Development in Company Direction in Europe
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The Empire Club of Canada Addresses (Toronto, Canada), 25 Feb 1971, p. 277-291


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Nicolson, David L., Speaker
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Text
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Speeches
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The recent legislation in Ontario on Company law and the interest it has engendered. Developments in Europe in the area of Company Law and some future trends. The debate on the structure of companies and of Boards of Directors and the number of new laws and far-reaching proposals that have been introduced in most industrial countries for at least a decade. The intentions in this regard in Britain and the relevance of Britain's possible entry into the European Economic Community. How that is also relevant to Canada. The new company legislation being introduced in most countries throughout the world as most business becomes increasingly international in character. A brief look at some of the developments which are taking place in other countries, providing us with an idea of how things might change in the United Kingdom in the future. Looking overseas and starting with Europe, the speaker reviews in some detail the activities in West Germany, France, The Netherlands, and then in America. He also looks at how these activities interact and affect one another. Two trends so far as America is concerned: the directors' liability; public affairs and corporate interest and participation in this field; a discussion of each. The situation for individual directors in Britain. The future in the United Kingdom and what might be expected. Some summary remarks about all these developments and what they will mean for corporations, and corporate directors and management.
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25 Feb 1971
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English
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The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.
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Full Text
FEBRUARY 25, 1971
Development in Company Direction in Europe
AN ADDRESS BY David L. Nicolson, CHAIRMAN OF BTR LEYLAND INDUSTRIES AND GOVERNOR OF THE IMPERIAL COLLEGE OF SCIENCE AND TECHNOLOGY
CHAIRMAN The President, Harold V. Cranfield
GRACE Dr. David Monson, Rabbi, Beth Sholom

DR. CRANFIELD:

The man you are about to meet is at the ideal age. He hasn't come to a time in life when a younger man would dare challenge his strength, for which I envy him every day, yet he has arrived at one where judgement and respect are due him for his accomplishments. Most people of his age excuse their lack of academic achievement by saying that they were caught up in the war and thus remain frustrated architects, lawyers, engineers, scientists or even physicians. We oldsters became involved in World War II after qualifying in our professions. He, instead, fought his war first and became academic later. His contribution to the landing at Normandy with the Royal Navy prompted his "mention in despatches" when there was undoubtedly lots of other things to engage his commanding officer's attention, besides this cool-headed youth doing his job courageously and effectively.

He began his education in a small school in Hertfordshire called "Haileybury", one that was firmly established before Canada's confederation. It is one of the "Headmasters Conference Schools" that are designed and conducted to bring its graduates to University admission. His professional education was acquired at the Imperial College of Science and Technology with an honours degree as a Bachelor of Science in Engineering. This is one of the schools of the great and respected University of London. Perhaps it is an indication of the regard with which his Alma Mater holds him that he has been elevated to the post of Governor of this the Imperial College of Science and Technology. He is also a fellow of the "City and Guilds of London Institute" and "Royal Society of Arts" and the "Institution of Mechanical Engineers". This latter is at #1 Birdcage Walk which sound falls strangely on the provincial ear of a Canadian.

I judge, if I interpret my information correctly, that his breadth of knowledge encompasses divergent fields since he has been chairman of the "British Management Consultants Association" and the "British National Economic Development Counsel for the Hosiery Industry". Fortunately the failure of public acceptance of the maxi skirt prevented the eclipse of the hosiery industry and also thwarted the scope of the maxi skirt slogan, "Men's eyes are now on their last legs!"

In addition to his educational interest as Governor of the Imperial College of Science and Technology he is one of the 15 member group of the Science Research Council. Perhaps the best known of these in Canada, since we see him here on T.V. is Sir Bernard Lovell of Jodwell Bank Observatory. As many of our audience are aware our speaker is Chairman of the "British National Export Council Committee for Canada" and as such, relates to the British Canadian Trade Association whose members are here in profusion today. So much for our speakers Public Appointments. He is prominent in the area of business as well. He holds the chairmanship of the Associated British Maltsters Limited and is Chairman of BTR Leyland Industries Limited, not to be confused with the Motor Car industry but is involved in rubber components for them.

His business acumen, knowledge of the sciences and his commercial management skills have him in demand as a director of such diversant companies as: Delta Metal; Richard Costain; Charterhouse Group Ltd.; Black and Decker Ltd. and the Bank of Montreal. We are fortunate indeed that the plans of Mr. David L. Nicolson have permitted his presence here today to address us on the topic: "Developments in Company Direction in Europe".--Mr. Nicolson.

