Board Evaluation
-The conflict between being a financial supplier as well as a corporate governor and the need for a professional approach and an institutionalised governance process, on a capital market largely inhabited by financial institutions-

Background
Money, or ‘Funds’ in its various shapes and forms is in itself not a bearer of knowledge. Money is sometimes even labelled ‘stupid’. However, managed by clever people it can be used to employ ‘corporate governors’ in order to achieve a more efficient utilisation of the invested capital and to create better returns.

In Sweden, the transformation from a capital market dominated by private owners in the early parts of the last century till today’s largely institutionalised environment created a vacuum. A vacuum that in most cases was filled from below, by corporate managements extending their role and sometimes even acting as owners as well as managers. Not until the discussions around Corporate Governance became more generally accepted did we see any reaction to this trend.

My experience with the Swedish State Portfolio is similar to that of long-term shareholders in the US, where most of the recent wealth creation has mainly benefited the corporate managers, leaving the long-term shareholder with diminishing direct returns and decreasing net asset values.

Having pioneered in deregulating several sectors, Sweden and its State Portfolio was in desperate need of a more efficient corporate governance model. Not least since the Portfolio is several times the size of its private equivalents such as the Wallenberg, Handelsbanken and Stenbeck investment vehicles, as well as representing more than 25% of the domestic business sector in value terms and 7 % of the GDP (slide 1 - “Comparing with Investor etc.”). The Private Equity sector provides such a model, making a clear distinction between the money and the governance function. This distinction is perhaps even more important to make in a political environment, where the ultimate shareholder is the rather distant taxpayer.

Over the period when this restructuring took place, the value of the almost US$ 50bn Portfolio was increased with more than 12%, while the local stock market had a mere 6 per cent growth. There was also individual performance far exceeding this, such as in the case of the individual restructurings of AssiDomän, Celsius, SAS and Vattenfall etc. (slide 2- “Value Enhancement”). In addition, more than US$ 14bn was realised in cash over the period.

The tools used to achieve this transformation were apart from increased transparency and improved capital structure, evaluating and recruiting the relevant professionals to actually execute the individual restructurings on the board level. More than 85% of the non-Executive Board members and 75 % of the CEOs were replaced over this three-year period (slide 3 –“Execution”).


Objective
The objective was clearly to improve the performance of the portfolio by empowering the only institution that, by law, is responsible and accountable for the development of the corporation- the Board (or the Non-Executive Board, in the two-tier system). This presented a challenge to the Government, as well as to other co-owners not only because of the lack of a corporate governance function but also because it meant living up to a more consumer friendly approach not usually seen in the financial industry. For a start it had to borrow some of the thinking behind fundamental democratic principles such as:
• Transparency towards the ultimate owner, people who have trusted their savings with a financial manager.
• Second, by accepting the prevailing structure of a capital market filled with institutions rather than private individuals the need to, institutionalise the process in which board members are selected would only seem natural, through the use of a Nomination Committee.
• Last but not least, changing the attitude to Board membership. In Swedish, the term used to be to “sit on a board”. Indicating a passive rather than an active and responsible position. As if being nominated was the goal and not the starting point. Rather, the Board must be seen as a team of people working together, not unlike to that of a football team or a symphony orchestra. It is the concerted effort that creates the best results. Not forgetting that you will be held accountable, it certainly requires your best effort - otherwise you could lose more than your place on the board.

Process
• The process we used started with a market analysis serving as common foundation for the owner/ owners to understand the market and where the company fits in.
• It is the owners’ responsibility to set out a vision where they want the company to be in say 3-5 years, or in some cases perhaps even 5-10 years or more.
• Continuing by evaluating the existing board composition from this perspective will give at hand what kind of competence was needed. The three fundamental strategies creating shareholder value; i.e. operational, capital structure and business development strategy, served as a model to structure the competence needed in each individual board, at a given time in its development (slide 4 – “Creating Shareholder Value”).

Critical Issues
In my experience, the need for Legitimacy increases the closer one gets to the fine-tuning of a restructuring in a corporation and its governance. Apart from a transparent and professional process, Board Evaluation is a vital part in creating the required legitimacy, whether this takes the form of the informal evaluation process used in our earlier stages, or the more comprehensive approach as suggested in our policy paper ‘Proposed rules of procedure for the boards of government-owned companies’ (see attached). Evidently we came to the conclusion that the latter procedure is to be preferred. However, this is connected with a few challenges such as agreeing on a process and being able to work with other owners that might not have organised a proper governance function.

It is also critical to achieve the buy-in from the Chairman, who is needed to actually carry- out and lead the more formal evaluations.

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The aim however is clear - to improve the long term value of the corporation, by institutionalising a professional board nomination process that is not only workable for all kinds of institutional owners, but that can also be understood and respected by their ultimate clients – the beneficiaries, the real shareholders.