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Anglo-American and European Models
Some people say that is how it should be.
Some people say, “if these minority investor have
put their capital in our companies, they know
what they are coming in for. They know we are
in control.” They say this very openly and
frankly – at least they are truthful about their
views. But the reality is that you don’t build a
capital market that way. You cannot create the
level of trust and confidence that is needed, and
this is a serious handicap for many firms which
have difficulty with access to capital.
In conjunction with this control by a limited
number of large block holders, we have across
Europe many instances – or even systems – of
limitation of shareholder sovereignty, be they
golden shares on the part of government, limits
on voting rights, pyramid schemes, dual systems
of shares, etc. This is from northern Europe to
southern Europe, east and west. One share, one
vote is the exception rather than the rule and
that of course creates a different model and a different
approach.
So is this good or bad This model has significant
advantages. These reference shareholders
perform an important role in providing stability,
and in particular, commitment to a certain strategy
that often has to go beyond short-term
cycles. In certain industries in particular this has
become extremely beneficial. Managers know
with whom they are working – they do not have
the same independence that they have in the US,
but on the other hand they also know that they
have the support of shareholders and if things
work well those shareholders will very often provide
the commitment and the long-term view
which management would otherwise need to
move forward.
In fact, what we have is this concept of active
ownership: I not only own these shares, but I
actually get involved in the company and I help
my management. To a certain degree I delegate
the management of the company but I am there
to support, guide, make clear my preferences and
stand by them when things become a little rough.
There is a line of argument that says this is a
caricature of governance, because what happens
in these corporations is that you fill up the
boards with your cronies, you get friends to hold
stock in your company while you hold stock in
their company and through these cross-holdings
you actually extract yourself from market scrutiny
and therefore there is no accountability and
no sanctions if things go wrong.
Actually some very interesting research that
one of our colleagues at ECGI produced shows
that the opposite is true. These so-called friendly
shareholders very often are the first to turn
around and become hostile when things go
wrong. They know where their interests lie and
interestingly, for example in Germany, sometimes
these so-called friendly shareholders and
board members are the first to hold hostile positions
and to hold them in a clandestine way
which is nobody detects until it is too late. They
actually become an agent of change, which is
quite curious.
So what are the challenges of this model
Often, it is easy to distort the model, in particular
through these limitations of shareholder sovereignty,
to protect control and to make sure that
whatever happens I do not loose the control of
my company and therefore I am not subject to
market scrutiny through takeover.
This is supposedly beneficial in the longer
term, giving time to solve problems and put
things back on track, but in fact we know that
this often becomes essentially a protectionist system.
If you put this together with the tendency
of many governments to intervene and to work
together with companies to supposedly help
them become stronger, you move towards the
politicisation of companies which is so easy to
detect in particular countries like France, Spain
or Italy, and which is far from market discipline.
You could also argue that there are serious
issues with board authority. Boards very often
are pro-forma. They are window dressing. We
go there, we sit we listen. Management makes
wonderful reports. We ask some questions, they
respond, but we know the real decisions are not
taken at the board, they are taken in meetings
between the management and the dominant
shareholders somewhere else – that, again, is not
in the interest of minority investors. There are
serious concerns about compensation, and finally
it is worrying that there is no openness to using
market mechanisms as the ultimate source of
reward or sanction.
If I take this a step further and become even a
little more radical, let me talk for a bit about the
New Economy: a growth model based on innovation,
entrepreneurship and risk-taking, which
demands very rapid reallocation of resources.
The most important features must be a strong
ability to get rid of inefficient uses of resources
and to channel resources to whatever new opportunities
may exist, some of them quite random
really, with some prospect of gain but with very
high risk associated with them.
This approach, which of course lies behind
the extraordinary performance in the US economy
that we are now observing, is clearly based on
ruthless market discipline. If you don’t keep up
with market expectations, after a few quarters
you are out. If this kind of performance continues,
your company will be taken over and the
resources are diverted elsewhere. The knowledge
that the takeovers, real or potential, can happen
quickly generates a permanent sense of fear and
anxiety, where people know they have to be on
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