MR. NICOLSON:

The recent legislation in Ontario on Company Law must have been of particular interest to many of you here today, and I thought it might be of interest to you to hear something of developments in Europe in this area, and some future trends as we may see them.

There has been a debate going on in most industrial countries for at least a decade on the structure of companies and of Boards of Directors and in a number of these countries, new laws and far-reaching proposals have been introduced. The whole question appears to find its source in the growing awareness that a company as a corporate body has a responsibility to society with certain rights and duties, rather like an individual.

The last Government in Britain intended to introduce a new Bill which would re-examine the joint stock company entirely and, on November 4th, 1970, in the House of Commons, the spokesman for the new Government, Mr. John Davies, said that it was their intention to look at company law, to look at the possibility of improving levels of disclosure and to look at the situation and rights of both shareholders and consumers. This was also confirmed in the Queen's speech. So there is little doubt that we shall have governmental action on company structure in due course, although any move is likely to await a decision on whether the U.K. goes into the Common Market or not. The same thing of course is awaited in Canada, and some changes in the law have already been enacted in Ontario from January 1st this year.

This possible entry into the E.E.C is relevant because Britain may well have to consider whether she is going to adopt the new Common Market company structure, the concept of what they propose to call the Societas Europaea or S.E.--the European company. Germany and France have already put major changes in company law into effect and Belgium, Holland and Italy are moving towards the German two-tier Board system which seems to be becoming the accepted model on the continent.

On the broader scene, we have also seen the growth of the multi-national company which in a period of continuing peace--which we all hope for--emerges as the best organization for large-scale technical and marketing operations. It has to adapt itself to the needs and to the interests of the host countries in which it is working and it has, therefore, to work in a widening context of social responsibility. In America we see federal and state agencies applying pressure to improve company management and information and companies already have to disclose much more than they do in Britain.

Thus new company legislation is being introduced in most countries throughout the world, business is becoming increasingly international in character and the Common Market is on Britain's doorstep. There are grave differences between practices in the United Kingdom and other countries and we must accept that, as in all other sectors of industry and management, the Board of Directors faces change.

A brief look at some of the developments which are taking place in other countries can provide us with an idea of how things might change in the United Kingdom in the future. Looking overseas and starting with Europe, one has to look first at West Germany. This country above all others highlights the difference in thinking between the United States and the United Kingdom and other countries in the approach to Board structure.

Not too many people are familiar with the German system of the two-tier Board structure. There are three main characteristics. The two-tier Board is enforced by law; there is employee representation; and, there is a huge role played by the banks in company direction.

The top tier is represented by the supervisory board or "Aufsichsrat" and this body is the spokesman, in effect, for shareholders. It is wholly non-executive and one-third of its members are elected representatives of employees, except in the coal and steel industries where half the members are elected by employees. It meets at least four times a year, has ultimate sanction on major investment decisions, is responsible for the employment and payment of senior management, including the executive directors, and examines accounts and other reports from management before the annual general meeting. By law, no executive director can sit on this top-tier Board.

The lower, or second tier, the management Board of "Vorstand", runs the company and is wholly executive. One of these full time directors is chosen by labour and is responsible for personnel management, though he is not necessarily a Trades Union representative. In fact it is considered better if he is independent. A North American observer would be surprised at the degree to which codetermination is accepted, particularly in the steel industry. The Vorstand generally has a sizeable influence on the membership of the supervisory Board providing that the company is running well. An interesting point is that members of either of these Boards can serve on supervisory or management Boards of other companies, and they do so. You quite often find that the chief executive of the management Board of one company will be a member of the supervisory Board of another. In fact, occasionally the companies concerned arrange such representatives between themselves although this, for obvious reasons, does not extend to competing companies in the same fields of operation. No member of a supervisory Board may, however, serve on more than fifteen Boards.

To take an example, a large German engineering company; the supervisory Board has nine members. Three, or one-third, are employee representatives. Of the other six, it is interesting to note that five have degrees, four of them being technical qualifications. In this company the management Board also has nine members, of whom seven have degrees, six of them technical degrees.

It is worth noting here that this is in rather deep contrast with the quite low status of the engineer and the scientist in the U.K., so far as Board membership is concerned. In the United States you find that sixty per cent of the presidents in the largest science-based companies have got degrees in technology. The comparative figure in the United Kingdom is twelve per cent. It is clear from these statistics that we need much better bridges between industry and the Universities and we need far more engineers trained in manufacturing, marketing and finance as well, which is a prerequisite to them playing a bigger role in business in general.

