Last week, in a speech at a High Pay Commission seminar, the shadow business secretary Chuka Umunna and former Business Secretary Lord Myners both put forward arguments in favour of shareholder nomination committees as a way of improving corporate governance. Rather than the current UK model whereby the Nomination Committee is made up of members of the Board of Directors, they suggested that we should be following the "European model" (well, the Swedish one actually, although there are a few Finnish companies with the Finnish Government as a major shareholder tagging along).

What is the "European Model"?

Under the Swedish system, representatives of the largest shareholders form the Shareholder Nomination Committee, supported in their deliberations by the Chairman of the Board. At many Swedish companies, these large shareholders also benefit from capital structures which provide different shareholders with a different number of votes per share. For example Investor AB has both an A Ordinary (1 vote per share) and a B Ordinary (10 votes per share). As a result, while the Knut & Alice Wallenberg Foundation hold 18.6% of the shares in issue, they hold some 40% of the voting rights. However, in practice, the plurality standard of voting at Swedish companies means that it is very rare for directors to be voted on individually and for any post AGM voting disclosures to be made.

The combination of enhanced voting rights, together with their presence on the Nomination Committees, ensures that power is concentrated in a small group of shareowners. However, the counter argument is that this provides for a more effective system of ownership. So what does the evidence show us about the Swedish approach to ownership?

Swedish Nomination Committees Analysed

Manifest looked at the 29 constituents of the OMXS 30 (one company has two capital types in the index so appears twice) of whom 26 had shareholder nomination committees. The three companies who did not use this model are incorporated outside Sweden (ABB, AstraZeneca and Nokia). Including the Chairman of the Board, there were on average 5.04 members per nomination committee.

Shareholder #of Nomination Committee Representatives Notes Alecta Pensionsförsäkring AB 16 Swedbank Robur Fonder 16 AMF Pension Fonder 9 AB Industrivärden 6 Plus 5 further positions where Board Chairman is on Committee and is linked to AB Industrivärden Skandia Liv 6 Svenska Handelsbanken 5 Investor AB 4 Plus 2 further positions where Board Chairman is on Committee and is linked to Investor AB Knut & Alice Wallenberg Foundation 3 Plus 1 further position (at Investor AB) where Board Chairman is on Committee and is linked to the Knut & Alice Wallenberg Foundation SEB Fonder 3

We also looked at the identity of the representatives, to see which people held the most positions:

Individual #of Nomination
Committee Roles Representing Carl-Olof By 7 AB Industrivärden Marianne Nilsso 6 Swedbank Robur Fonder Jan Andersson 6 Swedbank Robur Fonder Bo Selling 5 Alecta Pensionsförsäkring AB Caroline Af Ugglas 4 Skandia Liv Petra Hedengran 4 Investor AB

One of the key concerns here is the small pool of people making nomination decisions - a pool that is perhaps even smaller than the UK's board focussed system.

So How Might This Translate to the FTSE 100?

To illustrate  the possible situation as it might apply to the FTSE100, we have taken disclosed shareholders collected in annual reports over the last year, and for each company limited the list to at most 5 shareholders.

This approach is, admittedly a bit rough and ready as some companies do not have any disclosable shareholders (i.e. holding 3% or more).  The figures in the table below are likely to therefore be understated, for some or all of the shareholders noted. Further, some disclosures are based on pooled nominee account names which is not as transparent as designated accounts when determining the beneficial owners of a company.

Shareholder #of Nomination Committee
Representatives Blackrock 67 Legal & General 60 Capital Group 20 AXA 17 Fidelity 11 INVESCO 10 Lloyds Banking Group 8 Schroders 8

The big question will be, should Lord Myners' proposals get to the next stage, who will pay for the additional resources required by these shareholders? Will this end up as an additional cost on management fees charged to pension funds and other holders of managed funds? Could any regulation potentially result in fund managers being less willing to become a "top 5" shareholder in an effort to reduce the costs to the beneficiaries of their funds or to avoid accusations of being insiders?

Should this proposal be contemplated as an insertion to company law, an extensive cost-benefit analysis would be expected. An alternative approach could be to pilot Shareholder Nomination Committees at a small number of companies before considering whether a market wide adoption would pass the cost-benefit test.