48-HOUR EXAM CORPORATE

GOVERNANCE AND FINANCE:

Copenhagen Business School

Student number: 103539

1. Introduction
This aim of this paper is to analyze the corporate governance structure and mechanisms of
Svenska Handelsbanken AB (henceforth HB), and its effect on the company. According to
Yahoo! Finance, the corporate governance of HB scores well above the average of other
banks (Appendix 1). In order to confirm or deny this, the paper will start by giving a
descriptive analysis of the company, its ownership structure, board of directors and executive
pay. Thereafter, agency problems will be discussed. Lastly, the conclusion will bring forth a
recommendation to the investor. Due to the limited scope of the paper, the focus will lie on
the most obvious corporate governance issues within HB.
2. Descriptive analysis
2.1. Company overview
HB was established in Sweden almost 150 years ago, and is today one of the leading banks in
the Nordic region. As a full-service bank, they provide a broad range of financial services to
both private and corporate customers. HB operates in more than 20 countries, but considers
six European countries to be its home markets; Sweden, Denmark, Norway, Finland, the UK
and the Netherlands. The long-term goal of HB is to stay above the average profitability of
the local markets in the Nordics and the UK, which has been fulfilled over the past 47 years
(Svenska Handelsbanken AB, 2019a). This has been achieved through low costs, low
tolerance of risk and satisfied customers (Svenska Handelsbanken AB, 2019b). HB sticks to
their low risk tolerance throughout the entire business cycle, even though that sometimes
leads to underperformance in good times (O’Neil, 2018). This has proven to be a successful
strategy in the past, especially during the 2008-crisis (O’Neil, 2018). What differentiates HB
from other banks is their traditional focus on a local presence, and they have approximately
800 branches (Svenska Handelsbanken AB, 2019a). The overall structure of HB is
decentralized, where “the branch is the bank” (Mayer, 2018). Through these strategies, HB
has become one of the banks with the best financial stability, and surveys have proven that
they have the most loyal and satisfied customers compared to rivals (Mayer, 2018).
2.2. Ownership structure
HB is listed at the Stockholm Stock Exchange, and the ownership structure is a dispersed
investor ownership with two majority holders; Industrivärden with 10,6 % shares and
Oktogonen Fonden with 10,5 % shares (Appendix 2). The rest is owned by other private and
institutional inventors. HB operates with a dual class share system of A and B class shares,
however, class A represents 98,19 % of the shares and 99,82 % of the votes (Svenska
Handelsbanken AB, 2019a), which means the company roughly operates as a single share
1
103539 Corporate Governance & Finance 27-29.05.2019

class company. HB follows the Swedish Corporate Governance Code (henceforth SCGC).
This states that decisions at shareholder meetings are decided by simple majority (Swedish
Corporate Governance Board, 2016; Svenska Handelsbanken AB, 2019a). Thus follows, as
the top ten shareholders of only cover 36,4 % of the total votes (Appendix 3), majority
blocking is not possible.
The relationship between HB and Industrivärden is quite intricate, as HB and
Industrivärden are parts of a cross-ownership sphere (Mayer, 2018). While Industrivärden
owns shares in HB, HB also owns 7,1 % of the shares in Industrivärden (Appendix 3). Cross-
ownerships have been criticized for loss of flexibility and risk of deficient mutual monitoring
(Thomsen & Conyon, 2019). A case of deficient mutual monitoring occurred in 2015, when
employees of another cross-owner of Industrivärden, SCA, misused the company jet knowing
they would be protected by their cross-holding owners (Rosen, 2015). As the cross-ownership
was blamed for weakening the checks-and-balances of the corporate governance system, the
cross-ownership sphere was encouraged to be dissolved (Rosen, 2015). However, only SCA
sold their part in the cross-ownership, meaning that Industrivärden and HB are still closely
interconnected (Reuters, 2015). That relationship might be harder to break, as it was HB
whom established IV back in 1944 (Industrivärden, 2019b). The other big investor in HB is
Oktogonen Fonden, which is owned by the employees of HB (Svenska Handelsbanken AB,
2019a). This will be further discussed in section 2.4.
2.3. Board of directors
The board of directors of HB operates under the two-tier system, where the shareholders elect
a board of directors, whom again elects an executive management team (Thomsen & Conyon,
2019; Svenska Handelsbanken AB, 2019a). The management team is responsible for the daily
operations of the company, while the board represents the shareholders and is responsible for
the management team and all major decisions (Thomsen & Conyon, 2019). When evaluating
the board of HB, we will look at both diversity and independence.
Diversity of the board can be evaluated looking at five different factors; gender, age,
nationality, education and professional background (Thomsen & Conyon, 2019). The board of
HB consist of 11 board members, which is very close to the Swedish average of 10,9
members (Appendix 4; SpencerStuart, 2017). As 37,5 % of the board is female (not including
employee representation), they place slightly below the Swedish average of 39 %
(SpencerStuart, 2017). In 2017, the government of Sweden voted no to introducing a 40 %
quota for women on boards, and today there are no other legal requirements for female
representation on boards in Sweden (SpencerStuart, 2017). The age of the members span from
2
103539 Corporate Governance & Finance 27-29.05.2019

