International Collaboration
David R. Beatty O.B.E., CFA
June 9, 2010
In my country _______________ a firm exists for the….
Question: Under which of the following assumptions is a large company in your country managed?
A firm exists for the interests of the shareholders
A firm exists for the interest of other stakeholders
USA
76
24
Take aUK
piece of paper and
71 write down a number
29
For
22 shareholders : ______
78
France
For other
______
17 stakeholders :83
Germany
TOTAL
100
97
Japan 3
0
Source: Masaru Yoshimori, 1995
20
40
60
80
100
Stakeholder orientation varies dramatically by country….
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Stakeholder orientation varies dramatically by country….
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Stakeholder orientation varies dramatically by country….
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Stakeholder orientation varies dramatically by country….
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Stakeholder orientation varies dramatically by country….
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Assume there are two main models: the Anglo-American
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Assume there are two main models: the Anglo-American & EU
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
Assume there are two main models: the Anglo-American & EU
Shareholders
USA
Other stakeholders
76
UK
24
71
France
29
22
78
17
Germany
83
Japan 3
0
Source: Masaru Yoshimori, 1995
97
20
40
60
80
100
North America has Soviet style of elections for directors:
VOTE FOR THE SLATE OR DON’T VOTE
and it doesn’t really matter if you vote anyhow
This WITHHOLD voting arrangement is called PLURALITY VOTING:
ONE vote FOR and you are elected.
SOX is designed to solve an American problem…..
… the widely held company and the IMPERIAL CEO
SHAREHOLDER
Plurality Voting
AUDITOR
BOARD
Chair/CEO
CEO
COMPANY
Some 65 Enron financial employees
were ex-Arthur Anderson
SOX is designed to solve an American problem…..
… the widely held company and the IMPERIAL CEO
SHAREHOLDER
Plurality Voting
AUDITOR
BOARD
Chair/CEO
CEO
COMPANY
SOX is designed to solve an American problem…..
… the widely held company and the IMPERIAL CEO
SHAREHOLDER
Plurality Voting
AUDITOR
BOARD
Chair/CEO
1.
Re-establish an
independent
audit function
CEO
COMPANY
Self Regulation of Public Accountants Removed
Audit Standard #1
Audit Standard #2
Chairman William McDonagh
former Federal Reserve Bank of
New York president
etc
THE OUTCOME….
“Management used to own the auditor-client relationship – no longer! ”
Senior Audit partner quoted in II May, 2004
The AUDIT function in North America
has been re-built
•
•
•
Chairman William McDonagh
former Federal Reserve Bank of
New York president
•
•
•
•
© David R Beatty 2007
© beatty@rogers.com
Independent audit committees; need for
“financial expert”
Audit committee hires auditor
Auditors can only audit unless consulting
contracts pre-approved
Audit fees disclosed as well as non-audit
fees
Auditors can not join audited company for
3 years (“cooling off”)
CEO/CFO certification of financial results
Whistle blower processes required
SOX is designed to solve an American problem…..
… the widely held company and the IMPERIAL CEO
SHAREHOLDER
Plurality Voting
AUDITOR
1.
Re-establish an
independent audit
function
BOARD
2.
Make directors
independent of
management
Chair/CEO
CEO
COMPANY
3.
Make CEO/CFO
sign off on
finances
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European board structures are very diverse….start with
one-tier or two-tier variants
Two-tier board
One-tier board
Without codetermination
With mandatory
co-determination
Without codetermination
Employee appointees
Employee appointees
2 or 3
1/3
members
U.S., U.K., Switzerland,
Belgium, Italy, Spain
Sweden
Source: Corporate law statutes; McKinsey analysis
<1/3
50%
Netherlands
France Luxembourg
With mandatory
co-determiantion
France, Finland
1/3
Netherlands Austria
50%
Germany
European board structures are very diverse….start with
one-tier or two-tier ….then add co-determination variants
220101LNZXL492TSMW-P1
Two-tier board
One-tier board
Without codetermination
With mandatory
co-determination
Without codetermination
Employee appointees
Employee appointees
2 or 3
1/3
members
U.S., U.K., Switzerland,
Belgium, Italy, Spain
Sweden
Source: Corporate law statutes; McKinsey analysis
<1/3
50%
Netherlands
France Luxembourg
With mandatory
co-determiantion
France, Finland
1/3
Netherlands Austria
50%
Germany
European board structures are very diverse….start with
one-tier or two-tier ….then add co-determination variants
220101LNZXL492TSMW-P1
Two-tier board
One-tier board
Without codetermination
With mandatory
co-determination
Without codetermination
Employee appointees
Employee appointees
2 or 3
1/3
members
U.S., U.K., Switzerland,
Belgium, Italy, Spain
Sweden
Source: Corporate law statutes; McKinsey analysis
<1/3
50%
Netherlands
France Luxembourg
With mandatory
co-determination
France, Finland
1/3
Netherlands Austria
50%
Germany
European board structures are very diverse….and some
countries offer listing companies a choice i.e. France and
Netherlands
220101LNZXL492TSMW-P1
Two-tier board
One-tier board
Without codetermination
With mandatory
co-determination
Without codetermination
Employee appointees
Employee appointees
2 or 3
1/3
members
U.S., U.K., Switzerland,
Belgium, Italy, Spain
Sweden
Source: Corporate law statutes; McKinsey analysis
<1/3
50%
Netherlands
France Luxembourg
With mandatory
co-determination
France, Finland
1/3
Netherlands Austria
50%
Germany
European board structures are very diverse….and some
countries offer listing companies a choice i.e. France and
Netherlands
220101LNZXL492TSMW-P1
Two-tier board
One-tier board
Without codetermination
With mandatory
co-determination
Without codetermination
Employee appointees
Employee appointees
2 or 3
1/3
members
U.S., U.K., Switzerland,
Belgium, Italy, Spain
Sweden
Source: Corporate law statutes; McKinsey analysis
<1/3
50%
Netherlands
France Luxembourg
With mandatory
co-determination
France, Finland
1/3
Netherlands Austria
50%
Germany
220101LNZXL492TSMW-P1
And now there is an EU choice of great interest to large
German companies
Two-tier board
With mandatory
co-determination
Without codetermination
1. Smaller Supervisory Board (Germany
requires 20) to 12
Employee appointees
<1/3
1/3
50%
2. Global co-determination 10 German
trade unionists to 4
3. Appointment of the Management
Board requires 2/3rds in
Germany vs a majorityLuxembourg
vote
Source: Corporate law statutes; McKinsey analysis
Germany
European and Anglo-American board structures, ownership,
systems and staffing are significantly different….
