Corporate Governance & Transformation HS2023 PDF

Session 8: Corporate Governance Prof. Dr. Artur Baldauf © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 1 Session 8: Corporate Governance Learning Goals: To identify and understand the meaning of corporate governance. VISION GOALS To understand why governance fails...

Session 8: Corporate Governance Prof. Dr. Artur Baldauf © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 1 Session 8: Corporate Governance Learning Goals: To identify and understand the meaning of corporate governance. VISION GOALS To understand why governance fails. To identify and understand the meaning of „board“ and management in the areas of corporate governance. © Artur Baldauf l Department of Management l University of Bern STRUCTURE SYSTEM PROCESS Corporate Advantage Corporate Strategy 2 "For me, the success of our company depends not on corporate governance, but on leadership and management principles." "Regulations will never be a substitute for good personal integrity." Peter Brabeck Former CEO & Chairman of the Board Nestlé S.A. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 3 Company Goals Deriving goals from the stakeholder value approach Top-Management Team Owners Returns Board Investment Employees Labor Management Manpower Income, Incentives Income Value Chain Price Suppliers Customers Company Interest and amortisation Creditors Products/Services Capital Others “We believe that it is only possible to create long- term sustainable value for our shareholders if our behaviour, strategies and operations are also creating value for the communities where we operate, for our business partners and, of course, for our consumers. We call this “Creating Shared Value” «Competence, ambition and integritiy ensure that we create value» © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 4 Corporate Governance „Corporate Governance ist die Gesamtheit der auf das Aktionärsinteresse ausgerichteten Grundsätze, die unter Wahrung von Entscheidungsfähigkeit und Effizienz auf der obersten Unternehmensebene Transparenz und ein ausgewogenes Verhältnis von Führung und Kontrolle anstreben“. (Swiss Code of Best Practice for Corporate Governance, Ingress) … die oberste Unternehmensführung … Codes of best practice (more than 40 just in Europa) Cadbury Report Greenbury Report … OECD-Principles Sarbanes-Oxley Dodd-Franck © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 5 Why Governance Fails Principals and Agents Assumption: rational self-interest of human beings Separation of Ownership and Control Agency Problem => Agency Costs Principals Agents Shareholders of a firm Act on behalf of principals in managing the firm © Artur Baldauf l Department of Management l University of Bern When interests are virtually identical, the agency problem is small: executives do what is in principals’ best interests However, when there are conflicting interests then agents may act to detriment of principals and visa-versa (e.g., executives raise salaries and reduce returns) Corporate Strategy 6 Why Governance Fails What Stakeholders Want … Stakeholder: «any group or individual who can affect or is affected by the achievement of an organization’s purpose» (Freeman, 1984: 53) Board of Directors Owners / Shareholders Higher stock price Value Dividends Reputation Personal interests … Free from responsibilities Payments Benefits? Goal accomplishment Reputation Power, influence Personal interests … © Artur Baldauf l Department of Management l University of Bern Top Management Job guarantee Payments, Benefits Higher stock price Goal accomplishment Reputation Power, influence Personal interests … Corporate Strategy 7 Mismanagement Evidence of Governance Failure Benefits for Management (managerial indulgences) Golden parachutes (golden goodbye): guaranteed payment of a specific amount of money after job loss Poison pills: Hindering activities for a takeover (also when majority of the shareholders supported a takeover) CEO compensation Empire Building: Purchase of several businesses to raise the size of corporation, but not the shareholder value Acquisitions and disinvestments (e.g., divestments of previous acquisitions) Legal Issues: Corporate (UBS) Accounting scandals, e.g., overrating earnings (Enron) Insider trading © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 8 Introduction Corporate Governance Mechanisms Investment Governance Mechanisms Contracts - compensation debt venture capital Legal Protection Large Investors - - - Management Voting rights Election of board Minority rights Duty of loyalty bankruptcy Large s’holder Takeover/LBO Large creditor Financiers Financial Accounting and Other Information SEC GAAP Audit Audit Committee Return © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 9 Corporate Governence – BOD Art. 716a OR – unübertragbare und unentziehbare Aufgaben 1 Der Verwaltungsrat hat folgende unübertragbare und unentziehbare Aufgaben: 1. die Oberleitung der Gesellschaft und die Erteilung der nötigen Weisungen; 2. die Festlegung der Organisation; 3. die Ausgestaltung des Rechnungswesens, der Finanzkontrolle sowie der Finanzplanung, sofern diese für die Führung der Gesellschaft notwendig ist; 4. die Ernennung und Abberufung der mit der Geschäftsführung und der Vertretung betrauten Personen; 5. die Oberaufsicht über die mit der Geschäftsführung betrauten Personen, namentlich im Hinblick auf die Befolgung der Gesetze, Statuten, Reglemente und Weisungen; 6. die Erstellung des Geschäftsberichtes sowie die Vorbereitung der Generalversammlung und die Ausführung ihrer Beschlüsse; 7. die Benachrichtigung des Richters im Falle der Überschuldung. