Carl Rosén is one of the world’s most influential responsible investors. In an exclusive interview with Ethical Corporation he explains why shareholders have a lot to learn from the financial crisis, and why politicians should stop meddling in executive pay
Carl Rosén is the recently appointed executive director of the International Corporate Governance Network, a global group of investors that campaigns for better corporate governance. ICGN members span more than 40 countries and include institutional investors responsible for $9.5tn in global assets.
In his new role Rosén – who is also head of corporate governance at Sweden’s AP2 state pension fund – plans to stick up for institutional investors using their shareholder rights to hold companies to account. But it is doubtful shareholders can do this effectively without major corporate governance reform.
Rosén spoke to Ethical Corporation’s managing editor, John Russell, in London at the end of April, when he took up his new post.
Russell: Weak corporate governance has been blamed for the current financial crisis, with the US and UK at its heart. Is the Anglo-Saxon approach to corporate governance still fit for purpose?
Rosén: Yes, but it can be improved as can a lot of other corporate governance regimes.
In the US, you can say there have been limited possibilities for shareholders to influence companies when it comes to corporate governance. Shareholder rights have been pretty weak – and that’s the problem. Hopefully this will be solved in the near future, perhaps because of this crisis.
In the UK and Europe, there are many jurisdictions where shareholders have the ability to influence companies – but that’s a novelty. This is the first crisis that shareholders had the power to influence before it happened. And there are lessons to be learned about how institutional investors and others have behaved as owners. It’s important that institutional investors step up to the plate and take their responsibilities seriously.
Russell: So would you say that shareholders failed to live up to their responsibilities as owners in the run-up to the crisis?
Rosén: The crisis sends a signal to institutional investors that they must put more resources into the process of exercising ownership rights in a responsible way. There are a lot of good leaders out there, but there are followers too. If you take a measure from 10 years ago to now, there’s been tremendous development. If the system is to work properly in future, institutional investors will have to invest more in being responsible shareholders.
Russell: What corporate governance reforms would you like to see to stop a repeat of the current financial crisis?
Rosén: In the US what’s important is proxy access, say-on-pay, the split between the roles of CEO and chairman, and broker votes (which has already been solved more or less). In terms of regulation or new rules that are needed, these are the most important.
On other hand, what we see is the threat of over-regulation. It’s certainly understandable that politicians want to do something. But if you are a regulator or law-maker not used to the mechanics of this system of shareholders, boards, companies, it’s easy to get the impression that you can do something. For example, where I come from in Sweden, the Conservative government is saying it’s against any form of variable pay. That is over-regulation.
Russell: So governments should not follow Barack Obama and regulate executive pay?
Rosén: Detailed regulation, certainly when it comes to executive pay, is counterproductive. What will happen is exactly what happened in the US in 1990s when Bill Clinton said CEOs would not be paid more than $1m a year. All the pay consultants decided on all the other ways you could get paid. That was the start of the options schemes and a lot of elements to executive pay that were not necessary.
It’s extremely important that politicians see shareholders as a resource not a problem. When it comes to executive pay, it’s much better to give shareholders the responsibility and possibility to influence than to take it away.
Russell: Would you support bonus clawbacks to stop rewards for failure?
Rosén: I support the principle that shareholders should in one way or another influence executive remuneration schemes. It’s hard to say what you should do about clawbacks. The most important thing is that the remuneration scheme is transparent and that shareholders can take part in this discussion with boards. It’s very much down to individual cases.
Russell: Say-on-pay is a huge issue in the US. Advisory votes on pay are something the UK has had for six years, and many are wondering what difference they have made. Executive pay still seems to rise uncontrollably. Does say-on-pay work?
Rosén: If you look at it from a UK perspective, everyone’s outraged about the level of pay. But everything is relative. It’s clear that compensation in the UK is much lower compared to in the US. That is proof in itself that say-on-pay is a good thing. It’s my impression that if the UK did not have the say-on-pay system, you’d have a similar position to what you have in the US right now.
Russell: What is a desirable balance between fixed and variable pay?
Rosén: If you compare the old capitalist system where you had a managing director reporting straight to a private capitalist, it was easy. Now it’s up to the board to interpret what hundreds of investors – each owning a small amount of the company – think about the executive compensation system. The information asymmetry between boards and institutional investors is the real problem. The more you can give shareholders more information and the possibility to vote and influence, the better their bargaining position.
Russell: Non-executive directors have been widely blamed for failing to challenge directors of banks pursuing risky strategies. Are non-execs up to their task?
Rosén: One way to strengthen the role of non-executives is to ensure that they know more about what shareholders want. There are examples of companies that have not had enough oversight, but it’s too early to jump to conclusions. Globally now there’s a tendency to say that all boards at all financial institutions have acted irresponsibly. It’s easy to say – but it’s too early to say. The key here is to get the owners talking to the non-executive board members.
Russell: Are there good examples of companies where boards and shareholders work closely together?
Rosén: In Sweden, institutional owners actually form the nomination committee – it’s not part of the board. I’ve been on a lot of nomination committees in big companies, which means we nominate board members who are elected at the AGM. We have to take on our responsibilities as owners seriously. Maybe it’s something other countries could look at. But I don’t have the ideal solution.
Russell: What about the idea of setting up supervisory boards in the UK?
Rosén: It’s very dangerous to take part of one corporate governance system and stuff it into your own. It’s best developed from best practitioners in your own market. A German system is very different from a UK or US one.
Russell: What have been the key achievements of the sustainable investment movement so far, and what are the key challenges that remain?
Rosén: The key achievement is that, nowadays, if you meet with a global blue chip company, they address these issues. They may not do so successfully all the time, but they address them. This has come from a very fruitful combination of consumer advocacy, companies themselves protecting their brands, and sustainable investment. Nowadays you cannot read in the business press that sustainable investment is on its way out. It’s here to stay.
As for the challenge, the key thing now is to protect institutional investors against over-regulation. Deregulation used to be a problem, but now it’s the enthusiasm from governments to over-regulate the market economy that must be stopped.
About Carl Rosén
Carl Rosén is head of corporate governance and communications at the Second Swedish National Pension Fund (AP2), one of the larger pension funds in Europe, which has a reputation for shareholder activism.
Rosén, a former business journalist and investment banker, joined AP2 in 2004. Before this he co-founded Nordic Investor Services, the proxy advisory firm. He was elected to the board of ICGN in 2008.