50 to 68 years with the average age being 60,4 years (Appendix 4). This is a bit old compared
to the average in Sweden being 57,8 years (SpencerStuart, 2017). The majority of the board
members are Swedish, in addition to two Norwegians, one Finnish and one Danish member
(Appendix 4). As the UK is their second largest market only after Sweden (Appendix 5), they
should also be represented on the board. In addition, all of the members have an education
similar to business administration, though most have a bit more widespread professional
background (Appendix 4). With the digital focus of HB and within the banking industry
(Svenska Handelsbanken AB, 2019a), a board member with more IT knowledge might add
value to the board.
According to the SCGC, the majority of the board members must be regarded as
independent of the bank and the bank´s management, and at least two of those independent
members must be independent of shareholders with 10 % of shares or more (Swedish
Corporate Governance Board, 2016). HB has three members from the bank, hereunder the
present CEO Carina Åkerström, and two members whom represent major shareholders, which
leaves six independent board members (Svenska Handelsbanken AB, 2019a). According to
the UK governance code, an independent board member cannot have served for more than
nine years (Thomsen & Conyon, 2019). This only holds for four of the independent members,
but is not relevant as they are following the Swedish code where there are no such
requirements. However, it adds an extra security of the independence of the board members.
2.4. Executive pay
Executive pay is a corporate governance mechanism that aims to align the interest of the
executives with those of the shareholders, thereby solving a possible conflict of interest
(Thomsen & Conyon, 2019). The risk-averse strategy of HB mentioned in section 2.1. is also
reflected in their executive pay policy. The executive pay at HB is a fixed remuneration,
which consists of basic salary, customary employee benefits and pension from Oktogonen
(Svenska Handelsbanken AB, 2019a). HB makes up for the lack of a motivational variable
bonus through a specially tailored pension system. The executives, just like other employees,
receive an allocation of shares in HB´s profit-sharing scheme, Oktogonen, which can be
retrieved from the age of 60 (Svenska Handelsbanken AB, 2019a). The payout from
Oktogonen depends on a set profit-benchmark, which follows the recommendations from
SCGC (Svenska Handelsbanken AB, 2019a; Swedish Corporate Governance Board, 2016).
Variable remuneration is not to be paid out to executives or board members (Svenska
Handelsbanken AB, 2019a). This lines up with the long-term and low-risk strategy of HB, as
it encourages the employees and executives to work towards the long-term success of the
3
103539 Corporate Governance & Finance 27-29.05.2019

bank. It is also worth mentioning that the total fixed remuneration of the board of HB has
been steadily rising from 10 million SEK in 2016, to 15 million SEK 2018. Compared to the
rest of the world, executive pay in Scandinavia is very low, but the pay at HB is almost
double the average Swedish board remuneration (SpencerStuart, 2017).
3. Agency problems
In the following section, we will use the enlightened agency theory perspective of Thomsen
and Conyon (2019) to analyze the above findings.
3.1. Type 1 Agency Problem: Owner – Manager
Type 1 agency problems arise when there is a separation of control and ownership between
shareholders and managers, assuming there is a conflict of interest. Investors as owners are
typically characterized as being risk-neutral and wanting to maximize the share value on a
short to medium horizon (Thomsen & Conyon, 2019). However, as the desires of the
shareholders are reflected in the company strategy through the board, we find in section 2.1.
that the strategy of HB reflect risk-averse shareholders who wants to maximize share value on
a long-term horizon. An agency problem occurs when the managers of HB do not risk-
neutrally maximize the long-term shareholder value. In order to prevent managers to act in
their own interest, the HB board is elected to supervise and control the managers on behalf of
the shareholders. As three executives are represented at the board, there is a close cooperation
between the board and managers, and thereby a loose separation of control and ownership
(Thomsen & Conyon, 2019). However, the strong representation of managers on the board
might hinder the supervisory ability of the board. One generic agency problem is excess
expenditure, which was witnessed with SCA. The balance of this problem is that if the
shareholders do not like what the managers do, they can fire them through the board. The
manager at SCA ended up leaving (Rosen, 2015), which proved the system to work.
All of the executive directors of the senior management owns at least 4 000 shares in
the company (Appendix 6), which motivates them to maximize shareholder value. Most of the
shares are indirect holdings through Oktogonen Fonden, mentioned in section 2.4. As the
managers and employees of HB are the owners of Oktogonen, they also own a part of HB,
and their payout is affected by the profit of HB. HB states in their annual report that this
“contributes to a high level of risk awareness and a long-term approach” of the employees
(Svenska Handelsbanken AB, 2019a). The lack of variable salary avoids tempting managers
to prioritizing scoring well on specific variable measurements (Thomsen & Conyon, 2019),
and Oktogonen encourages them to focus on the overall company performance. Using shares
as management compensation has been criticized for encouraging managers to hype up the
4
103539 Corporate Governance & Finance 27-29.05.2019

