Professor Trond Randøy

University of Agder, Kristiansand, Norway

Norway and the Nordic Corporate

Governance Model

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Corporate governance

• :”suppliers of finance .. make sure that managers do not steal the capital they supply or invest it in bad projects (Shleifer and Vishny, 1997: 737). – Shareholder wealth maximization

– An agency perspective

– Anglo-American capitalism

• The OECD Principles of Corporate Governance states: – "Corporate governance involves a set of relationships between a company’s

management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.“

– Stakeholder maximization

– Agency perspective – expanded

– Continental European perspective

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Good corporate governance:

…is a set of mechanisms, structures and incentives that facilities long-term value creation to the benefit of owners. – Relationships used to determine and control:

• mechanisms (accounting and audit)

• structures (ownership, general assembly, board meetings)

• incentives (rewarding of top management)

Long-term value creation

The Agency Problem

Agents and principals

Principals = owners, or anyone who hire

someone else to do a certain job at their

expense

Agents = managers, a person hired to do a

certain job in exchanged for an agreed

compensation

Whenever in a contract, one party therefore

needs to

1) monitor the other party

2) find ways to ensure that interests are

aligned

Good corporate governance is to ensure that

you as a shareholder get any return!

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Management versus corporate governance

Publicly traded Family firm NGO

Owners

Board

The Firm

Owner(s)

Board

The firm

Council etc.

Board

The Bank

Purpose

Agency problems – Type I, & II

• Agency conflicts type I most common in firms/nations with dispersed ownership – Collective action problems and free rider problems (no one has

incentive to monitor)

– Anglo-American capitalism

• Agency conflicts type II most common in firms/nations with concentrated ownership – Private benefits

– Continental Europe & rest of the world

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Corporate governance solutions

Legal Markets Social

• Investor rights Minority shareholders Creditors

• Boards’ legal responsibility

• Accounting laws and regulations

• Product market

• Executive labor market • Incentives • Recruitment

• Capital markets Take-over markets.

• Market for board-members

• Founder- or family influence

What are the specific relationships between the CG factors?

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Ranking of defenses against poor

corporate governance:

1. Legal rights, auditing, business ethics & social norms

2. Incentives – amongst owners, board, management

3. Board monitoring and control

4. Business takeovers/mergers 1. Voluntary

2. Hostile

The Corporate Governance Relationships

Value creation

for owners

Ownership Type: International?

Concentrated

Market for corporate control

Board Composition: int.?

Board size, competencies

Management Composition; int.? Incentiver

External corporate governance:

Internal

corporate

governance:

Corporate History of Norway

• Large corporations with government ownership – Statoil (67%), Hydro (44%), Telenor (58%) – No government ownership in small firms

• Many high-growth entrepreneurial firms (private) – Tandberg – bought by Cisco for £1.8bn in 2010 – Norwegian Air Shuttle – from 0 to 13 billion in market cap

(NOK) in 10 years

• Some large private family firms – Shipping, retailing, fish farming

• High level of foreign institutional ownership – 21% in 1986 and 35% in 2013

Norway vs. other Nordic

Similarities:

- Culture and language

- Legal framework (with some minor exceptions)

Differences:

- non-EU – but EEA - “membership without a vote”

- Ownership: state ownership

- Industries: Energy, Shipping & Seafood

- More political interventions – like gender board quota?

The Largest Nordic firms in 2001

Billions of NOK

The Largest Nordic firms in 2013

Billions of NOKs

Largest Norwegian

In September 2015: Novo Nordisk 800, Statoil 390, AstraZeneca 600, Telenor 248, Seadrill 28, Subsea 22

Impact of ownership in Norway

• Managerial ownership (Bøhren & Ødegaard, 2005) +

• Founder influence (Mishra, Randøy, Jenssen, 2001; Randøy & Goel,

2003): +

– Family influence (Randøy, Jenssen, Goel, 2003) – Family board influence +

– Family top management +/-

• Board ownership (Bøhren & Ødegaard, 2005) +

• Ownership concentration (Bøhren & Ødegaard, 2005) + (negative when very high>33-50%)

Implication for ownership

- Ownership in publicly traded firms:

- The Government is important as both regulator and investor: Will this change in the future?

- Will Norway remain open to foreign ownership?

2006 2007 2008 2009 2010 2011 2012

31,6 30,3 39,5 37,5 34,3 38,3 36,3 Government & municipalities

0,2 0,3 0,3 0,3 1,0 0,9 0,4 Comp. with governm. ownership

1,2 1,1 1,3 1,9 1,2 0,7 0,5 Banks & mortgage com.

