The book of the month: “Ownership and Value Creation – Strategic Corporate Governance in the New Economy” by Rolf H. Carlsson

News categories: the New Economy economics, value based management, investor and stakeholder relationship management

“The corporate governance movement has been more concerned with one of two important aspects of corporate governance: Accountability has predominantly been in focus while the other key aspects, the enhancement of business prosperity, has got much less attention.[…] The key reasons are the difficulties involved and the competence it takes to have an impact on value-creation as an owner. "

Rolf H. Carlsson

During the 20^th century business corporations evolved into major societal institutions in the developed countries. They became the main drivers and forces not only for economic wealth generation, but also for innovation and renewal in general. This was reflected in the fact, that more and more companies, which had been controlled since the end of the 19^th century first by their founders and later by their founder’s families, changed ownership and become publicly owned corporations. As a result, very often there was no dominant owner available anymore – only many minority shareholders. These shareholders had not been able, and probably not much interested as well, to control the company and especially top management.

Then, during the second half of the 20^th century, the portion of the non-privately owned shares of corporations, namely those held by insurance companies and pension funds – that is by institutional investors, grew larger and larger. Because these institutional investors where competing increasingly for customers over the performance of the funds they managed, they where seeking to enhance the control over the companies in which they had invested in order to “persuade” them to manage for value. These developments prepared the ground from which the corporate governance movement started off. But for the ignition of this movement, a more urgent motivation was required. And this motivation had been delivered by some American corporate executives, who misused their power to the disadvantage of their shareholders.

Since delivering business prosperity requires considerable freedom of action on the part of the board of directors and executive management as well, the risk grew larger and larger (together with the growing split of ownership, with many minority shareholders) that such power is misused and abused. This resulted in many ways of bad “corporate governance” practice, how it is called today. For example the executive board can, by favouring certain groups of shareholders, protect their own power position. Granting themselves over-generous remuneration packages is another example. They can promote their own personal business interests, employ their own, often unqualified, buddies, and such like.

In 1984 the Texaco management paid un exorbitant price to buy back the company’s own shares to avoid a hostile takeover which was threatening its own power base. This huge price was at the end not paid by these managers, but with other people’s money, with the money of the existing shareholders, without involving them into the decision process. This was when CalPERS, (California Public Employees Retirement System), the largest intuitional investor worldwide, which was a major Texaco shareholder, initiated the corporate governance movement and became one of its pioneers in executing its influence in that direction on the companies, of which it held shares.

Since mid of the 1990s the Corporate Governance movement grew into a major movement worldwide, spreading from the US, over the UK to the rest of the world. But the main focus until today was only the accountability aspect of Corporate Governance, that is: how can shareholders make sure, that they have some control of the company, in which they have invested, and that management is really accountable for its actions. This book from Rolf H. Carlssons is focusing on the other important aspect of corporate governance, which is the question, how to organize corporate governance in order to not just control management and the company, but to enhance business prosperity and drive value creation through a new ownership role of the shareholders.

“Ownership makes a difference” writes Carlsson is his groundbreaking book. His main message is, that the ownership function fulfils an indispensable role in the market economy. Its quality makes all the difference for sustainable value-creation. Globalisation and the New Economy with all its new technologies coming out currently are fabulous assets of our societies today. However, competent and diligent ownership has to be added, if societies want to succeed in transforming such assets (and especially intangible assets) into sustainable value-creation and business prosperity. Competence, adequate owner competence will be required to perform a value-creating ownership role, a critical development challenge that still remains to be accepted by many shareholders if they should become shareowners.

So the mission of “Ownership and Value Creation – Strategic Corporate Governance in the New Economy” is, to approach the problem of corporate governance from a totally different angle, compared to how it is done actually in most public discussion, e.g. like in Germany today. The conclusion in reading this book is, that the main challenge of the corporate governance movement may not be to establish the rules and procedures to assure the accountability of management in front of the shareholders, but to convince shareholder, that they have also to take over more responsibility – the one of an owner. Carlsson’s strong message is, that there must exist a party – no matter if it is an institutional or private investor – which will take over such a true ownership role for corporations – otherwise sustainable growth and value creation will be at risk in today’s New Economy societies.

The book provides an excellent overview of the history and an analysis of the actual status of the corporate governance movement worldwide and the different ways how it is evolving in the largest economies (USA, UK, Germany, France, Japan). Taking the example of the Wallenberg sphere as a case to be studied for ownership best practice in Sweden, the author demonstrates, how corporate governance can be “lived” in a different way than just through formal accountability rules. The Wallenberg family in Sweden, as a leading active owner has managed to develop, renew and sustain a considerable number of multinational corporations (like ABB, Astra Zeneca, Ericsson, Scania ..). In this book, Carlsson identifies and tries to make understand the core competence elements of such ownership taking the Wallenberg example.

Out if this, the author develops a conceptual framework, which addresses three fundamental sets of questions:

· Why is ownership and the role of the owner crucial

· What is ownership all about, and what distinguishes ownership from other roles in the process of value-creation ? What competence and other prerequisites are required ?

· How are value-creation contributions made, and how should ownership be exercised to be successful ?

Carlsson is addressing these questions from three different angles:

· The overall nature of the market economy – the concept of the process of creative destruction and demands for incessant renewal

· The fundamental rationale of the individual firm – the concept of the firm as a learning centre

· Ownership and risk – the two parameters of risk.

The implications of these propositions are analysed. Concepts and analytical tools for the active owner to address key issues of value-creation, management of demands for renewal and various kinds of risk are developed. Conclusions and recommendations are presented for the enhancement of ownership competence, the ownership function as a whole as well as for the organisation and exercise of corporate governance.

This book is a must read for everyone interested in managing a corporation in the New Economy, no matter if you are coming from the corporate sphere, from consulting, investment and financial communities or even from the political arena.

If the 19th century was the age of the entrepreneur and the 20th century was the age of management, the 21st century will be the era of corporate governance and the way that power is exercised over all corporate entities in society around the world. Very little has been so far written about the value and wealth creation role of the owner and the ownership function. This book fills that gap, serving as an excellent reference tool for understanding the practicalities of corporate ownership and its implications in the 21st century.

About the author:

Rolf H. Carlsson is a senior advisor on issues of business strategy, value creation, organisation, and corporate governance. Since the early 1970s he has worked as an international management consultant for SIAR and SIAR Bossard, now part of Cap Gemini Ernst & Young. Before that he worked in an investment/venture capital company and commercial bank. He has published several books on ownership in Swedish.

Ownership and Value Creation : Strategic Corporate Governance in the New Economy
by Rolf H. Carlsson

Hardcover - 307 pages (January 2001)
John Wiley & Sons; ISBN: 0471632198

More about about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in my newsletters and will be presented in my own forthcoming book on intangible assets, related management challenges and solutions.. To subscribe for my free-of-charge e-mail push newsletter click here.

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