Frame of reference
This chapter presents the frame of reference used to answer our purpose. Following an introductory discus-sion on the rational for our theoretical choices, the framework of previous theoretical contributions is pre-sented. Finally, the research questions are presented.
Choice of reference
Our frame of reference is built upon the prospective rationales of board internationaliza-tion. Out of the four parallel developments discussed in the introduction, this frame of ref-erence intends to focus on reviewing the related theoretical areas of: corporate governance, ownership structures, stakeholder pressure, and competitive advantage.
Corporate governance is the system by which shareholders relate to and control the man-agement of a company, hence a groundwork for the board of directors. In recent years various corporate governance frameworks have been adopted in order to prevent fur-ther scandals such as Enron, Ahold and Skandia. Given the strong influences of these frameworks on board composition, and the increased influence of foreign corporate governance this section presents the main features within corporate governance and how both Swedish and foreign corporate governance can effect board internationaliza-tion.
The ownership structure greatly influences board composition as each owner has the right to influence the election of directors. However, in practice owners tend to differ in level of engagement in matters such as board composition, where institutional investors are typically rather passive. Hence, this section aims at presenting related rights of a shareholder and discusses some typical owner types and their characteristics in relation to board election.
Stakeholder pressure is often considered to have an effect on persons and organizations. In this point of view, the board is assigned to satisfy all the stakeholders, especially the owners. In order to do so they have to respond to environmental demands and prove the company‘s credibility. The current debate about internationalization and diversity in the business life is one example to acknowledge. Hence, this section introduces some main references on stakeholder pressure and legitimacy.
The recurrent chase for competitive advantages in the business life nowadays is realized in the corporate boards too, especially as the strategic role of the board is enhancing. By utilizing all the potential competences, experiences and networks of the board members efficiently the board’s effort will contribute to a successful result for the rest of the company. Hence, this section introduces research on the creation of competitive ad-vantages and how the board contributes to this.
Becoming a shareholder you let go of the control of your investment to the people leading the company. As discussed by Carlsson (1997) corporate governance deals with the rela-tionship between shareholders and the executive management of a company. According to the Swedish Code of Corporate Governance it features how a company should be managed in order to in the best possible way meet its owners’ required return on invested capital (The Code Group, 2004). Several scholars (Mallin, 2004; Monks & Minow, 2004; The Code Group, 2004) explain that recent corporate scandals in many Western world countries, such as Enron and WorldCom in the US, Ahold in Holland and Parmalat in Italy, have acceler-ated its practice, in order to restore investor confidence.
Corporate governance is the modern term for the classical problem of the separation of ownership and control, later labelled the principal-agent relationship. As discussed by Fama Jensen (1983, p.321), an organization can be thought of as a ‘nexus of contracts’, result-ing in a number of agency relationships. The agency relationship was earlier discussed by Jensen & Meckling (1976) as “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. (Jensen & Meckling, 1976, p.310).
As discussed, both principals and agents are assumed to be rational and utility maximizers. In this context, it is unlikely that agents at all times work in the best interest of the principal (Jensen & Meckling, 1976). Agency theory has become a key contributor to organizational theory and one of the most fundamental influencers in corporate governance. This separa-tion of ownership and control and its difficulties, that the agent does not always work in the best interest of the principal, is argued (Mallin, 2004; Monks & Minow, 2004) to be the source of many corporate scandals. Despite this general consensus today, the problem was acknowledged already by Adam Smith “being the managers of other people’s money rather than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own” (Smith, 1838, in Mallin, 2004, p.11)
Hence, Carlsson (1997) argues that a key fundamental in corporate governance is to dis-tribute accountability; the board and the management are accountable for a company’s op-eration. Johnson, Scholes & Whittington (2005) explain these difficulties as the hierarchy of governance, where various groups on different layers exert influence. Within corporate governance, the role and performance of the board of directors have received increasing at-tention, as principals look for sources of poor corporate performance (Monks & Minow, 2004). The board of directors is an essential monitoring device in ensuring the minimiza-tion of any principal-agent problems between shareholders and management, as it is put in place to monitor management on behalf of the shareholders (Monks & Minow, 2004). Still, principal-agent problems can occur between the board of directors and the shareholders (Mallin, 2004). The Swedish Code of Corporate Governance defines the role of the board rather comprehensively to; setting main targets and goals for the business and deciding the strategy to reach them; continuously evaluate the executive management and when needed appoint or remove chief executive officer; ensure effective control systems; ensure trans-parency and accuracy in the company’s external communication; ensure satisfying control of the company’s compliance with laws and regulations and ensure that necessary ethical guidelines are being adopted (The Code Group, 2004). Nicholson & Kiel (2004) also high-light the different roles of the board and in particular the strategic one.
