The Swedish Corporate Control Model: Convergence, Persistence or Decline?

• Published date: 01 March 2012
• Author: Ulf Jakobsson,Magnus Henrekson
• Date: 01 March 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00889.x

The Swedish Corporate Control Model:

Convergence, Persistence or Decline?

Magnus Henrekson* and Ulf Jakobsson

ABSTRACT

Manuscript Type: Perspective

Research Question/Issue: In the f‌inance literature theoretical arguments have largely predicted a world-wide convergence

towards the Anglo-American model of corporate control. Still, there are few signs that this convergence is underway. This

paper explores the reasons for the persistence of the blockholder model by an in-depth examination of a single country –

Sweden – where blockholding always has been strong and where it still predominates among public f‌irms. In spite of the

fact that we explore the effects of deregulation, globalization and regulatory reform on corporate governance in a single

country, a further aim is to shed some light on the wider issue of the world-wide persistence of the blockholder model.

Research Findings/Insights: We f‌ind that globalization has undermined the traditional model of corporate control in

Sweden. However, there is no sign of expansion of the Anglo-American model of corporate control. A prerequisite for a

well-functioning model of dispersed ownership and management control is a certaindegree of autonomy/entrenchment for

management relative to owners. In Sweden this option is precluded by the corporate law and prevailing social norms. As

a result, theAnglo-American model is not viable and blockholder control still predominates among public f‌irms. However,

the importance of the stock exchange is declining and there is strong growth of control models outside the stock exchange,

notably private equity and foreign ownership.

Theoretical/Academic Implications: In the theoretical argumentation for the inevitability of theAnglo-American model in

a mature economy too little attention has been given to the necessary conditions for the viability of management control in

the case of dispersed ownership. A rigorous treatment of this question is needed if we want to formulate a relevant theory

for the nature of endogenous adjustment of control models in response to globalization.

Practitioner/Policy Implications: Reforms in corporate f‌inance implemented in the European Union are greatly inspired by

the UK system. In traditional blockholder governance systems such reforms undermine the basis for blockholder control.

If there are strong cultural and/or legal impediments to the emergence of f‌irms with dispersed ownership and management

control, institutional convergence could result in an erosion of national stock markets in Europe. The study also provides

support for the argument that the eff‌iciency of a particular corporate governance model hinges on the complementarity of

several constitutive elements, and therefore an isolated change in a certain element leads to inconsistencies, making the

model less eff‌icient.

Keywords: Corporate Governance, Blockholder Ownership, Scandinavian Economy(s), Institutional Theory, Legal

Effectiveness

INTRODUCTION

There are two basic models of corporate control of public

f‌irms in developed economies: 1) dispersed ownership

and management control; and 2) concentrated ownership

and private blockholder control. The f‌irst model predomi-

nates in the Anglo-American world, where common law

judicial systems largely govern. The second model, which

exists in several varieties, dominates in virtually all other

countries (Gourevitch & Shinn, 2005; Morck, 2005).

This dichotomy developed as early as the f‌irst decades of

the 20th century. As f‌irms and stock markets grew, and

corporate law changed in response, most of the blockhold-

ings in large, Anglo-American corporations were discontin-

ued, particularly in the United States (Morck, 2005). Berle

and Means (1932) “codif‌ied” this new state of affairs when

describing managerial control as the inevitable consequence

of dispersed ownership. Dispersed ownership in turn grew

*Address for correspondence: Magnus Henrekson, Research Institute of Industrial

Economics (IFN), P.O. Box 55665, SE-102 15 Stockholm. Tel: +46-8-665 45 00; Fax:

+46-8-665 45 99; E-mail: magnus.henrekson@ifn.se

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Corporate Governance: An International Review, 2012, 20(2): 212–227

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00889.x

from the combined effects of the sheer size of the stock

market, wealthy investors’ preference for a diversif‌ied asset

portfolio, government antitrust action, large market capitali-

zation of the big f‌irms, and the illusion held by several

leading families that they could retaincontrol despite having

sold their control block (Becht & DeLong, 2005).

The Berle–Means view of the modern public corporation

dominated the (mostly Anglo-American) research literature

on corporate governance for decades. When La Porta,

Lopez-de-Silanes, and Shleifer (1999) documented that

concentrated ownership and blockholding was indeed the

prevailing corporate governance model in non-Anglo-

American countries, it was seen as something of a scientif‌ic

breakthrough.

In recent decades the framework conditions for large and

medium-sized corporations have changed dramatically as a

result of the rapid growth of institutional ownership and the

globalization of capital markets. Theoretically, these forces

could transform both corporate governance models.

