Caspar Rose

The Danish Corporate Governance System: from stakeholder orientation towards shareholder value

This article presents a description of the Danish corporate governance system. It is similar to other continental European corporate governance systems, having concentrated ownership and no well-functioning market for corporate control. However, contrary to other European corporate governance systems, foundation ownership plays a vital and significant role in Denmark. Traditionally, the Danish corporate governance system has been oriented towards protecting the rights of various stakeholders and not only shareholders. In recent years, more pressure has been put on Danish firms for promoting shareholder value. As a consequence, Danish managers have begun to receive stock-related incentive contracts, although the Danish institutional framework still facilitates the protection of a broader range of stakeholders.

Stakeholder Orientation vs. Shareholder Value—A Matter of Contractual Failures

This article analyzes the conflict of interests between shareholders and other stakeholders, including when such conflicts of interests may arise. It is argued that shareholder value cannot be justified simply by referring to any prerogative property rights of the shareholders. Instead, shareholder value coincides with the efficient hypothetical perfect contract. However, due to contractual failures in certain bargaining situations, management may be unable to “internalize the firms externalities”. This means that in these situations there is a tradeoff between a broad duty of loyalty for management in listed firms and other traditional remedies. The theoretical insights are applied on a case from the Danish Supreme Court (Louis Poulsen A/S) where the interests of the stakeholders were decisive. It is shown that the verdict may instead harm the relevant stakeholders illustrating how cautious the legal system should use a doctrine based on the “companys interests”. In addition, the notion of a firms social responsibility is critically evaluated together with the associated pitfalls of accepting this concept.

Corporate Financial Performance and the Use of Takeover Defenses

This paper tests the hypothesis that the threat of a contested takeover improves corporate performance. This is done by a cross-sectional analysis of listed Danish firms with and without effective takeover defenses. Takeover defenses adopted by Danish firms mainly consist of dual class voting rights often in combination with foundation ownership. Using simultaneous equation estimation to deal with the problem of causation, the results show that unprotected firms do not outperform protected firms. This suggests that management in unprotected firms are disciplined by other corporate governance mechanisms than the market for corporate control, including the legal protection of shareholders.

The Challenges of Quantifying Investor Protection in a Comparative Context

La Porta et al. have made a number of influential empirical contributions linking the level of investor protection in different countries to the development of capital markets. They find that rules associated with common law are superior in fostering larger and broader capital markets, especially compared to countries based on the French civil law tradition. However, this article argues that the existing methodological approach is problematic when subjected to careful legal analysis based mostly on Scandinavian examples. In particular, one may question the appropriateness of relying on legal indices, as laws by their very nature cannot be stacked like bricks of similar size. Furthermore, it is argued that the notion of investor protection needs to be considered in a consistent, complete and unbiased manner, in which the binary categorisation should be modified. Specifically, due to the ambiguity of formal investor protection rights, it is suggested that the ratio of actual minority votes cast at the general meeting to the total number of minority shares may serve as an alternative proxy for the real degree of investor protection.

The Challenges of Employee-Appointed Board Members for Corporate Governance: The Danish Evidence

This article presents some evidence concerning the nature of co-determination using a sample of Danish employee-appointed board members. Even though Danish employee representatives only occupy one third of the seats and by design are always in a minority, they argue that they have a relatively high degree of influence on the decision-making process. This is especially profound in listed firms, where nearly 30 per cent state that they have much influence on the decision-making process, compared to 7 per cent who argue that they have no influence at all. For reasons that remain unclear, the results also document that male employee representatives claim a higher degree of influence than their female colleagues. It is shown that employee representatives have a dispersed educational background and that their occupations vary greatly in both listed and non-listed firms. The many different legal faces of European co-determination are also described. Finally, the article demonstrates that Danish employee representatives say that they care less about shareholder value compared to the supervisory board as a whole.

Financial Regulation and Risk Governance

The financial crisis has revealed that the current legislative framework has proved insufficient. As a consequence, many commentators have argued that there is a need for new regulation in order to reduce the pro-cyclicality of the existing Basel Capital Accord solvency rules as well as avoiding moral hazard problems from deposit insurance. The use of off-balance items such as structured investment vehicles (SIV) as well as the lack of transparency regarding over-the-counter (OTC) transactions has also come in for particular scrutiny. The role of credit rating agencies facilitating complicated structured financial products without proper due diligence has also been heavily debated. In other words, many of the fundamental building blocks in the global financial system have been seriously questioned following the crisis. However, perhaps most fundamentally, the existing regulatory framework as well as complicated risk management models failed to prevent the crisis that emerged from financial institutions’ liquidity problems.