Rocío Valdivielso del Real Visiting Fellow at the Centre of Globalisation and Regionalisation

University of Warwick London Centre for Corporate Governance and Ethics

Monthly Seminar Series20 January 2012

Birkbeck (University of London)

Piecemeal Liberalisation and Institutional Diversity: A Comparison of the Market for Corporate Control in the

British and Spanish Electricity Sector (1996-2010)

Argument

Presence of substantial institutional differences in national arrangements of corporate governance, but mediated by the regulatory choices of policy-makers

Ownership structures Voting rights of shareholders Independence of regulatory authorities

Two alternative explanations:

EU-driven market liberalisation Managerial Perspectives on Takeovers

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Research InquiriesDifferences in the prominence of takeovers in the

British and Spanish electricity sectorBritain: high prominence and foreign presenceSpain: unequal exposure

Endesa: subject to two takeover bids and then acquired by its white knight –i.e. Enel

Iberdrola (deviation one share-one vote) and Unión Fenosa (negotiated transfer of ownership)

Implications forThe divergent transformation of the electricity

sector in the context of the EU liberalisation policies across countries (Role of Institutions)

Incorporation of state activism (role of policy makers) as a complement to an institutional perspective

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Research Design

Cross-Country VariationBritain (Liberal Market Economy)Spain (Coordinated Market Economy: for several features of

its system of corporate governance, although experiencing change)

Within-Country Variation SpainUnión Fenosa ownership concentration Iberdrola effectiveness of deviations from one share-one voteEndesa dispersed ownership reduced effectiveness of deviations from one share-one vote

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European Union and Electricity Liberalisation

From state-owned to privatised companies; from regulated monopoly to re-regulated entities.

Change in technology (CCGT) and employment conditions: acquisition of new skills and decline in traditional engineering staff and financially generous early retirement policies.

EU electricity directives (96/92/EC and 2003/54/EC and Third Package proposals unveiled ob 19 September 2007) provide a high degree of flexibility and autonomy (silent on whether privatisation should take place, and on the ownership structure –concentrated/diffused- of privatised companies).

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European Union and Electricity Liberalisation

Incomplete character of the liberalisation process in the issue market for corporate control.

Member states must provide access to the national grid, must open markets.

Control over the opening of new plants (national jurisdiction)Therefore

Takeover of an established firm constitutes an interesting option for entering other EU markets

Absence of a level playing at the EU in the market for corporate control despite the implementation of several national and EU level reforms designed to protect the rights of minority shareholders in takeover contests (Goergen, Martynova and Renneboog, 2005)

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Managers and Takeovers Protection

The market for corporate control constitutes a threat for managerial autonomy (Culpepper, 2011)It is characterised by layoffs of the management

team of acquired companies (Aguilera and Dencker, 2004)

It is associated with concentrated costs for displaced managers and dispersed benefits for atomised shareholders (Frank and Mayer, 1996: Haverman and Cohen, 1994)

Lack of clear empirical evidence regarding the positive/negative contribution of takeovers

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Managers and Takeovers Protection

Insights

Insightful job in identifying the potential differences in the intensity of preferences of various actors

Shortcomings

The managerial perspective on takeovers does not take into account the presence of cross-national differences in institutions of corporate governance

Managers are embedded in different institutional settings across national systems of corporate governance (Rossi and Volpin, 2004: Aguilera and Jackson, 2003; Culpepper, 2011)

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Institutional Diversity of Corporate GovernanceThe discussion of takeovers raises an important issue for

National Business Systems/Varieties of Capitalism perspectives, namely the importance of access to long-term, patient capital (Whitley, 1999: Culpepper, 2005; 2011; Hall and Soskice, 2001: 2009). The market for corporate (i.e. takeovers) represents one of the most important threats to this access to patient capital.

The extent to which corporate executives are subjected to the pressures of shareholders and short-term indicators, such as quarterly earnings statements, constitutes an important difference between advance capitalist economies (Vitols, 2001).

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Institutional Diversity of Corporate Governance Differences in characteristics of the market for corporate

control reflect the institutional variation found across national business sytems/varieties of capitalism in the area of corporate governance (see Aguilera and Jackson, 2003; Jackson and Miyajima, 2007; Rossi and Volpin, 2004)

Three institutional arrangements of corporate governance are seen as a series of institutional stages in which executives seek protection from unwanted takeovers bids Ownership structure

Variation in corporate law + voting rights (one share-one vote)

Variation in takeover regulation10

Britain and the EU Liberalising Directives

Britainhappened earlier but inconsequential for the argument

(institutions and the choices of policy makers)

EU DirectivesMember states must provide access to the national grid,

must open markets

But no convergence on the approval of new plants + electricity is difficult to store and export

Takeover of an established firm constitutes an interesting option for entering other EU markets

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Britain

Before PrivatisationTariff setting and contributions to the Treasury Mission: keep lights on

After PrivatisationFrom monopoly to competitive marketsSeparation of generation and distribution Privatization of Powergen, National Power and

12 Regional Electricity Companies (RECs)

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Britain

Two Waves of Takeovers12 RECs (mid 1990s-early 2000s): initially by

US companies, then by European firms National Power (2001) and Powergen (2002):

by German companies Interestingly enough, takeovers took place in

the wake of the abolition of golden shares and were fought by incumbent management

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Spain

Before Liberalisation

Consolidation of companies into three large groups: Endesa, Iberdrola, and Unión Fenosa.

