Therese Strand - Developing Corporate Governance | Carlsbergfondet
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Developing Corporate Governance: Cross-Border Race to Influence

Internationaliseringsstipendium | 02/10/2017

During Therese Strand's stay at Vanderbilt Law School, significant time was devoted to study the role of corporate investors and their financial objectives and legal prerequisites in a contextual landscape that is far from the Nordic business environment. During the stay, data has been collected to explore how international sources of power impact on the Nordic business community.

By Assistant Professor Therese Strand, Copenhagen Business School

In 2016, The Carlsberg Foundation supported my visiting stay at Vanderbilt Law School. As an economist, the opportunity to spend time at a law school constituted an invaluable opportunity to study the role of the law in my research field, corporate governance. 

During the stay, significant time was devoted to study the role of corporate investors and their financial objectives and legal prerequisites in a contextual landscape that is far from the Nordic business environment. 

In the process, I have experienced great support from my host, professor Randall Thomas, who is a profound expert in corporate and securities law and specialises in shareholders and their actions. During the stay, data has also been collected to explore how international sources of power impact on the Nordic business community. 

Project and Activities

International influence on the Nordic business model, both in terms of non-domestic law makers and foreign investor expectations and practice, currently attracts considerable interest. 

This is reflected in policy-related initiatives, such as the report on The Nordic Corporate Governance Model (Lekvall et al, 2014), as well as Danish contributions to the debate concerning how the EU legislation pressures the Nordic model (e.g. Birkmose, 2014; Hansen, 2014). 

The nature of this pressure has only to a limited extent been investigated, despite increased internationalisation and far-stretched ambitions to harmonise European regulatory frameworks.
Corporate Governance

• Concepts of how companies should be directed and controlled. • Developed around the relationship and power balance between owners, boards, managers, and stakeholders.

• Addresses conflicts of interest, based on the assumption that rationality guides each party’s decision-making. 

• Results in legal frameworks and best practice principles that balance between contractual freedom, respect of private property principles, and protection of moral values and of parties with limited ability to protect themselves.

The collected data is used to explore the EU legislative process, and to what extent adopted legal initiatives correspond with the preferences of market participants, including those from the Nordic countries. 

The legislative process in the EU is transparent, which has allowed the collection of a unique dataset on market participants’ opinions in public consultation, and what pieces of legislation they approve or disapprove. 

Moreover, the role and impact of foreigners as corporate owners in the Nordic region is considered in the light of the increased internationalisation. 

Examples of foreign investor power has been seen at several Nordic companies’ annual general meetings. 

This indicates an inflow of Anglo-American oriented expectations and practices, giving rise to questions on the role of foreigners in Nordic companies.

Foreign influences also raise questions about the value of local corporate governance features, a richness in the Nordic model, and the importance of protecting well-functioning local features from international challenges and mainstreaming. 

The work carried out at Vanderbilt bridges into projects on the effects of Nordic ownership differences, long-termism, shareholder duties, and the value of corporate governance features of a particularly local character. 

The projects combine legal and economic perspectives, and ultimately aim to result in peer-reviewed publications, as well as dissemination articles and activities in Denmark and the Nordics through the Nordic Corporate Governance Network.

Campus courtyard with the law school in the background (red building).

The Idea of Corporate Governance

Corporate governance comprises concepts and frameworks that guide and direct the relationships between actors in corporate society. Corporate actors are generally divided into four broad categories: investors, directors, managers, and other stakeholders (for example employees, customers and creditors). 

Corporate governance essentially aims to provide mechanisms that protect the power balance from tilting too heavily in any direction between these actors, which could otherwise harm for example people, businesses, or the environment (see generally Thomsen & Conyon, 2012). In their most basic theoretical form, corporate governance models assume that all actors make decisions based on some kind of rationality (most often financial, but people can also have other interests and objectives) (Jensen & Meckling, 1976). This leads to conflicts of interest of various magnitudes.

Corporate governance frameworks aim to provide solutions to such conflicts, both by prohibiting actions of severe harm, and by giving preference to actions of significant benefit. The difficulties in developing corporate governance is that causality is not always clear. We don’t know for sure what causes positive and negative effects, and under what circumstances. 

We can also not predict the future. Financial investments and business decisions can turn out negatively, independently of how good the intentions have been. Corporate actors therefore need some freedom to make erroneous decisions, and the corporate governance framework must allow such decisions to exist.

Corporate Governance Model

• Nordic countries have been remarkably successful (given their size) in producing leading international corporations.

• Nordic corporate governance combines high transparency with strong controlling owners, strong minority protection, as well as a high degree of informal values, consensus, and social control.

