Corporate Governance – In Finland and the Nordics

    Stockholm (HedgeNordic) – The nordic region often punches above its weight when it comes to various global lifestyle and economic rankings. For its size, it also has a wide range of global companies from cars, design, furniture, technology and machinery sectors. so what makes nordic companies successful?

    Some argue that the culture of consensus-based decision making, transparency and poli cal stability are part of the success and that this has translated into the way companies are managed. Perhaps the me has come for the world to take note of the Nordic way of corporate governance, rather than just for its design, music and at- pack furniture.

    Friederike Helfer (pictured), partner at Cevian Capital, the ac vist investor, is of the opinion that Finland and the other Nordics could teach the world a few things about good governance and is urging ins tu onal investors such as pension funds to step up to the task. Talking of her experience on Nordic boards, including recently on the board of Valmet, the Finnish developer and supplier of technology and automa on systems and services for the pulp, paper and energy industries, Helfer explains some of the advantages of the Nordic way.

    The style of governance is unsurprisingly directly a re ec on of the culture and in Finland this tends to be fairly monosyllabic and true to the saying of ‘say what you mean and mean what you say’. Helfer said subtlety is not understood and directness is appreciated and respected. Out of the Nordic countries Finland is the most hierarchical whereas the Swedes discuss everything perpetually. “Being Austrian and having worked in Switzerland most of my career I can clearly see dis nct di erences. The Swiss do not exaggerate and are careful with words but careful to the extent that criticism might not be heard. Germans are more direct and blunt and employees appreciate a leader that takes charge. They would be at a loss with a Swedish- consensus seeking boss,” she explained.

    “The rst dis nc ve feature in the Nordics is the pronounced ownership mentality. There is a high private share ownership rate – a large majority of Swedes own shares, for instance. In addi on, there is a history of “spheres” which own 15-20% of total Swedish Stock Exchange, and most of the largest companies have a large private family owner, the biggest and most well-known being the Wallenbergs”, she explained.

    In Finland large institutional investors such as Ilmarinen take large stakes in companies thereby making them in uen al owners.

    Another feature is that shareholders determine the board composition directly through nomination commi ees. The typical Anglo-Saxon model is that boards nominate themselves. In the Nordics, the commi ee that nominates the board of directors is composed of the four largest shareholders in the register and the chairman of the board. “The biggest di eren ator, compared to the Anglo-Saxon world is the clearer feeling of accountability of the board members. The members understand they need to report to the shareholders, rather than to the chairman and the other members,” Helfer said.

    She also pointed out that the CEO is an employee and not the king, as is o en the case in the US, and the Nordic boards take a consensus oriented, pragma c, meritocra c approach, crea ng more checks and balances.

    Issues in the US or UK, where ownership has become so dispersed that no one actually feels responsible for the long term. “Ins tu ons tend to vote for management or vote with their feet – i.e. sell their stake. This has led to the CEOs of the companies essen ally becoming and behaving like kings, even though they should actually be the rst employee, but there is nobody le to control them. You read about the downside of these systems every day in the news – exploding remunera on and value-destroying acquisi ons, and too much risk-taking for short term pro ts, as shown by the banks in the run-up to the financial crisis”, she explained, adding that the shareholder ac vism in the US has par ally developed as a counter-movement, to rebalance the system. “In Sweden, the Wallenbergs and other spheres have always acted in this counterbalancing way”, she said.

    Helfer also said that the co-determina on structure is more construc ve than in many other countries. “Employee representa ves are from the company not from a na on-wide union aiming at achieving a greater goal rather than solving the issue at hand. A nega ve example is Germany, where na onal unions such as the IG Metall have representa ves on the boards. Those representa ves could actually have a very di erent agenda, strongly in uenced by poli cs or decisions based on principles or ideologies”, she said. She compared this with Finland and the case of lay-ofs at Valmet. “It is good to have strong unions as long as it is a two-way dialogue with all the par es working for construc ve solu ons, which was the case at Valmet”, Helfer said.