Corporate governance in an international perspective
Corporate governance differs between countries, due to traditions, legal frameworks, and ownership structure. Several sources (Mallin, 2004; Monks & Minow, 2004; The Code Group, 2004) addresses two main corporate governance systems; the Anglo-American and the continental European, with the US and UK typically representing the former and Ger-many the later. It is recognized that the fundamental source of difference between the two systems is the structure of share ownership, with the Anglo-American system typically hav-ing a very diverse ownership and the Continental-European enjoying a much less diverse and hence stabile structure. This difference has a significant effect on structures and com-positions of the board. The Swedish Code of Corporate Governance puts the Swedish sys-tem in the middle of these two systems, since it is common that one or a few major owners dominate ownership in Swedish listed companies (The Code Group, 2004). Still, much of the modern corporate governance origins from the US and the UK and despite differences, many common core principals exist around the world (Mallin, 2004).
Swedish corporate governance
The Swedish Code of Corporate Governance2 states in its introduction that the Swedish model is still highly influenced by the international standards (The Code Group, 2004). Carlsson (1997) argues that the Swedish corporate governance debate got its kick-start in the failed Volvo-Renault merger, where the institutional owners opposed and finally stopped the merger. This is argued to be a clear sign of shareholder activism, which reduces the problematic principal-agent problems (Carlsson, 1997). The international development within corporate governance made Sweden adopt a self-regulating code of corporate gov-ernance in 2004, serving as a complement to the basis of the Swedish corporate govern-ance; the Swedish Companies Act. The code features a number of guidelines related to the board but also internal control and financial reporting issues; board-auditor relationship; requirements on management and auditors; governance information requirements; com-pensation and annual general meeting procedures (The Code Group, 2004). In an interna-tional comparison, the Swedish framework is less formalized, comparing for example with the US. Further on, following the tradition of self-regulation, it works under a comply or explain basis; either companies covered by the Code follows the set-out policies, or they need to have good enough motivation for violating them (The Code Group, 2004).
Fundamentally, board composition is a matter for the owners and the Annual General Meeting (The Code Group, 2004) but several guidelines and some legislation need to be considered. According to The Swedish Companies Act (2004), a publicly listed company should have at least three members of the board, and the Swedish Code states that:
“The board should have a size and composition that enable it to embrace the various qualifications and experience needed and to meet the independence criteria required to manage the company’s affairs effectively and independently” (The Code Group, 2004, p.26)
On board diversity, the Swedish framework stresses the need of diversity and breadth in the backgrounds, experiences and qualifications of the directors. Naturally, as discussed by the Swedish Code, an appropriate board composition is very company specific and should be based on the company’s operations, the phase of development and other identified impor-tant conditions. Still, the Code does not specify diversity issue any further but only places The Swedish Code of Corporate Governance is henceforth labelled as The Swedish Code or The Code. The Code is developed by The Code Group, a committee appointed by the Government, comprising of repre-sentatives from both public and private interests.
an added importance on equal gender distribution on the board (The Code Group, 2004). The issue of board independence has been given even greater attention in the corporate gov-ernance framework than board diversity. It states that the majority of the board of directors need to be independent to the company and its management and at least two of the direc-tors need to be independent to the company’s major shareholder. Due to a tradition of ex-cluding members from the executive management, apart from the CEO, the board is nor-mally composed of non-executive directors, where directors with links to the major share-holders hold the majority of the board positions (The Code Group, 2004).
The Swedish corporate governance framework says little concrete on the issue of foreign di-rectors. The only issue addressed is that at least half of the board members in a Swedish company need to be residents within the zone of European Economic Cooperation3 (Ak-tiebolagslag 2005:551).
Foreign corporate governance
Given the highly spread ownership structure in both the US and the UK, many corporate governance developments origin from these countries. A focus is here placed on the influ-ences from the US and the UK corporate governance frameworks, given its strong impact from these countries. Carlsson (1997) argues that it was the hostile take-over of US-based Texaco in 1984 that spurred the work on corporate governance of the Californian-based pension fund CalPRES. CalPERS has since then been the initiator to many corporate gov-ernance development and one of the most important influencers in US corporate govern-ance (Carlsson, 1997; Monks & Millow, 2004).