As referred to earlier, the influence of the banks in Germany on the supervisory Boards is large. In fact, the supervisory Boards are very often instruments of bank influence. The chairman and the vice-chairman of the supervisory Board have special responsibilities and they must be consulted on matters concerning investment, finance and its timing. Very often the chairman or the vice-chairman is a banker. The big three German banks--the Deutsche,. the Dresdner and the Commerz--are most involved. The Deutsche Bank officials between them are estimated to hold 400 Board appointments; one in three of the non-employee places on the supervisory Boards are, in fact, held by bank representatives.

The reasons why the banks play such an influential role are not hard to find. The bulk of share dealings in Germany are handled by the investment departments of big banks and, with the proxy system which they have, they control something like seventy per cent of the quoted shares of public companies in Germany. This proxy system gives general voting rights on a continuing basis and sometimes the banks exchange these rights between each other, in particular instances when they feel that one can deal better with a situation than another.

Further, no dealings in shares can take place until one year after the registration of a new company and, therefore, in Germany new companies depend upon the banks for finance and the banks keep a very careful watch during the early stages of a new public company. In fact, one can say that in general German companies depend to a great extent on the banks for making a market in their shares.

Needless to say, the banks are automatically in very close touch with industry and are equipped with technical departments and obviously pride themselves on their ability to take industrial decisions.

The same sort of thing is developing in France where, for example, the Banque de Paris et Pays Bas now has over 100 engineers on its staff. This is in direct contrast to the situation in the United Kingdom where although the institutions and insurance companies are estimated to control forty percent of the equities in British public companies, they are generally pretty loath to appoint even a non-executive director, let alone play a leading part in policy-making of a company. The Banks furthermore do not exert influence on policy-making by any control of shareholdings directly or indirectly, and are mainly concerned with the terms and security of their lendings.

There is thus clearly a considerable difference between the U.K. system and that of Germany and this may be significant if, and when, the U.K. enters the Common Market.

What do the Germans think about all this? In general they consider their system reasonable. It is felt that having employee representatives on the supervisory Boards means that discussions with the trade unions are automatically initiated at an early stage when change is likely. There is an automatic communication with both banks and trade unions. However, a number of people, including academics, economists, and both bank and trade union representatives, would like to see a closer control over management. They are not opposed to the system or the principle; it is really a question of technique. They have this lower tier wholly executive management Board, with the supervisory Board often not meeting frequently and having essentially a shareholders' trustee or supervisory function, and not being directly concerned with management although some chairmen of Aufsichsrat's spend a lot of their time with the company. Thus management have a great deal of power in their hands.

The trades unions say that the system is undemocratic. They point out that the proxy system and collaboration between banks and major shareholders is such that the ordinary small shareholder gets really very little say in policy. One of the suggestions which they have been promoting is that delegates should be elected, both to shareholders' meetings and also to the supervisory Boards, on the basis of forty per cent from the shareholders, forty per cent from the workers and twenty per cent from the public interest. This may never come to pass, but it is indicative of the pressure from the labour movement in Germany with their system as it is.

In the Netherlands, most Dutch companies now have supervisory Boards. In Sweden the Board is usually a group of non-executive directors, with the managing director as the sole member of the management on it. He, of course, has a management committee which he chairs, but the managing director in Sweden is not allowed to be chairman of the Board. So the chairman is non-executive, as in Germany.

In France traditionally you had a Board consisting of non-executive directors and only one executive director on it, but he had to be the chairman, which is exactly the opposite. However, France is now moving much more toward the German model and, although it is still optional and not enforced by law, firms may adopt the two-tier structure, the supervisory Board being called the Conseil de Surveillance, and the management Board being called the Directoire. The banks are also active in company matters. It is interesting to note that the supervisory directors are only paid for attending meetings and by a share of the profits, unless they are given special tasks to perform. A works Council is obligatory and two of its members may attend the supervisory Board as employee representatives.

In 1967 in France an Act increased disclosure considerably. Shareholdings in other companies have to be disclosed, turnover figures and balance sheets produced for each quarter and accounts have to be submitted to the Works Council before they go to the annual general meeting. Future plans affecting manpower, hours of work, conditions of employment, redundancy, production and order levels, plant projects and developments resulting in change have to be submitted to the Works Council too, as well as a general report at least once a year on past and present wage levels and plans. The Works Council is supposed to be bound to secrecy.