    In addi on, the Nordic corporate structure tends to be non-hierarchical so there is less need for ‘face saving’, she explained. “The boss doesn’t need to have all the answers, doesn’t need to be always right, so there are less ego driven ghts for power in contrast to the US where the CEO is the Chairman, who is the one who rules”, she said.

    “The established discussion culture makes sure every voice on the table is heard. This is good for board dynamics as everybody is encouraged to speak up and importance is placed on that the board is not composed of yes-men and box ckers.” she added, no ng discussions do not slow down corporate decision-making.

    Another re ec on of society on boards is equality, even if there is s ll a way to go, Helfer said. Legisla on has forced boards in Norway to take on more women and other countries are considering similar steps. “It is o en a genera onal issue. I know this from my work on the Valmet board, which is a male-dominated, tradi onal company. The older men may think you are less quali ed because of your age, not just gender. I would say it is equally hard for a man under 40 as it is for a woman in general to get heard. Being on a board can be brutal and if you are seen as less quali ed it will be no ceable. You just have to be persistent and make yourself heard,” she said, adding that having a strong backer, i.e. Cevian with a 14% stake in Valmet at the me, helped.

    Despite the many posi ves, issues remain, Helfer said. “In Sweden the dual share classes enable dynas es such as the Wallenbergs to control more companies with limited amount of capital,” she added.

    Votes could historically be as low as 1:1000, now limited by law to 1:10. “The pro argument for ra o shares is fundamentally that it enables the company to tap interna onal capital markets while at the same me keeping Swedish, long-term ownership and therefore con nuity and oversight. O en men oned is the example of the bad short-term hedge funds that are just in there to make a quick buck. Contra arguments are that it violates the key democra c principle of 1 share 1 vote, making all investors equal and that it protects the incumbent, implying that the incumbent is the be er owner. History tells of course that this is not always the case”, she explained, poin ng to the recent corporate scandals showing that even the incumbents might need some oversight.

    Recently Finland has had a dificult me economically but Helfer puts this down to the tradi onal industries, rather than corporate structures or governance. However, there are s ll improvements to be made on the corporate governance level too. She said one of the problems comes from the mix of poli cal and economic interests. The Finnish government, through Solidium, is holding big stakes in listed companies. In the cases of Valmet and Metso, Solidium is holding above 10% of shares. “The conflict of interest becomes apparent in discussions whether or not Solidium should be able to invest outside Finland? Should it be able to divest stakes in important companies and who they could poten ally sell to,” Helfer said, adding that the current discussion focuses on what the purpose or goal of Solidium’s involvement is. “It seems the pendulum is swinging more towards the poli cal role/involvement, meaning that the government keeps a controlling stake in companies it de nes as key to in uence, but disposes of the rest”, she noted.

    Cevian has its origin in the Nordics and brands itself a construc ve ac vist as opposed to an event-driven or hos le ac vist investor. Its rst fund, Cevian Capital I, was purely focused on the Nordics whereas the second Fund, Cevian Capital II, expanded towards other Northern European Countries, notably Germany and the UK. The Nordics remain a very important part and currently Cevian has about 1/3 of its AuM invested in the region. Cevians’s disclosed investments in the Nordics include Danske Bank, Volvo Trucks, Tieto, Metso, and Valmet. The two founding partners are Swedish and have learned their nuts and bolts about inves ng and have developed their strategy in a Nordic corporate governance environment. Cevian aims to be the biggest minority shareholder when it takes a stake in a company, Helfer explained.

    “We see ourselves as owners of companies who have rights, but also obliga ons to contribute to the long-term value of the company, which we do through par cipa on in nomina on committees and boards. We see our role especially in companies with fragmented ownership that actually lack a commi ed shareholder. Our own rms culture and our construc ve interac on style has been successful”, Helfer said, adding that culturally having public ghts, i.e. in the media, is not the done thing in Finland.

    Article taken from special report: Alternative Investments in Finland

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