• Still, countries are not as homogeneous as one might think.

• Widespread differences in, perhaps most notably, ownership forms and structure, for unknown reasons

Overall, the framework needs to balance carefully between a multitude of variables: 

Basic legal principles, such as the freedom to form contracts and private property rights, protection of weaker parties including those that cannot argue for themselves (i.e. children and the environment), and the recognition of the fuelling power of the economic system that exists in peoples’ right and ability to make profits. 

This complexity makes the study of how corporate governance frameworks develop particularly interesting, both from the perspective of changes in legislation, and from more “evolutionary” perspectives, i.e. changed behaviour among corporate actors.

Spring at Vanderbilt University.

Nordic Corporate Governance – Excellence and Challenges

Corporate governance is generally divided into two broad distinctions; the Anglo-Saxon model and the Continental European model. The Nordic model is a local variant of the latter. Nordic corporate governance is characterised by strong, controlling owners combined with extensive rights for shareholder activism, transparency, stakeholder concerns, and a high level of social and reputational control (Agnblad et al, 2002; Lekvall et al, 2014). 

Scholars note that the model presents a puzzling case for law and economics literature, as nominal papers (La Porta et al, 1997, 1998, 1999) predict that the presence of controlling owners who lock in power over generations through dual-class shares and pyramids should lead to small financial markets (Agnblad et al, 2002). In reality, it is the opposite (Ibid, 2002). 

The Nordic region has displayed exceptional performance in building a corporate society. The number of leading international firms per capita is higher than in both Germany, the UK, and the USA (Forbes, 2013; Lekvall et al, 2014). Similarly, on a per capita basis, Stockholm ranks second in the world (behind Silicon Valley) to produce billion-dollar start-ups (Atomico, Telegraph, 2015; Financial Times, 2015). 

Sweden, Norway, and Iceland are among the countries that have the most billionaires (per capita) in the world (Forbes, 2015; Business Insider, 2015). And on innovation, talent, and technology, four Nordic countries rank among the top ten in the world (Global Creativity Index, 2015).

The Nordic model has been argued to be under pressure (Lekvall et al, 2014). Internationalisation of investments, development of new financial technology, and ambitions to harmonise corporate governance frameworks in the European Union can all contribute to challenging scenarios. 

It is therefore important to obtain a better understanding of investors from other business cultures, the impact of European Union level legislation, and what elements of the Nordic model that are particularly valuable and should be protected.

Bridging Law and Economics

Data collected during last year aims to shed light on the above-mentioned issues. At Vanderbilt, focus has been on developing my competencies within the field of law as a complement to my PhD in economics. 

This has been achieved through a mixture of law courses, participation in the school’s Law and Economics seminar series, exploration of new data sources, and networking with legal scholars with similar research interests. 

Professor Randall Thomas has offered valuable insights on American institutional investors, a category that appears to become more and more influential in Europe and the Nordics. Moreover, knowledge has been obtained on the more fine-grained legal differences, and their roots, between Anglo-Saxon and European corporate governance. 

As many have argued that the corporate governance framework at the EU level is developing in a more Anglo-Saxon direction, it becomes increasingly crucial to understand the origin and motivations of corporate governance features from this tradition. 

Moreover, the collaboration between economists and lawyers – which is on the rise in corporate governance research – aims to capture a richer, more nuanced, and multi-faceted picture of the corporate society and its increased complexity.

Published Articles, Working Papers, and Projects

Strand, T., Nytt EU-Direktiv Ska Lösa Oklara Problem, Nordisk Tidsskrift for Selskabsret, no.2 (2015), pp.29-41.

Strand, T., Short-Termism in Europe, Columbia Journal of European Law, Vol.22, No.1 (2016)

Strand, T., An Economic View on Shareholder Duties in Corporate Governance, in H. Birkmose (ed.) Shareholder Duties in Europe, Wolter Kluwers (2017).

Nielsen, C., Martikainen, M., Ohnemus, L., Strand, T., Return on Equity Targets in the Financial Sector: Earnings Strategy or Risk Trap? A Focus on the Nordics, working paper (2017)

Suggested Readings

Ilmonen, K., Dynamics of EU Corporate Governance Regulation – Nordic Perspectives, doctoral dissertation, University of Helsinki (2016)

Lekvall, P. (ed.), The Nordic Corporate Governance Model, SNS Förlag (2015)

Schouten, M., The Political Economy of Cross-Border Voting in Europe, CJEL, Vol.16, 1-37 (2009)

Thomsen, S., The Nordic Corporate Governance Model Revisited, Nordic Journal of Business, Vol.65, No.1, 4-12 (2016)