04/03/2008

Introduction: the choice of Sweden

This report is the outcome of a descriptive exercise of the Swedish corporate governance system in an international trade union perspective. This exercise has consisted in screening the Swedish system through the conceptual framework identified in a 2005 Global Unions discussion paper on corporate governance: “Workers’ Voice in Corporate Governance – A trade Union Perspective” . Hence the aim and ambition of this report are less to fully encompass and analyse the Swedish regime – a task that would be out of reach of this project – than to test the key findings of the 2005 report in a specific national context, and Sweden was an ideal choice for such exercise.

The 2005 Global Unions report outlines two parallel strategies to promote workers’ interests in corporate governance: (i) workers as employees of the companies and (ii) workers as shareholders of companies via their pension funds' and/or other long term saving schemes' holdings.

The first approach – workers as employees – is an obvious and universal labour condition to effective corporate governance. Workers invest specifically in the company that employ them and are equally exposed to firm specific risk. Accordingly workers need to participate in the governance of the firm above and beyond the mere respect of the contractual terms that bind them with the company, be it the employment contract or the collective agreement. Legislations on worker participation are most developed in civil law jurisdictions, notably in continental Europe, where workers’ employment contracts and collective agreements are usually supplemented by institutional representation in the firm. Worker representation mechanisms (also known as “worker participation”) can take various forms:  elected employee representatives sitting in “works councils”, in occupational health and safety committees, board level employee representatives.

The second approach – workers as investors – is not a universal condition to labour’s approach to corporate governance so far as it is strongly correlated with the mode of financing of the national pension system. However it is no less crucial for the labour movement in a globalised and financialised economy. Workers’ capital constitutes an important policy issue in jurisdictions where pension financing relies extensively on pre-funding (by opposition to pay-as-you-go redistributive pension systems) as it is the case in Anglo-American common law jurisdictions. Workers’ pension savings are invested in financial markets by their pension funds, including in equity. In the US, the UK, Canada, and Australia, pension funds’ holdings in equity amount to circa a fifth of those countries’ stock market capitalisation.

The 2005 Global Unions discussion paper shows the complementarities between the two approaches to achieve effective corporate governance and in particular to ensure accountability of the board of directors. In practice however, most OECD jurisdictions lean toward one or the other and few can pretend to encompass both approaches. Sweden does. Not only that, part of the Swedish workers’ capital relies on a pay-as-you-go system (the ‘buffer’ funds of the AP nation-wide pension scheme) and not on a pre-funded system as in Anglo-American economies. This feature – that is workers’ capital not relying entirely on a pension pre-funded system – may facilitate comparative analysis within Europe and, perhaps, help draw lessons for other OECD countries.

Corporate governance reforms should be judged upon their appropriateness to the national context, to the country’s economic and social heritage and culture. Reforms proposal should be assessed bearing in mind the specificity of national jurisdictions, of ownership structures and modes of financing of the economy. International institutions such as the OECD and the World Bank often claim, but regrettably not always apply such no-one-size-fits-all principle. While setting out broad objectives, the 2005 Global Unions discussion paper emphasises the diversity of solutions. In doing so, the report stresses the importance of history in assessing national corporate governance regimes. This report on Sweden thus brings particular attention to the post-war developments that help understand the country’s current regime.

The report is structured in three chapters:

• In the first part (“A brief retrospective”) the report begins with a broad overview of the Swedish model and its ownership structure (“a Rhineland model pushed to the extreme”), the role of shareholders (“widespread use of controlling enhancing mechanisms”) and the typical organisation of the board of directors (“an entrepreneurial model of board governance”). From there, the paper explains a paradox in the system: the fact that a heavily concentrated corporate power has co-existed with an equally heavily egalitarian and solidarity-based welfare society (“the Swedish paradox”) and how that paradox led to an ambitious labour and – retrospectively – workers’ capital project in the 1970s (“the wage earner fund project”). The failure of the project took place in a context of vast de-regulatory reforms in the following decades (“the years of de-regulation 1980-1990”). Surprisingly enough, the brutal changes that occurred then in the Swedish economic and corporate landscape did not substantially alter the corporate governance regime of the country.
• In the second part (“the Post-Enron era”) the paper focuses on the corporate scandals and controversies in the aftermath of the burst of the IT-internet bubble in 2002-2003 (“Scandals and controversies”), the regulatory reaction that followed (“the regulatory reaction”) including the outcome of an almost 10-year long discussion on reform of corporate law (“the 2005 Companies Act”) and the introduction of a national code (“the national code”).
• Having set the broader context the final chapter (“Labour issues and challenges”) addresses how the two labour approaches to corporate governance are developed in Sweden: first worker participation (“Representation in the board”) and its broader CSR environment (“high governmental profile on CSR”), then Swedish workers’ capital with a particular focus on state-owned pension funds (“The policies of the AP funds”). The chapter ends with a brief discussion on the wave of private equity investments in Sweden (“The challenge of private equity”).

...

related weblinks:

• 15/03/2008| From shareholder value to private equity – the changing face of financialisation of the economy
• 01/09/2005| Workers’ Voice in Corporate Governance - A Trade Union Perspective
• 02/04/2006| Creating Alternative Routes to the World Bank Highway