Reduced Government Ownership Changes Finnish Board Structures

06.15.2001

by Nina Penna, Senior Analyst

Government ownership of Finnish companies is gradually being reduced, following the general trend in Scandinavia. Since the government has stated that supervisory boards may be abolished in companies where the state's stake falls below 50 percent, the change is having an impact on board structure and the election of directors.  

The unitary board structure is most common in Finland. Supervisory boards are dinosaurs, largely extinct except in state-controlled companies where the two-tiered board structure provides a means for government control. The powers of the supervisory board are stipulated in the company's articles. Some have a role of merely monitoring operations, while others have wider appointment powers.  

This proxy season, ISS covered several shareholder proposals to abolish the supervisory board at Finnish companies. At Kemira Oy, the AGM agenda provides for the election the supervisory board, which appoints the board. The board, in turn, appoints the managing officers. Traditionally, the government has held over 50 percent of the shares of Kemira. With a proposal in the Finnish Parliament suggesting that the minimum required level for government ownership in Kemira be reduced from 33 to 15 percent, a shareholder considered the time ripe for a change in the board structure. At the April 3 AGM, however, the shareholder proposal was rejected.  

Kemira has stated that for the time being, the supervisory board will remain, as it does not interfere with the management of the company. Rather, it is a discussion body, which helps the company with community relations. Often the existence of a supervisory board at a Finnish company is due to the reluctance of politicians to give up their seats. This explanation is probably applicable to Kemira's case as well.  

Sonera Corp. also received a shareholder proposal calling for the abolishment of the supervisory board. The board structure at Sonera is similar to the one at Kemira. This time, the proposal was accepted by the government, which represented 52.8 percent of the shares. It should be added that inflamed relations between the CEO and the board contributed to the restructuring of the board system at Sonera. In the future, shareholders will directly appoint the board. The abolishment of the supervisory board is a clear sign that the government is planning to reduce its influence over the company, which is facing harsh competition from its Scandinavian peers in a restructured industry.  

Sonera will thus join the majority of Finnish companies, which maintain a single board. In these companies, the boards are increasingly composed of outside directors, although some, mainly family-controlled companies, still have management representatives on the board. The vast majority has at least a few nonexecutive directors, and many have a majority from the outside. One example is Nokia Corp., where only the CEO, Jorma Ollila, is an executive director. Since the dual board system in Finland is tied to high government ownership, which is not viewed favorably by investors, it can be expected that more Finnish companies will turn to the use of the Anglo-Saxon board structure, rather than the central European one.