European model
Anglo/American model
•Two tier or one tier boards
•One tier boards
• Dominant shareholdings
• Multiple takeover defences
• Weak shareholder rights
• Low use of market incentives
• Dispersed ownership
• Few defences
•‘Insider’ boards
•‘Independent’ boards
Belgium
Denmark
France
• Strong shareholder rights
• High use of market incentives
Germany Sweden
U.K.
Finland
Netherlands
Source: McKinsey
Austria
U.S.
The Anglo/American model of governance has dispersed ownership
220101LNZXL492TSMW-P1
Other investors
Institutional Investors
Board
Management
Stakeholders
Other investors
The European model of governance has a significant controlling block
220101LNZXL492TSMW-P1
Other investors
Institutional Investors
Controlling
Block Holders
Board
Management
Stakeholders
220101LNZXL492TSMW-P1
In the EU there are usually dominant block shareholders of
the largest companies
Average
controlling block
48
36
Belgium
France
35
35
Germany Netherlands
33
Sweden
Control
Number of co.s:
Sample based on:
18
38
30
25
13
BEL20
CAC40
DAX30
AEX25
SX18
Source: Déminor; McKinsey analysis
220101LNZXL492TSMW-P1
In the Anglo-American model there is widely dispersed share
ownership
Average
controlling block
48
36
35
35
33
3
Belgium
France
Germany Netherlands
Sweden
Market
Control
Number of co.s:
Sample based on:
UK
18
38
30
25
13
29
BEL20
CAC40
DAX30
AEX25
SX18
FT30
Source: Déminor; McKinsey analysis
European or ‘control’ model has ‘insider’ boards….
Anglo/American or ‘market’ model has ‘independent’ boards….
CONTROL MODEL
MARKET MODEL
•Two tier or one tier boards
•One tier boards
• Dominant shareholdings
• Multiple takeover defences
• Weak shareholder rights
• Low use of market incentives
• Dispersed ownership
• Few defences
•‘Insider’ boards
•‘Independent’ boards
Belgium
Denmark
France
• Strong shareholder rights
• High use of market incentives
Germany Sweden
U.K.
Finland
Netherlands
Source: McKinsey
Austria
U.S.
In the control model boards are largely insiders….
220101LNZXL492TSMW-P2
1
100% 
13
19
48
99
87
68
Independent
32
'Insider' or
unclassified
81
52
Japan
France
Germany
UK
Control
Number of co.s:
Samples based on
Source:
U.S.
Market
100
38
38
29
419
Top 100
CAC40
DAX30
FT30
S&P500
Déminor; IRRC; Nippon Life; McKinsey analysis
In the market model boards are largely independent….
220101LNZXL492TSMW-P2
1
100% 
13
19
48
99
87
68
Independent
32
'Insider' or
unclassified
81
52
Japan
France
Germany
UK
Control
Number of co.s:
Samples based on
Source:
U.S.
Market
100
38
38
29
419
Top 100
CAC40
DAX30
FT30
S&P500
Déminor; IRRC; Nippon Life; McKinsey analysis
In the market model boards are largely independent….
220101LNZXL492TSMW-P2
1
100% 
13
19
48
99
87
68
Independent
32
'Insider' or
unclassified
81
52
Japan
France
Germany
UK
Control
Number of co.s:
Samples based on
Source:
U.S.
Market
100
38
38
29
419
Top 100
CAC40
DAX30
FT30
S&P500
Déminor; IRRC; Nippon Life; McKinsey analysis
Stakeholder orientation varies dramatically by country….
220101LNZXL492TSMW-P2
Which would you have rather owned?
11
13
27
31
Japanese companies:
1. Primacy of JOB SECURITY
2. Insider board – NO outside directors
3. No committees
Extraordinary diversity within English speaking nations….
SAME
Board size
Board diversity
8-12
8-12
8-12
8-12
10% female
9% female
17% female
6% female
Board terms
80% annual
100% annual
100% annual
100% staggered
Director elections
WITHOLD
WITHOLD
AGAINST
AGAINST
Chair vs CEO
80% combined
80% separate
90% separate
90% separate
DIFFERENT
EDs vs NEDs
only CEO
only CEO
40% EDs
YES
only CEO
Senior Independent Director
X
X
Term limits
X
TD Bank
CIBC
9 year review
12 year indep’t
X
X
YES
YES
Precatory compensation
Voting at AGM
Accounts
© David R Beatty 2002
beatty@rogers.com
X
Quarterly
Quarterly
Half Yearly
X
Half Yearly
The Fundamental Tasks of a Corporate Board
Owner(s)
Stakeholders
• Hire CEO
The Board
PAST
Ensure accounts accurate
Report to shareholders
PRESENT
Oversight of company
Management
FUTURE
Involved with strategy
Involved with talent pool
35
International Collaboration
David R. Beatty O.B.E., CFA
June 9, 2010
beatty@rogers.com