1,9 1,8 1,3 1,7 2,0 1,3 1,4 Private pension funds/Life insurance

0,3 0,2 0,3 0,4 0,5 0,1 0,4 General insurance

3,8 3,6 3,8 5,3 5,9 5,1 7,0 Mutual funds

17,5 18,3 16,9 14,7 16,1 14,3 14,3 Other companies

3,7 3,6 3,8 4,1 4,0 3,7 3,7 Private investors

39,7 40,8 32,8 34,0 34,9 35,5 35,8 Foreign investors

0,0 0,0 0,0 0,0 0,0 0,0 0,1 Others

100,0 100,0 100,0 100,0 100,0 100,0 100,0 Total

Impact of boards

Boards

• A history and culture of government interference with firms’ (publicly traded) corporate governance

Shareholder elected female directors (%)

Impact of board composition

Performance studies:

• Anglo-American board members; Oxelheim & Randøy, 2003) +

• Forced female recruitment (Bøhren & Strøm, 2007; Ahern and Dittmar, 2012) –

• Employee representation (Strøm, 2007) –

• Multiple board positions/network (Bøhren & Strøm, 2005) +

Other implications of gender quota:

- Change of legal form, partly to avoid quota, such that the total number of females in publicly listed firms were constant (Bøhren and Staubo, 2012)!

- New female board members have less board experience, less diversity of education, but more internationals (Gregoric, et al, 2015)

Impact of CEO pay/incentives

• Firm performance explains small fraction of change in pay – changes in firm size substantially more (Oxelheim and Randøy, 2008)

• Anglo-American board members: Higher pay (Oxelheim & Randøy, 2005)

• Family ownership (Randøy & Nielsen 2002) Less pay

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

-100 -50 0 50 100 150 200 250

Tota

l CEO

Pay

in 1

00

0

NO

K

Yearly return to Investors(%)

What explains CEO pay in Norway

Lederlønn

Nivå

Firm size

Profit

Close to

capital city

Many owners

Foreign owner/

board member

Female

CEO

Female

Chair

Large owner

Outside

capital

Publicly traded

Government

ownership

High pay industry

Chair’s tenure

CEO age

Higher pay Lower pay

CEO pay issues

• A low level of CEO pay:

– But higher pay growth that overall economy

– foreign ownership increase pay

• Government (last) like to see lower CEO pay

– Little or no impact of implemented policies of curbing pay

– Some of the largest pay increases in firms with government ownership (Telenor, Cermaq)..what is the paradox?

Lessons to be learned for Latvia?

• The corporate governance system is path dependent: What is good for Norway is not necessary good for Latvia – Norway’s high quality of legal and accounting system support good

corporate governance, less need for other «mechanisms»

• Norway is able to have low level of CEO pay, partly due to cultural reasons and strong owners (family & founder firms)

• Foreign ownership can both be a source of capital, and better corporate governance.

• Challenges when government have high ownership share – similar to dispersed ownership problems in the Anglo-American system.

References:

• Ahern and Dittmar, 2012. The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation, Quarterly Journal of Economics, 2012, vol. 127(1): 137-197.

• Wang, Mingzhu and Kelan, Elisabeth, 2012, “The Gender Quota and Female Leadership: Effects of the Norwegian Gender Quota on Board Chairs”, Journal of Business Ethics

• Ø Bøhren, S Staubo - 2012 Changing organizational form to avoid regulatory constraints: The effect of mandatory gender balance in the boardroom- webfirstlive.lse.ac.uk

• Lars Oxelheim and Trond Randøy (forthcoming). Globalization of monitoring practices: The case of American influences on the dismissal risk of European CEOs. Journal of Economics and Business, in special issue on International Corporate Governance. DOI: 10.1016/j.jeconbus.2013.02.002

• Oxelheim, L., Gregoric, A., Randøy T. and Thomsen, S. (2013), On the Internationalization of Boards – the case of Nordic Firms? Journal of International Business Studies 43 (3), 173-194.

• Christofer Edling, Bersant Hobdari, Trond Randøy, Anna Stafsudd & Steen Thomsen, 2012. Testing the “old Boys`Network”: Diversity and Board Interlocks in Scandinavia. Chapter 6 (pages 183-202) In “Small World of Corporate Governance”, edited by Bruce Kogut. Mass.: MIT Press. ISBN: 978-0-262-01727-5.

• Gregoric, A., Oxelheim, L., T. Randøy and S. Thomsen (forthcoming), "Does the corporate elite block female appointments?" Journal of Business Ethics

• Piekkari, R., Oxelheim & Randøy, T, (2015), " The silent board: How language diversity may influence the work processes of corporate boards”, Corporate Governance: An International Review, 23 (1): 25-41.

• Trond Randøy and Jim Nielsen, 2002. Company Performance, Corporate Governance, and CEO Compensation in Scandinavia. Journal of Management and Governance, Vol. 6 (1), 57-81.

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