4.1. Corporate governance and the primacy of the shareholder
Corporate governance is the process by which shareholders, creditors and other firm stakeholders exert an influence on managers’ decisions. Historically the forms of corporate governance vary considerably across countries. I will concentrate on two models of governance.
- The Anglo-Saxon system, which is market based and relies on publicly listed companies with diffuse shareholdings. Bond markets are developed and restructuring tends to be accomplished via M&A activities (often in the form of hostile takeovers). Managements often have strong influence over relatively weak boards. The maximization of “shareholder value” is a central element in this governance system.[46]
- The continental European bank-based system that consists of listed and unlisted firms, tightly controlled by families or foundations through shares with differential voting rights. In this model the state is often a strategic partner and/or shareholder. Other stakeholders than shareholders traditionally play an important part.[47]
It is possible to trace the influence of the Anglo-Saxon governance system on our case study.
i) The decision to sell the company was taken because the overriding aim of Saga’s management and board was to maximize shareholder value. An outright sale, at a significant premium, was the best solution for the shareholders of Saga.
One investment bank that made a presentation to Saga during the winter of 1999 summed it all up when it compared the value-creating capacity of four options for the company.
Stay independent: “Precedents have, at best, been mildly value enhancing”.
Joint ventures: “Uncertain”.
Merger of equals: “Uncertain”.
Takeover: “Positive value impact today for shareholders”.
This was pretty much the “consensus” view of the investment banking community.
Throughout the winter and spring of 1999 a number of calculations of the value of Saga were made both by Saga’s external advisors and by the company itself. They showed, almost without exception, that it was very difficult for any solution to compete with an outright sale of the company. These calculations estimated the value of Saga expressed by discounting future cash flows. There are significant uncertainties associated with all such calculations because we deal with the future. Company and equity valuations are therefore as much an art as a science and one must always watch for biases in the use of input variables in such calculations. However, it turned out to be very difficult to put together any combination of generally accepted input variables that did not show that a sale would create most value to Saga’s shareholders. For example no “reasonable” set of assumptions would give a “business as usual” solution for Saga an expected value equal or higher to an instantaneous 30-40 percent lift in share price, which was the expected outcome of a sale. [48]
It is also worth noting that the perspective of shareholder value became the mental “frame of reference” for almost everyone involved in the Saga takeover, including the employees. [49]
ii) The interests of other stakeholders did not significantly influence the outcome of the takeover. During 1998/99 the management of Saga had conducted extensive discussions especially with its employees, but also with representatives of local communities and the supply industry. But when the final decision was taken, it was the interests of the shareholders that decided the outcome. It was probably easier to achieve such an outcome because the compensations paid to Saga’s employees were, by any standards,very generous.[50]
iii) The abolition of voting restrictions (however imperfect these may have been) in Saga in May 1998 that aimed to show the true value of the company conformed to the thinking of the Anglo-Saxon governance system.
iv) Diderik Schnitler who took over as CEO in 1998 pursued the aim of maximizing shareholder value more aggressively than did his predecessor. There is no reason to believe that Schnitler got the job as CEO of Saga in order to sell the company. But Schnitler represented a changed emphasis and perspective. He saw no point in continuing Saga’s existence, either by keeping a favourable relationship with the government or by other means, unless the owners got a maximum return on their investments.
This is not to say that maximization of shareholder value had not been the aim of earlier Saga managements. The chairman of the board, Wilhelm Wilhelmsen, had been a longstanding member of the board and Mr. Schnitler kept large parts of the old senior management. But Mr. Schnitler put Saga on a more aggressive course in this question.
v) There was in the end a high degree of agreement between management and owners as to the desire to maximize shareholder value. Such an agreement is quite unusual in an Anglo-Saxon model of governance where management often is seen to pursue its own agenda in opposition to those of the shareholders[51]. But this did not seem to have been the case in Saga, where there were no attempts by management to put in place any kind of “poison pills” or other anti-takeover measures.
However this was not the situation from the start. Saga’s board and management examined seven different structural alternatives during 1998/99.
- “Go it alone” based on organic growth.
- An international cooperation with no change in governance (Burlington).
- A merger of equals (Lasmo/ Enterprise).
- A downstream industrial solution (RWE).
- A North Sea cooperative venture (Shell).
- A take over with some “softening” features (Elf).
- An outright sale (Hydro/Statoil).
The first four options, which were all considered during the autumn of 1998, would have maintained Saga as an independent company, but were not necessarily in the interests of the shareholders. This is in line with the expectation that managers as long as possible will try to look after their own positions and that there are deep-seated inclinations in almost all organizations to keep them independent as long as possible. But in the end the management came around to the “shareholder view”. Whether any of these four initial solutions would have been stable long term solutions for management or employees is a very different question. It is probable that only the RWE solution could have set Saga on a qualitatively different path.
In summary: The Anglo-Saxon governance system with its emphasis on the interest of the shareholder had a profound effect on the outcome of the Saga case study. When Saga was eventually sold at a 35 percent premium to Hydro/Statoil, this indicated that the CEO and the chairman of the board had done their job for the shareholders. And they had done it well.
[46] In the US legal system the maximization of shareholder value is a fiduciary duty for management written into the law and takes precedence over the interests of other stakeholders. This does not mean that other stakeholders totally lack influence, but their influence is clearly proportionate with their importance for maximizing the return to the shareholders.[]
47[ ]For a good overview of the different global systems of governance including the Asian one, see Gilson, Ronald J. 2002. Globalizing corporate governance: convergence of form or function. Working paper no. 174. New York: Columbia Law School, Center for Law and Economic Studies.[]
48 What if the calculations had been made based on a USD 25/barrel price (which has been close to the average price global price since the takeover)? Would a sale then have been the obvious answer? This is, however, not a fruitful approach to the problem because the financial markets at the time of the takeover used a normalized USD 16/bbl to value companies. Also if expected prices were higher, the relative ranking between different outcomes would not have been different.[]
49 In the final press release where the majority of the Saga board recommended an acceptance of Hydro’s offer, the representatives of the employees referred to “both internal and external valuations that show [...] that Saga’s shares can have a potential at today’s oil price that is above the offer. These values can be realized if the company continues as an independent company”. See press release from the board of Saga, June 11, 1999.
[50] The government paid for a large part of these extra costs through the tax system.
[51] This is expressed in the literature through the so called “agency problem”.