Privatisation of Endesa: Extensive use of hard core cross-shareholdings of friendly companies.

National Champions Preference. 14

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Spain After Liberalisation

Iberdrola: from BBVA (bank) Caja Valencia (bank), BBK (bank), and ACS (construction).

Unión Fenosa: from concentrated ownership to concentrated ownership (ACS Gas Natural).

Endesa: outlier Ultimately acquired by Enel, its white knight.

Institutional Diversity and Varieties of Takeovers

Three Institutions

Ownership structure

Deviations from one-share, one-vote: ownership ceilings

Degree of independence of regulatory authorities

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Britain

Ownership Structuredispersed, but Golden Shares initially ownership diffusion was associated with

competition. Takeovers were interpreted as a healthy sign of market competition

Deviations from one-share, one-vote allowed, but importance of institutional

investorsRegulatory Authorities

City Code and protection of minority investors

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SpainOwnership structure

Union Fenosa: between 23-62%

Iberdrola: between 13 and 27%

Endesa: between 9 and 29% Expiration of golden shares in 2005 Caja Madrid: only core shareholder left in 2005

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SpainDeviations from one-share, one-vote

Iberdrola: tough ownership ceilings that could only be removed with 75% of vote

Endesa: ownership ceilings could be removed at 50%

Independence of Regulatory Authorities (CNE)Initially, limited powersStrengthen by Zapatero government in context

of board composed of political appointees. Future??

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Institutional Diversity and Varieties of Takeovers(Summary)

Britain

Outcome

High prominence of takeovers in Britain

Spain

Outcome

Low prominence of takeovers in Spain for Iberdrola and Unión Fenosa

Formal acquisition of Endesa by a foreign firm despite preferences of Spanish policy-makers for national champions.

Institutional Diversity and Varieties of Takeovers(Summary)

Britain

Institution #1: Ownership StructureAbsence of ownership concentration. The largest shareholders were institutional investors (<3 percent) such as pension and mutual funds. Firms vulnerable to unwanted takeover bids.

Institution #2: Corporate Law and Associated Voting RightsUse of deviations from the one share-one vote standards remains limited. None of the privatized electricity companies relied on deviations from the one share-one vote with the exception of the transitory golden share scheme.

Institution #3: Regulatory Process of Takeover ApprovalCentral role of the Panel on Takeovers and Mergers. All shareholders must be treated equally by a bidder. High degree of protection for minority shareholders. Ofgem recognized for the independent regulation of a competitive electricity market.

Spain

Institution #1: Ownership StructurePresence of ownership concentration via a controlling owner at Unión Fenosa (Gas Natural). Absence of ownership concentration at Endesa and Iberdrola

Institution #2: Corporate Law and Associated Voting Rights

Reliance on voting rights ceilings that cap that caps the amount of votes any investor may cast regardless of the total number of stocks held, namely at 10% Voting rights ceiling could be removed during takeover contests with 50% of the equity capital at Endesa.Voting rights ceiling could be removed during takeover contests with 75% of the equity capital at Iberdrola

Institution #3: Regulatory Process of Takeover Approval

The Competition Tribunal and the National Energy Commission have traditionally issued non-binding recommendations regarding the approval/rejection of takeovers bids. Overall, Spanish regulatory authorities possess some degree of independence but limited powers.

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Discussion (Policy-Making in Britain)Political foundations of institutional

frameworks

Britain: privatisation driven by revenue concerns, breaking TU power

Liberalisation conceptualised as the breakdown of the domestic duopoly (National Power-Powergen)

Foreign companies allowed to bid for English utilities

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Discussion (Policy-Making in Spain)Institutions also reflect the choices of

policy makers) The exposure of Spanish firms to takeovers was

itself the result of state action:Non-renewal of golden shares in EndesaChanging voting rules for one share-one vote during

takeovers bidsGovernment increased the power of Energy National

Commission and to insure the neutrality of the CNMV – Spain’s stock market regulator

Actions of the state can go against preferences of firms

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Discussion (Policy-Making in Spain)Reflect multiple preferences (i.e. support for EU

policy as well as building national champions)

Acquisition of Endesa was not desired by Spanish policy-makers

Yet, Spanish policy-makers introduced policies that exposed Endesa to unsolicited takeover bids

State activism impacts on the processes of institutional creation and reproduction

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Conclusion Role of institutional frameworks to explain and assess change in the role

of takeovers on the transformation of the British and Spanish electricity industry; but also centrality of the state and the choice of policy makers in the role of takeovers.

The creation of a complete level playing field in the European electricity market will remain an illusion in the context of piecemeal policy-making. European Union changes in competition rules were not matched by the corresponding reforms in the spheres of corporate governance and takeover regulation at the EU and member states’ level. The advent of convergence in some (important) areas of energy policy-making has not been matched by corresponding integration in the corporate and financial spheres.

Incorporation of state activism/choice of policy makers as a complement to an institutional perspective.

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Many Thanks!R.Valdivielso@warwick.ac.uk

rovaldivielso@gmail.com

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