Friday, 22 March 2013

* Swedish business management as a model for long-term stability and expansion

Financial Times 
Richard Milne
The two men joke, finish each other’s sentences and defend the other from attack. “You start!” jokes one when the subject turns sensitive.

But behind this veneer of camaraderie, the two are rivals: Börje Ekholm and Anders Nyrén are two of Sweden’s most important businessmen, heading the holding companies that together control more than half of Stockholm’s stock exchange.

For the first time in the 69 years that their two companies – Mr Ekholm’s Investor and Mr Nyrén’s Industrivärden – have existed side by side their chief executives have agreed to give a joint interview.

The subject that has brought them together is the Swedish model of active ownership of companies – the distinctive way Sweden has placed corporate power not with management but with shareholders who are obliged to elect board directors and be involved in big strategic decisions.

With a structure that promotes long-term thinking, the Swedish model is attracting interest worldwide from regulators and governments looking to head off financial crashes. Some think that adapting the model’s tenets could reduce the short-term thinking that can damage companies, while also boosting local industry.

Both chief executives say the success of a country of just 10m people, home to world-beating companies such as Volvo, Electrolux, Ericsson, Handelsbanken and Atlas Copco (all Investor or Industrivärden holdings), owes much to the stability that comes from instilling so much power in the owners.

“The key thing, if you look philosophically at developing a business, is the long-term proposition,” says Mr Ekholm. “You want to look at building a company not in a quarter or six months or even a year; it’s a longer process. I think what Industrivärden and Investor can provide is the stability for the company to focus on the long-term and instead maybe become unpopular in the short term.”

After being overshadowed by the US-UK practice of corporate governance, where control is vested with management, the Swedish model is now being studied for the way it empowers shareholders. Even features such as dual-class structures – the infamous A and B shares that give extra voting rights to certain investors – are being revisited. Some governance experts are endorsing the idea of giving long-term shareholders bigger dividends.

Mr Nyrén says: “You see a total change in the opinion. Why? Because we’ve had this crash and everyone is trying to find the mechanism whereby you’re encouraging long-term active ownership. A and B shares calls for exactly that.”

The interest in Sweden’s approach comes as the debate over ownership and shareholder rights is reigniting across the western world before the latest season of annual general meetings. The Kay Review in the UK looked at how to encourage long-term investment, while many countries, led by Switzerland, are trying to give investors a stronger say on pay.

Even Norway’s national oil fund is considering taking a more active approach to ownership, starting with its Swedish holdings.

Despite the focus on Sweden, a big question remains: is its approach to ownership exportable or is it intrinsically, uniquely Swedish?

There is little doubt of the importance of the impact of long-term ownership on Sweden. For some it underpins not only the country’s successful export sectors, but also the Nordic model itself by allying financial performance to the long-term interests of society.

Anders Borg, Sweden’s finance minister, says the country took the role of owners for granted several decades ago, prompting some entrepreneurs such as Ingvar Kamprad of Ikea and Hans Rausing of Tetra Pak to leave the country. These days the appreciation of strong owners has returned.

“You don’t need an anonymous mutual fund or investment fund, you need strong owners with a name, with a responsibility and a clear role ... to be there in times of crisis and to provide new management if that is necessary. So I think we have seriously undervalued the role of ownership in general in our western society,” says Mr Borg.

Between them, Investor, the holding company for the powerful Wallenberg family, Industrivärden and a smaller Wallenberg foundation have stakes in companies that have a combined annual turnover of SKr2,200bn ($341bn) and employ 1m workers.

It is not just about size. Industrivärden and Investor point to the performance on a one-, five-, 10- and 20-year basis, with both companies delivering a return that is better than either the Stockholm stock exchange or a broader European index.

Mr Ekholm stresses that while Investor always has a long-term objective, “we’ll be terriers in the short term on how you run the business”. He adds: “I often get asked the question: ‘Isn’t this long-term focus just a way to hide? You don’t have to perform because you say it’s five to 10 years out.’ But I disagree fundamentally. It’s about where the objective is. Then there is a path you’re going to execute to reach that objective. That you can evaluate every day.”