All of these things indicate the way people are thinking and developing Board structures in Europe and they pose a number of questions if Britain enters the E.E.C. The Societas Europaea, the European company of the future, has been drafted in provisional form by a committee of lawyers chaired by a Dutch professor. It is based very largely on the German model, although there are transitional arrangements and it does incorporate the supervisory Board principle.

In America there is a single Board system, as in Britain, but in practice it is far more akin to the two-tier system because the Board per se has far more non-executive directors. The non-executive directors outnumber the executive directors by three or four to one, which is the reverse of the United Kingdom practice, and the executive committee which is chaired by the president with all his vice-presidents is rather similar, in a way, to the management Board of a German company. Far fewer chairmen are also chief executives in America than in the U.K. The New York stock exchange requires that at least two non-executive directors should be on the Board of each newly listed company. The payment of non-executive directors is again usually by attendance, but a great deal more use is made of them in various committees--bonus and salary committees, finance committees, audit and policy committees, and so on. Audit committees composed of outside directors are now obligatory in Ontario, and are responsible for vetting financial statements before they are submitted to the full Board for approval.

There are two other trends so far as America is concerned. Firstly, on directors' liability; there has been a considerable increase recently in legal actions against executive directors who have been suspected of being incompetent managers. The injury from this incompetence is, of course, to the corporation, so when a stockholder initiates action it is described as "derivative" in the U.S.A., or in Canada "representative" action, and it can be for malfeasance, negligence or ultra vires, as distinct from the United Kingdom where really a director is only liable if it is a case of fraud, although occasionally there have been cases on ultra vires. It used to be like this in Ontario too, and still is for Federally incorporated companies, which do not have to have Audit committees either--yet! In Ontario now, however, a shareholder can initiate action, if he first gets sanction of the Supreme Court, and has tried to get the Corporation to prosecute action first. Furthermore the Corporation may be required to finance the suit.

In America, however, the corporation usually reimburses the executive if he successfully defends such a suit and reimbursement is permitted in all but ten States. Furthermore, liability insurance is being developed rather like that which is available to a physician or a consulting engineer. The odium of adverse publicity, of course, remains. In Ontario too the Corporation may only indemnify a director if he achieves success in defending the action brought against him. But the standard of care, diligence and skill required has been modified to be that of a "reasonably prudent person" rather than that of a professional director, which provides some easement.

Another trend worth mentioning in American companies which is quite different from Europe relates to public affairs and corporate interest and participation in this field. Eighty per cent of the leading companies in America now have a public affairs function. This is a function which is intended to maintain relations and a dialogue with legislators, political and economic education authorities, community relations activities, corporate philanthropy and so on. It concerns itself with matters like inflation, taxation, labour relations, pollution, poverty, civil rights, urban renewal, etcetera. It is very interesting that only a small minority of these leading firms consider that their business is only to produce and sell goods. They are trying to achieve an interplay between business and education, science and the arts. It may be that America has a very different environment from Britain, where there has been so much of the Welfare State and so much government activity in these areas, but it does pose the question of whether there should not be a bigger role for businessmen on a semi-corporate basis, rather than leaving it all to the Government.

In Britain of course individual directors do serve on bodies like N.E.D.C., on the councils of the institutions, the Industrial Welfare Society, the Royal Society of Arts and many other bodies, but this is sporadic and voluntary and is certainly not on a corporate basis. If, in future, more bridges need to be built between business and public affairs, and if this does emerge as a desirable and natural part of our society, then I think it is a natural role for the right sort of non-executive director to fulfill on behalf of a company.

Turning to future changes in the United Kingdom so far as one can forecast them, it is hard not to expect increasing pressure for more supervision and information from Government, from financial analysts, from the Press, from institutions, banks, shareholders, as well as from trade unions and employees, partly in the light of what is developing in other countries. While not suggesting that it is desirable that Britain should adopt the German two-tier structure--although who knows she may have to one day if she enters the Common Market--it is clear that one cannot ignore the demands for better supervision on behalf of shareholders. We should be prepared for more disciplines, and we can expect wider disclosure to be demanded of shareholdings and other interests, more frequent reporting, more information to employees and to trade unions, more information relative to new issues. I think that more supervision will have to be provided for shareholders because the present form of British annual general meeting is really a formality and has little power to do anything other than remove directors, or alter articles. All other powers are conferred on the directors, the Board. There may also be greater accountability and, possibly, liability of directors, whilst the question of qualifications of directors may arise, quite apart from such simple things as age limits.