Still, the first comprehensive corporate governance framework, the Cadbury report, was adopted in the UK in 1992, leaving strong influence around the world. This clearly empha-sized the central role of the board, the division of responsibility in top management and the role of non-executive directors and recommended a Code of Best Practice for board of di-rectors (Mallin, 2004). The UK adopted throughout the 1990’s various policies, which were all incorporated in the Combined Code of Corporate Governance adopted in 2003.
The US: the Sarbanes-Oxley Act
Contrary to the many countries, the US does not have a definitive code for corporate gov-ernance, but rather various state and federal developments have taken place. As explained by Monks & Minow (2004), following the many corporate scandals in the US, the Congress adopted in 2002 the most comprehensive and formal US corporate governance influencer ever, focusing on internal financial control; the Sarbanes-Oxley Act (SOX). This legislation affects also Swedish companies, as all companies listed on the stock exchange in the US need to comply with the rules. This makes the Sarbanes-Oxley Act probably the primary foreign corporate governance influence, next to the Combined Code. Companies obliged to follow the SOX need to ensure an adequate internal control structure and procedures for financial reporting, a requirement demanding a rigorous formal control system (Deloitte, 2006). As explained by Mallin (2004) the SOX demands the Chief Executive Of EES – Europeiska Ekonomiska Samarbetsområdet ficer and the Chief Financial Officer to certify that quarterly and annual reports are fully compliant with laws and regulations and that it reports a correct view of the company’s fi-nancial state (Mallin, 2004). Thulin (2004) argues that the Sarbanes-Oxley Act has made corporate governance very formalized. Several Swedish companies have abandoned its US listings, according to Thulin (2004) partly because of the fierce accounting requirements adopted with the Sarbanes-Oxley Act.
The way of governing companies in the US have long been very different from the Swedish one, owing partly to the differences in ownership structure. Two main contributing differ-ences is that the US way is seen as more formal and on the matter of board composition, less weight have been put on board independence (The Code Group, 2004). Normally the area of board composition is the one where the Anglo-American system differs from the Continental European (Mallin, 2004). Corporate governance is a global phenomenon (Carlsson, 1997) that strongly influences the Swedish corporate governance framework and best practices (The Code Group, 2004; Aktiespararna, 2006). The way of governing com-panies outside Sweden together with the requirements of some Swedish companies to adapt to new foreign regulations and conduct puts an influence on what experiences one is looking for to the board of directors.
Fundamentally, ownership is a combination of both rights and responsibilities. Hedlund, Hägg, Hörnell & Rydén (1985) argue that an owner have the right to receive returns, the right to trade its share with another person, and the right to participate in the control and governance of the company’s management and business, by voting on the annual general meeting. Dahlbäck (1987) takes the right of a shareholder further, translating them in to ac-tivities, such as voting at the Annual General Meeting, meet with the management, nomi-nate board of directors and appoint a board representative for oneself. Despite the equal right of all owners to nominate board candidates and have their say at the Annual General Meeting (The Code Group, 2004) owners differ by nature and several distinctions exists. Arlebäck (2000) makes the distinction between “owners” and “speculators”, where the former is a shareholder with a long-term and often emotionally attached ambition to de-velop the company, while the latter views its holdings in the company as the current most attractive investment. Another frequent distinction is between “active” and “passive” own-ers, enfolded in the phenomenon of shareholder activism and passivism. Lindgren (1994) argues that the minimum requirement placed on an “active” owner is involvement in board work. The Corporate Library (2004) discusses shareholder activism as the practice of taking action to effect change in publicly listed companies for the benefit of its shareholders.
1.2 Problem discussion
1.4 Target group
1.6 Thesis structure
2 Frame of reference
2.1 Choice of reference
2.2 Corporate governance
2.3 Ownership structure
2.4 Stakeholder pressure
2.5 Competitive advantages
2.6 Research questions
3.1 Research approach
3.2 Research design
3.3 Data collection
3.4 Data presenting and analysis
3.6 Reflection on the method
4 Empirical findings and analysis
4.1 Company profiles
4.2 Introductory Q&A
4.3 Corporate governance
4.4 Ownership structure
4.5 Stakeholder pressure
4.6 Competitive advantage
5 Conclusion and discussion
GET THE COMPLETE PROJECT
Internationalization of Corporate Boards and the rationals behind it