The two exercise their power through nomination committees, in which the largest shareholders propose board members and set general pay policy for the annual meeting of investors to vote on. Investor or Industrivärden will often therefore receive the chairmanship of the board. This stands in contrast to the Anglo-American model where dispersed ownership among thousands of investors means shareholders usually have little power, with votes at annual meetings often resembling Soviet-era elections. Instead, both management and the board are subject to far less oversight than in Sweden. Some are seeking to change that UK-US approach.

Cevian Capital, Europe’s largest activist investor (which happens to be based in Stockholm), sent a submission to the Kay Review arguing that the ability of the board to challenge management has become “increasingly ineffectual”. Cevian pointed out that from 2006 to 2010 not a single director proposed by a FTSE 350 company was voted down.

Christer Gardell, the co-founder of Cevian, says active ownership is a crucial element in making the Swedish economy successful. “Shareholders take responsibility for the company. The accountability between the board and shareholders is also very clear,” he says. He argues that involving shareholders actively in the nomination process for UK boards would be hugely beneficial.

One consequence is that the power of management has more checks on it. Ronnie Leten, chief executive of Atlas Copco, the industrial group that is Investor’s largest single holding, says strategy is always discussed jointly with the board. “You have to share your power. You have to justify yourself in your own way. What Investor brings is the continuity. We agree on a strategy and then: ‘Let’s do it’.”

Both Industrivärden and Investor operate discretely, preferring to deal with issues within nomination committees and the boardroom rather than in public. They use their long heritage and broad industrial knowledge to offer support to directors. Mr Nyrén says his company is there as a sounding board for both management and the board all the time.

“That’s where you find the true influence is based on trust, not on corporate governance or anything. And you earn your trust,” he adds. A decade ago, in an example of how Industrivärden makes tough decisions behind closed doors, it helped Ericsson change the management and board, and support a rights issue.
But the chief executives agree that the Swedish model may be difficult to implement abroad.

Mr Nyrén underlines how Sweden’s approach grew out of a history of concentrated ownership, first from banks and now holding companies.

Mr Ekholm says requiring shareholders who have investments in hundreds or thousands of companies to vote on all their holdings could be counter-productive. Often those investors rely on the advice of proxy advisory companies to tell them how to vote, a situation Mr Ekholm compares to that of credit rating agencies. “Has that made the shareholder base more long-term, business friendly and sure to drive the development of the companies? No.”

Both men argue that the limited time horizons of the typical UK or US investor mean it would be difficult to emulate the Swedish approach. “That’s why you can’t copycat the Swedish system and put it in London,” says Mr Ekholm. Mr Nyrén adds: “And you cannot copycat London and put it here.”
. . .
Under proposals being floated by Brussels, long-term shareholders in EU companies could be given enhanced voting rights and higher dividends. But the proposals are controversial in countries such as the UK and Germany with Hermes, the London-based activist investor, warning in a previous consultation: “A too cosy relationship between the company and its long-term shareholders often translates into a too close relationship between the company and its dominant shareholders, to the detriment of the interests of smaller ones.”

Equally, both CEOs are aware of how fashion waxes and wanes with the Swedish model, which was highly unpopular before enjoying its moment of fame. Its time in the spotlight does not mean the system is perfect.
Mr Gardell, for all his praise, is vehement in his criticism of A shares, which can give holding companies up to 100 times more voting rights per share than a B stockholder. “The advantage could be that they could develop these companies long-term. The disadvantage is that, philosophically and fundamentally, control should be protected by competence not by preference voting rights. You should always be able to challenge incompetence,” he says.

One example he points to is SCA, an Industrivärden holding with separate forestry and personal care businesses. “They should have undertaken the restructuring and separation of the paper business from the hygiene business 10 years ago. They were able to postpone it because people weren’t able to challenge it,” he argues.

Mr Nyrén is having none of it. “I was visited a lot in the early 2000s by a number of hedge funds in London that told me that we were so stupid not breaking SCA apart. The same guys are sitting in the office now saying: ‘Thank you for being so smart’.”.

Critics also point to the discount the holding companies trade at – typically 10-40 per cent lower than the value of their stakes – as evidence that their approach is far from ideal. But Mr Ekholm says the discount is less important over long periods of time as it tends to be fairly stable.

They both argue that the Swedish model allows them and their companies to emphasise the long-term rather than pushing for short-term measures such as a break-up or a special dividend.

Mr Ekholm says: “If you’re going to build a strong company, it’s about focusing on what are the right long-term decisions, and actually the Swedish model gives you that ability.”

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