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 10 Governance Mechanisms (GM) Types Hierarchical Governance Mechanisms Ownership Concentration Board of Directors Executive Compensation: stock based Organization Structure: M-form Market for Corporate Governance: (Changes in Governance Environment): Threat of takeover, if the corporation is undervalued Measures against takeover Corporate Raiders LBOs: Offer from managers to buy corporation © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 11 Governance Mechanisms (GM) Hierarchical GM: Ownership Concentration Ownership Concentration: Number of major shareholders (large-block) and percentage of their stock holdings; hold at least 5% of the issued shares Large-block shareholders have an interest to control management Large stakes require/justify time, costs and supervision efforts. Influential shareholders: Institutional investors (mutual fund, pension funds, hedge funds, investor groups, …) my obtain board seats to increase their monitoring role Institutional Investors Have size (proxy voting power) Can affect firms’ strategies © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 12 Governance Mechanisms (GM) Hierarchical GM: Board of Directors (BOD) BOD: Group of chosen individuals whose primary task is to act in the interests of the owners (regulation and monitoring of the top-managements) Board consists of insiders (CEO and other top-manager of the corporation) and outsiders (related and unrelated) Have a treasury responsibility to secure shareholders‘ investments Decisions on corporate strategy Selection, monitoring, assessing rewarding (controlling) executives Succession planning (selection, layoff of CEO & top management) Protection of the value of corporate assets Regulation of the financial corporate conduct Delegation of decision authority … Frequently: BOD is often not objective and independent and operates without adequate information (they are not involved in daily business)! © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 13 Governance Mechanisms (GM) Hierarchical GM: Executive Compensation Compensation: a GM which combines the interests of the owner with those of the manager; through payment of: fixed salaries, bonuses, long-term incentives (stock options) Factors, complicating compensation: Strategic decisions are complex, non-routine, have long-term impact Many external factors influence performance Stock ownership (long-term incentive compensation) makes managers contingent for market changes (which they cannot control) Incentive systems offer no guarantee that managers make the „right“ decisions, but they increase the probability that the managers set actions for which they are paid. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 14 Governance Mechanisms (GM) Hierarchical GM: Executive Compensation of Swiss CEOs in 2020 (Salary & Bonus) in Mio CHF Source: https://de.statista.com/statistik/daten/studie/291684/umfrage/hoechste-managergehaelter-in-der-schweiz/ © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 15 Governance Mechanisms (GM) CEO and BOD (2022) Wert (Mio.$) 1. Jan., % Current, % CEO Presidents of the Board ABB Ltd 57 718 -0.46% 0.71% Björn Rosengren Peter Voser Alcon Inc. 32 158 -0.39% 0.25% David J. Endicott Michael Ball Compagnier Financière Richemont SA 69 802 -1.55% 1.75% Jérôme Lambert Johann Rupert Credit Suisse Group AG 11 160 -1.55% -3.69% Ulrich Körner Axel P. Lehmann Geberit AG 16 887 -2.11% -0.48% Christian Buhl Albert M. Baehny Givaudan SA 31 094 -2.62% -1.57% Gilles Andrier Calvin Grieder Holcim Ltd. 30 738 0.20% 0.14% Jan Jenisch Beat Hess Logitech International 9 485 -2.10% 0.24% Bracken P. Darrell Bracken P. Darrell Lonza Group AG 38 629 -1.23% -0.95% Pierre-Alain Ruffieux Albert M. Baehny Nestlé SA 321 732 0.62% -0.21% Mark Schneider Paul Bulcke Novartis AG 184 350 0.66% 0.38% Vasant Narasimhan Joerg Reinhardt Partners Group Holding AG 26 555 -1.80% -0.49% David Layton Steffen Meister Roche Holding AG 265 850 0.11% -0.56% Severin Schwan Christoph Franz Sika AG 39 596 -1.61% -0.38% Thomas Hasler Paul Johann Hälg Sonova Holding AG 16 193 -2.22% -1.05% Arnd Kaldowski Robert F. Spoerry Swiss Life Holding AG 16 291 -0.71% 0.88% Patrick Frost Rolf Dörig Swiss Re Ltd. 24 464 0.04% 0.88% Christian Mumenthaler Sergio P. Ermotti Swisscom AG 27 218 0.62% -0.06% Christoph Aeschlimann Michael Rechsteiner UBS Group AG 58 507 -0.40% 0.05% Ralph Hamers Colm Kelleher Zürich Insurance Group Ltd. 68 887 1.09% 0.31% Mario Greco Michel M. Liès Firms © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 16 Governance Mechanisms (GM) Hierarchical GM: Executive Compensation BOD should try to align the interests of the CEO (top executives) and the owners of the corporation: “Interest harmonization” can be achieved through: CEOs become significant owners. Fixed salary, bonuses and stock options can be structured in a way, that there is a reward for success and a penalty for failure. “Lay-off” in case of a failure should be realistic. EVA – as Benchmark © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 17 Governance Mechanisms (GM) Hierarchical GM: M-Form Organizational structure is … GM and General Particularly M-Form (see Ch. 6) Colonel A Colonel B Captain B Captain A Sergeant A Sergeant B Private A © Artur Baldauf l Department of Management l University of Bern Captain C Private B Corporate Strategy 18 International Corporate Governance Germany Owner and manager are often the same person in private firms Public firms often have a dominant shareholder too, frequently a bank Medium to large firms have a two-tiered board Management monitors and controls managerial decisions Board of directors elects the management Employees, union members and shareholders appoint members to the board of directors Frequently, there is less emphasis on shareholder value than in U.S. firms; however, this may be changing. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 19 Information about the Final Presentation (20%) Reminder: Deadline for Submission of Presentation All final slide decks are due on Wednesday, 6th of December, 11.00 a.m. This applies to all groups. When presenting you don’t need to prepare questions for the Q&A session; the questions will come from the plenary. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 20