Transatlantic Answers

Politicians, regulators, and corporate executives in the United States can be downright chauvinistic about the American way of doing business. Indeed, during the 1990s, many U.S. executives crowed about the superiority of their free-market system. Conversely, others privately belittled certain countries as bastions of crony-capitalism.

But in the wake of the recent accounting scandals, it appears America has its fair share of crony-capitalists. Ironically, outside of Vivendi Universal and Elan Corp., few financial controversies have come to light in Europe in the past year. And this lack of scandals has a few observers wondering if standards-setters over here can learn anything about corporate governance from over there.

At first blush, any attempt to gain such insight would seem a fool's errand. Despite the formalization of the European Union, governance in Europe is anything but uniform. The United Kingdom, for starters, operates under a one-tier board system much like the United States, but Germany's system is two-tier and France offers a choice. Disclosure requirements also can be fragmented, and suffer from the lack of a Securities and Exchange Commission­type enforcer. Moreover, Europe is still pervaded by many family-owned and -controlled businesses as well as elaborate pyramid ownership structures. This leads to worries that minority shareholders are abused by such blockholders rather than all-powerful U.S.-style managers.

Nevertheless, some U.S. executives are pointing to several practices in Europe that they believe are worth importing. Specifically, they mention splitting the CEO-chairman role, enabling major shareholders to have more influence in corporate dealings, and instituting an independent governance-rating system.

Marco Becht, executive director of the European Corporate Governance Institute, can't wait. "The problem with Corporate America is that shareholders aren't involved enough, and some say they're not allowed to be more involved," he says. Europeans avoided U.S. problems "because we have shareholders that are generally larger, better informed, and better able to get directly involved," asserts Becht.

Split Personalities
The European idea of separating the CEO and chairman roles is one of the more likely imports. And to date, about 80 percent of U.K. companies have adopted the practice.

The idea of the split is actually part of the U.K.'s Cadbury Report, landmark governance rules developed in the early 1990s after several corporate scandals. Elsewhere on the continent, however, countries are adopting their own versions of the rules. In France, for example, combining the chairman and CEO roles used to be mandated by law, but in 2001 French legislation gave firms the freedom to individually choose whether to separate them.

Still, U.S. executives are enamored with the idea: consider that a combined 69 percent of respondents in McKinsey & Co.'s 2002 Director Opinion Survey on Corporate Governance either very much support or somewhat support the move. To date, however, less than 20 percent of companies have actually adopted the practice, says Bert Denton, president of New York­based investment firm Providence Capital Inc., who is planning a campaign to encourage American boards to switch to a nonexecutive chair.

To Denton, however, the initiative is "the most important single change that could be made to address the issue of a very powerful CEO who's driven by short-term aspirations related to his options package." But Thomas Weatherford contends the split won't work at companies of all sizes. As CFO of Business Objects SA, a cross-border software business that must comply with both French and U.S. regulators, Weatherford says that it's at the larger companies such as General Electric where two heads are better than one. "It's extremely hard to know everything going on in a complex company," he says. "In smaller companies, you need everyone to wear several hats."

In addition, the split may have ominous implications for CFOs. Jonathan Low, senior fellow at Cap Gemini Ernst & Young's Center for Business Innovation, says the movement to separate the offices "almost by definition diffuses the power of the CFO because it creates a third senior executive."

In the Telephone Booth
Dealing with another executive, however, may be less taxing than dealing with a chorus of stakeholders. The typically largest U.K. institutional investor, for example, owns about 9.5 percent of the voting power, Becht explains. Putting three to five such investors together equals some 30 to 35 percent of the votes at a meeting. In continental Europe, one shareholder or shareholder coalition can bring 20 to 25 percent of the voting rights. In Germany, companies have shareholders with more than 50 percent.

Patrick McGurn, vice president of Institutional Shareholder Services, says the concentrated ownership structure is jokingly referred to as "telephone-booth companies" because all majority shareholders could be squeezed into one. But it's no joke. The concentration allows for change to occur quickly, he says. (Consider Vivendi Universal and other firms that have ousted their CEOs in past months.) In contrast, U.S. CEOs are generally forced out because of bad news or scandal. "It's not because of investors," says McGurn.

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