price of the shares for a quick sale through for example false reporting or short-term focus
(Thomsen & Conyon, 2019). However, this is avoided since the payments from Oktogonen
first start after the manager turns 60 years old.
The monitoring role of the board is not of great importance in this case as the interests are
aligned. Thereby, the role of the board focuses more on consulting and cooperating with the
management team. Through this cooperation, the diversity of the board is increased, reducing
the possibility of groupthink (Thomsen & Conyon, 2019).
3.2. Type 2 Agency Problem: Majority – Minority
Type 2 agency problems occur if there are conflicts of interest between minority and majority
shareholders (Thomsen & Conyon, 2019). However, as the ownership of HB is very
dispersed, decisions have to be made with simple majority and the majority owners have less
than 21 % of the total voting rights (Appendix 2), the majority owners do not have the power
alone to impact the firm.
3.3. Type 3 Agency Problem: Shareholder – Stakeholder
Type three agency problems occurs when shareholders make self-interested decisions that
have an impact on stakeholders (Thomsen & Conyon, 2019). There are several stakeholder
problems to analyze, but we will focus on one of the biggest stakeholders; the employees of
HB. HB has more than 12 300 employees, most of whom operates at local branches (Svenska
Handelsbanken AB, 2019a). The alignment of interest between employees and shareholders is
done through the same mechanism as for the management, Oktogonen (Svenska
Handelsbanken AB, 2019a). Simply stated, HB avoided conflicts of interest between
shareholders and employees by turning the employees into shareholders.
4. Recommendation & Conclusion
Based on this paper, I would recommend EPF to invest. Our findings suggest that the
corporate governance of HB complies with the SCGC, mostly lives up to average standards
and do not have any clear agency problems. We would recommend acting with caution in
regards to the cross-ownerships and the nationalities of the board. However, based on our
research, there were no red flags within the corporate governance of HB. Tough I find it
important to remark that this is only an analysis of the corporate governance of HB, not their
strategy and financial performance. If we were to include this in our analysis, our suggestion
might change. Therefore, I will conclude that the corporate governance of HB could be
improved on some areas, but is compliant and strong like Yahoo! Finance claimed.

5
103539 Corporate Governance & Finance 27-29.05.2019

Appendix 1: Historical Environment, Social and Governance performance of

Appendix 2: The largest shareholders of Handelsbanken (Svenska Handelsbanken AB,

6
103539 Corporate Governance & Finance 27-29.05.2019

Appendix 3: The largest shareholders of Industrivärden 2018 (Industrivärden, 2019a)

7
103539 Corporate Governance & Finance 27-29.05.2019

Appedix 4: The Board of Handelsbanken (both pictures below) (Svenska Handelsbanken

8
103539 Corporate Governance & Finance 27-29.05.2019

Appendix 5: Segment reporting of home markets 2018 (Svenska Handelsbanken AB,

Appendix 6: Executive directors in Senior Management at Handelsbanken (Svenska

9
103539 Corporate Governance & Finance 27-29.05.2019

Works Cited
Industrivärden. (2019a, March 31). Ownership Structure. Hentet fra Industrivärden:
https://www.industrivarden.se/en-GB/Corporate-governance/Ownership-structure/
Industrivärden. (2019b). About Us: Fast Facts. Hentet fra Industrivärden:
https://www.industrivarden.se/en-GB/About-us/Fast-Facts/
Mayer, C. (2018, December 6). Professor Colin Mayer CBE. Hentet fra Medium:
https://medium.com/obbf2018/colin-mayer-469278763911
O’Neil, D. (2018, November 22). Is the Handelsbanken model under threat? Hentet fra
Euromoney: https://www.euromoney.com/article/b1by1qd6l1lrt2/is-the-
handelsbanken-model-under-threat
Reuters. (2015, November 3). SCA sells stake in top owner Industrivarden. Hentet fra
Reuters: https://www.reuters.com/article/sca-industrivarden-cellulosa-sca-
idUSL8N12Y1MA20151103
Rosen, C. (2015). A jet scandal in paradise. Hentet fra Ethical Boardroom:
https://ethicalboardroom.com/a-jet-scandal-in-paradise/
SpencerStuart. (2017). Nordic Board Index 2017. SpencerStuart.
Svenska Handelsbanken AB. (2019a). Annual Report 2018. Stockholm: Svenska
Handelsbanken AB.
Svenska Handelsbanken AB. (2019b). Handelsbanken in brief. Hentet fra Handelsbanken:
https://www.handelsbanken.com/shb/INeT/IStartSv.nsf/FrameSet?OpenView&id=IDn
av_About_the_group&iddef=aboutthegroup&navid=Investor_Relations_En&sa=/Shb/
Inet/ICentSv.nsf/Default/qF0547EAEE37862B5C12575EB00411872
Swedish Corporate Governance Board. (2016). The Swedish Corporate Governance Code.
Hallvarsson & Halvarsson.
Thomsen, S., & Conyon, M. (2019). Corporate Governance and Board Decisions.
Copenhagen: Djøf Publishing.
Yahoo! (2019, May 28). Svenska Handelsbanken AB. Hentet fra Yahoo! Finance:
https://finance.yahoo.com/quote/SHB-A.ST/sustainability?p=SHB-A.ST&.tsrc=fin-
srch

10