Last week, in a speech at a High Pay Commission seminar, the shadow business secretary Chuka Umunna and former Business Secretary Lord Myners both put forward arguments in favour of shareholder nomination committees as a way of improving corporate governance. Rather than the current UK model whereby the Nomination Committee is made up of members of the Board of Directors, they suggested that we should be following the “European model” (well, the Swedish one actually, although there are a few Finnish companies with the Finnish Government as a major shareholder tagging along).
What is the “European Model”?
Under the Swedish system, representatives of the largest shareholders form the Shareholder Nomination Committee, supported in their deliberations by the Chairman of the Board. At many Swedish companies, these large shareholders also benefit from capital structures which provide different shareholders with a different number of votes per share. For example Investor AB has both an A Ordinary (1 vote per share) and a B Ordinary (10 votes per share). As a result, while the Knut & Alice Wallenberg Foundation hold 18.6% of the shares in issue, they hold some 40% of the voting rights. However, in practice, the plurality standard of voting at Swedish companies means that it is very rare for directors to be voted on individually and for any post AGM voting disclosures to be made.
The combination of enhanced voting rights, together with their presence on the Nomination Committees, ensures that power is concentrated in a small group of shareowners. However, the counter argument is that this provides for a more effective system of ownership. So what does the evidence show us about the Swedish approach to ownership?
Swedish Nomination Committees Analysed
Manifest looked at the 29 constituents of the OMXS 30 (one company has two capital types in the index so appears twice) of whom 26 had shareholder nomination committees. The three companies who did not use this model are incorporated outside Sweden (ABB, AstraZeneca and Nokia). Including the Chairman of the Board, there were on average 5.04 members per nomination committee.
| Shareholder | # of Nomination Committee Representatives | Notes |
|---|---|---|
| Alecta Pensionsförsäkring AB | 16 | |
| Swedbank Robur Fonder | 16 | |
| AMF Pension Fonder | 9 | |
| AB Industrivärden | 6 | Plus 5 further positions where Board Chairman is on Committee and is linked to AB Industrivärden |
| Skandia Liv | 6 | |
| Svenska Handelsbanken | 5 | |
| Investor AB | 4 | Plus 2 further positions where Board Chairman is on Committee and is linked to Investor AB |
| Knut & Alice Wallenberg Foundation | 3 | Plus 1 further position (at Investor AB) where Board Chairman is on Committee and is linked to the Knut & Alice Wallenberg Foundation |
| SEB Fonder | 3 |
We also looked at the identity of the representatives, to see which people held the most positions:
| Individual | # of Nomination Committee Roles |
Representing |
|---|---|---|
| Carl-Olof By | 7 | AB Industrivärden |
| Marianne Nilsso | 6 | Swedbank Robur Fonder |
| Jan Andersson | 6 | Swedbank Robur Fonder |
| Bo Selling | 5 | Alecta Pensionsförsäkring AB |
| Caroline Af Ugglas | 4 | Skandia Liv |
| Petra Hedengran | 4 | Investor AB |
One of the key concerns here is the small pool of people making nomination decisions – a pool that is perhaps even smaller than the UK’s board focussed system.
So How Might This Translate to the FTSE 100?
To illustrate the possible situation as it might apply to the FTSE100, we have taken disclosed shareholders collected in annual reports over the last year, and for each company limited the list to at most 5 shareholders.
This approach is, admittedly a bit rough and ready as some companies do not have any disclosable shareholders (i.e. holding 3% or more). The figures in the table below are likely to therefore be understated, for some or all of the shareholders noted. Further, some disclosures are based on pooled nominee account names which is not as transparent as designated accounts when determining the beneficial owners of a company.
| Shareholder | # of Nomination Committee Representatives |
|---|---|
| Blackrock | 67 |
| Legal & General | 60 |
| Capital Group | 20 |
| AXA | 17 |
| Fidelity | 11 |
| INVESCO | 10 |
| Lloyds Banking Group | 8 |
| Schroders | 8 |
The big question will be, should Lord Myners’ proposals get to the next stage, who will pay for the additional resources required by these shareholders? Will this end up as an additional cost on management fees charged to pension funds and other holders of managed funds? Could any regulation potentially result in fund managers being less willing to become a “top 5” shareholder in an effort to reduce the costs to the beneficiaries of their funds or to avoid accusations of being insiders?
Should this proposal be contemplated as an insertion to company law, an extensive cost-benefit analysis would be expected. An alternative approach could be to pilot Shareholder Nomination Committees at a small number of companies before considering whether a market wide adoption would pass the cost-benefit test.
Last Updated: 18 January 2012
This is an interesting analysis but there are of course differences in the legal company framework in Sweden(versus the UK)and the general culture and management style – which is more “consultative” as I discovered when I worked for a Swedish company. But certainly having a separate Shareholder Nomination Committee might help to change the culture of UK companies in a positive direction. Incidentally I do not think there would be a need to change Company Law in the first instance to support Shareholder Nomination Committees. Any board of directors can form a committee of advisors to advise them on who to put forward for election at an AGM.
Practically the Nom Com issues are less of a concern and even better once given a clever twist to the Swedish system that I call ‘The Smarter ShareSoc system’ to reduce the dominance of the largest shareholding organisations.
1. Becoming an insider restricts trading so the large Swedish shareholders rotate which ones they have a nom com member in a particular company so that they can trade on their ‘off’ years.
2. Most large Index or closet Index funds if taking percentages of the PLCS listed trade rarely and can ride out periods of selected inactivity with wise allocations
3. By having the 3rd of the 4th shareholder voting seats allocated to a Qualified recognised private shareholder Association representing the 7-10% of shares owned by generally long only private investors are taken into account balances some influence.
4. The fourth seat can be allocated to the 10th to 15th largest shareholder institution generally far smaller and thus sharing the of a burden on the staff alternatively in companys with heavily indebted businesses if the bank lending is bigger than the shareholder then that bank would be invited onto the committee. Thus bringing commercial lending banks valuable expertise and viewpoints similar to the highly successful bankers on the German supervisory boards (non exec)
5. Institutions can always refuse however in practice public naming and shaming of the Institution in the retail press worked well in Sweden as reputational risk rose from avoiding attending 4 meetings a year
Elegant and effective with the incentives in all the right Direction. This tweak has the benefit of 15 years of Swedish experience in consultation with the Swedish Shareholder Association.
Finally nominations are just that the Board can still recommend against those nominations as they currently do providing a good check and balance. Also there would be some rotation of personnel in the biggest shareholders and surprisingly less effort as the 4 shareholder members on the committee relieve another 5 or 10 from trying to analyse the proposed Directors saving time whilst improving selection.
Do you think shareholder owners of RBS not of acted earlier?
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