Drucker (1976) argued that the growth of pension funds

would in practice socialize the US corporate sector, with

far-reaching consequences for the governance of US corpo-

rations. Similarly, the increased ownership of American

f‌irms by Japanese and, more recently, Chinese investors and

Sovereign Wealth Funds has spurred alarmist reactions

across the US. Yet the Anglo-American corporate gover-

nance model seems to have accommodated these changes so

far.

As for the blockholder model, theoretical arguments

anticipate that structural changes will likely require its

modif‌ication. These arguments most commonly predict a

world-wide convergence towards the Anglo-American

model. Hansmann and Kraakman (2004) extend some of

the scholarly world’s most forceful arguments in favor of

convergence.

Arguments against convergence have also been raised,

many of them of a political nature. Roe (2003, 2004) has

maintained that dispersed ownership is not a viable control

model in economies where social-democratic ideologies and

concomitant institutions empower employees relative to

owners or management. Bebchuk and Roe (2004) provide a

long list of arguments that indicate stickiness in existing

rules even when globalization pushes towardsconvergence.

In the “varieties of capitalism” literature, where the impor-

tance of the complementarity between the ownership struc-

ture and the type of economic activity in a country is

stressed, a lack of convergence need not imply ineff‌iciency

(Carlin, 2009).

Still, few signs have emerged as yet to indicate that a

general convergence towards the Anglo-American model is

underway. Why does the blockholder model persist in its

varieties despite it being judged as inferior to the Anglo-

American model by many f‌inance scholars and regarded

with suspicion by international institutional investors?

We will explore this question by studying how corporate

governance has developed overthe last three decades in one

country – Sweden – a place where blockholding by control-

ling owners has always been predominant. The Swedish case

is of general interest for a couple of reasons. First, this aspect

of the Swedish social model is likely to be of interest also

outside the community of scholars studying comparative

corporate governance. Second, Swedish economic perfor-

mance seems to have benef‌itted from globalization; the GDP

per capita growth rate has been on average .9 percentage

points greater than for the OECD average in the 1994–2010

period, resulting in an increase in PPP-adjusted GDP per

capita of roughly 15 percentage points relative to the OECD

average since 1993.

Beginning after the Second World War, corporate control

became increasingly concentrated, at least until the early

1990s. Voting rights have been differentiated from cash-f‌low

rights by intense use of dual-class shares and pyramiding.

By the early 1990s, the two dominant ownership groups in

Sweden had used these instruments to control 50 per cent of

the market cap of the Stockholm Stock Exchange (SSE) based

on a mere two per cent of the dividend rights.

Sweden certainly belongs to a large family of countries

where control by blockholding is the dominant corporate

control model. Unique to the Swedish model, though, is that

the wealth on which the controlling ownership is based had

become extremely thin by the 1990s, probably thinner than

in any other country (Agnblad, Berglöf, Högfeldt, and

Svancar, 2001). Therefore, among the countries character-

ized by blockholder control of listed f‌irms, the Swedish

control model could be expected to be more vulnerable both

to the forces of globalization and the growth of institutional

ownership. As a result, an exploration into why the block-

holder model persists in Sweden applies more generally.

Moreover, Sweden is of special interest with respect to the

relationship between corporate governance and the political

inf‌luence of organized labor. According to Roe (2003), the

Swedish labor movement enjoys stronger inf‌luence than in

any other country. Henrekson and Jakobsson (2001) have

also documented how the governance model evolved in

strong connection with the politics and the ideology of the

predominant Social Democrats. An interesting question is

whether the apparent persistence of the model can be inter-

preted as a vindication of Roe’s hypothesis.

The question of whether Swedish corporate governance is

converging has been analyzed by Högfeldt (2005), Carlsson

(2007) and Henrekson and Jakobsson (2005). The f‌irst two

authors both f‌ind that the traditional Swedish model of “old

capital” still dominates among listed Swedish f‌irms. Hög-

feldt (2005:538) concludes that “[d]espite the very signif‌icant

increase of institutional capital and foreign capital,corporate

ownership is as entrenched as ever in Sweden since the

largest f‌irms are still controlled by an old f‌inancial nobility

of the third to f‌ifth generation and by banks, but to a much

lesser extent by institutions that provide the majority of the

capital.” This conclusion was based on data ending in 2000,

and it is quite clear that it no longer holds true, and, as we

will show, it is doubtful that it was true even then.

Weargue that the effects of deregulation and globalization

on the Swedish corporate sector are multidimensional; the

direction of corporate governance cannot be determined by

simply examining whether the governance of public f‌irms is

converging to the Anglo-American model. Instead, our f‌ind-

ings can be summarized in the following f‌ive points:

1. The traditional model of Swedish ownership based on

“old capital” reached its zenith on the SSE in the early

1990s and has since been in decline.

SWEDISH CORPORATE CONTROL 213

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