It would be preferable for European Boards to move toward the American Single Board model, in which a good proportion of the directors are non-executive, but the administrative and supervisory functions are represented in the same group of people.

Apart from the big companies where there is scope for what is virtually a full time non-executive chairman, the chairman of the medium-sized and smaller companies should be part-time and non-executive and something like forty to fifty per cent of the directors should be non-executive as well. If Britain does not move towards the continental supervisory Board pattern then surely supervision of management must be effected through Boards as they are now constituted. In fact there may even be some regulation of the proportion of non-executive directors one day. The non-executive director acts almost as a trustee for the shareholders as well, of course, as being available to give second opinions to executive directors from his experience, to produce ideas and to stimulate action. He must be a man of financial and intellectual independence. It is a vital role and one is tempted to ask whether, in the future, if this is fully recognized, a qualification will be demanded from such people. It would not be at all surprising and it could be done. The banks, insurance companies and institutions are also going to have to take a much greater interest in the administration of companies and in the question of the non-executive director and supervision.

It is perfectly reasonable to expect in the future post-experience courses to be put on at both business schools and universities in this subject. Executive directors may quite customarily move in the future as their careers develop, to a point where they will serve as non-executive directors in other companies. There is no reason why very effective courses should not be developed to prepare them for this when the time comes. One subject which might well be included is Board management. There is a great deal to be done here because, after all, the Board is part of the company management structure. It is the top part and it must be efficiently managed itself. If it is, then everything else down the line happens faster and better.

In this connection clearly Board agenda have to emphasize strategy and not administration. It is also worth making the point that the role of any Board of directors must be seventy per cent on strategy and policy and not seventy per cent on management matters, as is the case with so many of the Boards one sees today. We have to distinguish between the two and I think it is one of the failures of British Boards that they do not always distinguish between them clearly.

Excess paper, ritual and routine have to be avoided like the plague, not least of all things like drafting reports in committee. One should certainly use professional advisers and experts but not at the Board table, and Board meeting time should be kept for productive policy making. This means the careful design of short reports and I am sure most people will agree that it is much harder to write a short report on some subject than it is to write a long one. It also means ratios and graphs where you can see all sorts of trends quickly. It means getting the sequence of presentation at the Board right. The financial director has first to display the trends which are taking place, then the managing director has to follow to explain what he is doing about them. Experience in many cases shows that Board productivity, if one can measure such a thing, could be doubled, and, if so, it is likely that a lot of other people's productivity will be too.

Corporate planning as a management function has come to stay; it is vital and the Board has a real role to play in it. The setting of priorities calls for experience and breadth of knowledge and it is very doubtful whether the big issues are ever going to be settled by computers. Extension of, and comparison with, plans can be helped by computers and systems and mathematics but the broad issues depend on experience and knowledge backed by technical forecasting. This confirms the role for scientists, consultants and economists or bankers as specialist non-executive directors. Again, international operations, which are so important today, financial policy, personnel development and industrial relations are all susceptible to advice from particular types of non-executive director.

The chairman has to study the contributions that these men can make and blend them all together. He has to see that they are paid enough to give them enough time to give them a chance to do a good job. The Board must not stumble into discussion of major policy matters; it has to programme such discussion, and it must have the right composition of members to do justice to the subject.

On a brighter note, and having said all this, as it is hard to find good men to this important non-executive director work, it will have to become more attractive. There will have to be higher fees, although possibly payment by attendance, share options, pensions and possibly contracts as well.

The gratitude of the Club was expressed by Col. E. A. Royce.

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Development in Company Direction in Europe


The recent legislation in Ontario on Company law and the interest it has engendered. Developments in Europe in the area of Company Law and some future trends. The debate on the structure of companies and of Boards of Directors and the number of new laws and far-reaching proposals that have been introduced in most industrial countries for at least a decade. The intentions in this regard in Britain and the relevance of Britain's possible entry into the European Economic Community. How that is also relevant to Canada. The new company legislation being introduced in most countries throughout the world as most business becomes increasingly international in character. A brief look at some of the developments which are taking place in other countries, providing us with an idea of how things might change in the United Kingdom in the future. Looking overseas and starting with Europe, the speaker reviews in some detail the activities in West Germany, France, The Netherlands, and then in America. He also looks at how these activities interact and affect one another. Two trends so far as America is concerned: the directors' liability; public affairs and corporate interest and participation in this field; a discussion of each. The situation for individual directors in Britain. The future in the United Kingdom and what might be expected. Some summary remarks about all these developments and what they will mean for corporations, and corporate directors and management.