to other British regulation (such as the London City Code on take-overs or the Companies Act). From this point one might question the relevance of the Swedish corporate governance code altogether, however there is a clear tendency that the Swedish code made use of the British rules as labels and that the more substantial part of the rules has been adopted to local circumstances (Jonnergård & Larsson, 2007). Therefore we must se to the individual rules in the code.
Following the purpose of this paper, we focus on the code rules relating to different types of owners. As a first step we categorise the rules favouring majority or minority owners. Majority owners in turn could is divided into private/sphere, Swedish industrial and foreign, following the classifications in table 3. Minority owners are further divided into local institutional, international institutional and physical minority following the different minority interest groups reported in Jonnergård & Larsson (2007). The whole analysis is found in Appendix 1 and the Swedish corporate governance code can be found at www.bolagsstyrning.se.
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Number of rules
69
Rules not relevant
24
Rules favouring Minority
44
Rules favouring Majority
3
- Thereof Local
28 (2)
- Thereof International
39 (5)
- Thereof Small private
38 (4)
- Thereof Private/Sphere
3
- Thereof Swedish industrial
0
- Thereof Foreign
0
Table 4. Number of rules favouring different owners. Please note that one rule can favour more than one owner. Number of rules only relating to one certain type of owner is reported in (brackets)
In summary, we should note that the rules in the Swedish corporate governance code in a majority of the cases (45 out of 69) relates to the conflicts of interest that occurs between different owners in the public firm. These rules almost exclusively give different favours to the minority owners. The most favoured owners are the small private owners and the international institutional investors, however, given their local occurrence and the size of their holdings one should not underestimate the favours given to the local institutional investors either.
5. Discussion and conclusion ”Ownership [in Sweden] did not separate widely because of laws (reflecting the strong political and economic interests of leading banker but with support of the Social Democrats) that allowed banks to directly and then indirectly own shares, which in effect made two dominating banks the controlling owners of the largest listed firms, and bank loans the major way to finance their firms’ investments besides retained earnings” – Högfelt, 2004, pp 31
The structure of the ownership of the public firms’ is not only a question of rules and laws of today. As reflected in the quote from Högfelt it is also path dependent in the meaning that historical rules and laws, and the inertia of those, will be relevant when changing the ownership structures (also see Bebchuck & Roe, 2004). Thus, as new political agendas are set, it is not easy to come to terms with the existing ownership structure. In Sweden, as seen here, the ownership has been called institutional and international for almost 30 years, and
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still the influence of the international and institutional owners is small in the firms ruled by these regulations.
It is this tension – the complex relation between regulation and ownership structure – that is the main focus of this paper. Following Coffee, this is a discussion on the hen or the egg: “In short, if form follows function (that is, if legal rules are determined by the system of corporate governance that pre-exist those rules), then no similar rapid legal transition should necessarily be expected in the Continental economies in which concentrated ownership is still the norm” Coffee, 2001, pp 14
In Sweden, as we have seen above, the condition is still concentrated ownership, but new regulation is issued very much favouring dispersed ownership. We argue that this regulation is the result of strong agendas set by for instance the EC, leaving the regulators with a conception of the ownership resembling that of the modern corporation portrayed in Bearl and Means (1932) and glorified by agency theory (se for instance Fama, 1980). So, in summary – what has happened? If we were to summarize our observations in a number of steps we would get the following process: 1. A discursive change has occurred in the stream of problems, whereby the condition earlier interpreted as concentrated ownership has been re-defined to a condition of diffused ownership based on institutional and foreign owners. 2. This newly defined condition is part of a larger programme based on the AngloSaxon’s corporate governance model. This implies that new solutions are made possible and legitimate. One such solution is to implement a code of conduct in order to assure the rights for the owners in relation to the management. 3. The code of conduct is not only one solution within the programme, but has achieve a diffusions amongst different countries and a status that give the code the status of a world model. This implies that it is a powerful force for political agenda-setting as it may give both legitimacy and status to the politicians that enforce the code. 4. However, as been noticed in the empirical part of the paper, the content of the Swedish corporate governance code does not agree with the content of the original code (the Cadbury code). The focus of the Swedish code is on protection of minority owners, rather than the protection against shirking management.
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5. One may claim that the Swedish code agree with the conditions at hand, in that it reflects possible problems in context with concentrated ownership. It is also in agreement with one of the discourses involved in the programme on Anglo-Saxon corporate governance system, i.e. the idea that in the case of concentrated ownership a protection of minority owners and a restriction on the right of the majority owners is needed. On the other side, new conditions for majority owners probably decrease these owners to remain large stakes concentrated in specific companies. 6.
From a politics point of view the effects with the implementation of the code could be stated as (i) to gain legitimacy through the import of world model (ii) to change the material condition for ownership
Several conclusions and speculations may be drawn out of this case. First of all, it seems that Kingdom’s agenda-setting model are partly applicable on the development in the field of corporate governance. Problems and solutions, politics and actors seem to be loosely connected, but coincidence when a window of opportunities is opening up. In the area of corporate governance, however, it seems that politics rather than conditions (problems) is the main force by putting an issue on the agenda. Second, even though the agenda-setting model is applicable in general, several features of the process differ from the original model. Kingdom’s model was developed for the American administration during the early 1980’s. It is describing complex situations, but mostly situations inside one nation with one administrative structure and one hierarchical order. When discussion the diffusion of the code we deal with a complex structure of national (Swedish) agenda setting, depending on a pannational (EU) agenda setting. The choice of what agenda to promote is thereby partly delimit by the agenda setting process on pan-national and international level. The politics involve therefore includes the legitimacy both to the own voters and toward the international community. The application of a well-known world model is a way to achieve this. Third, there exists an allowance for re-interpretations of the world model in use, in this case the code of conduct in that the implementation may change the content of the code even though the structure and the stature of the code remain the same.
So what does this tell us about the issue of responsive regulation, which we discussed in the beginning of the paper? If we assume that the aim still is to achieve such a regulation, two speculations may be done. The first is that the idea of to what the regulation should respond should be re-defined. Instead for a respond to the material conditions at hand in the specific context, the responds is to find toward the relevant political arenas. These areas may be 19
national, but in the case of corporate governance system and through the Anglo-Saxon programme the arenas to an increasing degree become international. The second speculation is that it the responsiveness may not be toward the material conditions at hand, but to desired future conditions. This implies that political entrepreneurs have a conscious desire to change the ownership toward a more diffused one and is willing to use so-called coercive isomorphism to achieve this goal. This kind of responsiveness might in the short run imply inefficiency as well as resistance from local elites but implies a long-term convergence with the world models at hand. This speculation is well in line with earlier results regarding import of corporate governance reforms. According to this research (eg. Jonnergård & Larsson, 2007) the import of corporate governance reforms is a process more driven by politics, than by the markets. In other words, the diffusion of the Anglo-Saxon model is neither due to demands on efficiency or mimetic isomorphism, but due to a political agenda and connected to a coercive isomorphism. In this perspective to investigate in and detect the kind of “responsiveness” we may find behind regulation appears as important not only from the point of market effectiveness but further more from a democratic point of view.
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