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Inside Sweden's unique approach to board recruitment

They are among the most active election committee members on the Swedish stock exchange. Here’s how they find the right candidates.

Anders Oscarsson, Head of Equities and Corporate Governance at AMF Pension, and Johannes Wingborg, Head of Corporate Governance at Länsförsäkringar Fondförvaltning, are both strong proponents of the Swedish model for corporate governance, where the election committee process is a key element. As the recent meeting season draws to a close, they can look back on another intense period of work.

Both belong to the exclusive group of election committee members who have consistently held over ten different assignments year after year. This not only reflects the size of the funds they represent but also the fact that Swedish institutions take significant responsibility for maintaining the election committee system, which is very unusual internationally. Several of the largest foreign owners on the Stockholm Stock Exchange have chosen not to participate in the work, especially index funds from the USA.

Anders Oscarsson och Johannes Wingborg

– They are not interested in taking ownership responsibility because they don't really care about how the company is doing; they just follow an index, says Anders Oscarsson.

– If anyone declines, it is generally foreign investors, but we have started to see that European investors are increasingly saying yes nowadays, says Johannes Wingborg.

"It ensures that people dare to invest"

Both are convinced that the work of the election committee pays off in the form of increased insight and transparency and a more professional board work. This, in turn, leads to fewer scandals and ultimately better returns for all owners.

– Looking over time, there are many companies that perform well on the Stockholm Stock Exchange and assert themselves well in international competition. This is proof that we have a transparent system that creates liquidity. It ensures that people dare to invest, says Anders Oscarsson.

The election committee working year begins after the summer when listed companies contact the three or four largest owners and offer them a place on the committee. The chairman of the board is usually also part of the group. At the same time, a board evaluation has been conducted, which the election committee gets to take part in.

Different companies have different routines, but the evaluation is usually a well-thought-out process that results in a written report. Sometimes consultants are hired to assist with the work. Thereafter, the members of the election committee, who are not themselves part of the board, conduct their own interviews to get an even deeper understanding.

– What we insist on, and generally always do, is to meet each individual board member and interview them. Then we can ask questions about how the board work functions, how the chairman leads the board work, and how well the relationship between the chairman and the CEO works. Normally, we also interview the CEO and sometimes even the auditor. For me, these conversations are actually more valuable than the board evaluation we get to take part in, says Johannes Wingborg.

Crucial questions

During this interview round, it is crucial for the election committee to pinpoint the most important issues for the upcoming work of proposing a new board: Is any member considering leaving? Are all necessary competencies present in the current board? What needs does the CEO have? Have the company's goals and strategy changed in a way that affects the board's composition? And perhaps the most difficult question: is there any member who does not measure up and needs to be replaced?

Different companies require different measures; a basic rule is not to make any major changes if everything is running smoothly. But sometimes one or more new members must be found before the annual general meeting. In this second part of the work, many factors must be balanced. Each member of the group has one vote, and it is usually possible to reach a consensus on the final candidates, but sometimes election committees break up due to disagreements that cannot be resolved. However, such disagreements are rare, according to Johannes Wingborg.

Significant ownership changes are an example of when the election committee's work can become more complex. If the new main owner sees the holding as strategic, it usually means claiming one or more seats on the board. This disrupts the balance between the different competencies.

– A classic example is when an older founder with operational leadership and industry experience sells their shares and is replaced by a young investment director from the new main owner who lacks equivalent experience. This can trigger the need to also replace one of the independent members and bring in someone with extensive CEO experience from the industry, explains Johannes Wingborg.

New candidates can be found in several ways, ranging from a main owner having their own proposal for new members to a recruitment consultant presenting a selection. AMF and Länsförsäkringar also have well-stocked candidate banks themselves, and both Anders Oscarsson and Johannes Wingborg always have their radar on to find new interesting names. Sometimes it can take several years from the first contact to an actual proposal.

– If someone asks me what the most important trait for being a board member is I usually say, somewhat jokingly but also seriously, that one is to be able to say the word "no". And the other is to dare to challenge the CEO on strategic issues, says Anders Oscarsson.

Background checks are standard practice

The selection process resembles a regular executive recruitment in many ways, with interviews and reference checks. Some form of background check is also standard nowadays, but how it is done can vary. In some cases, the recruitment consultant offers such a service; in others, the company itself might have an established routine, or the main owner takes on the responsibility of conducting the check.

– Many recruitment firms offer this as a module included in their service, but I don't think they do the checks as thoroughly as you (Look Closer) do. This is an area where, to be honest, more could be done, especially among the smaller companies on the stock exchange, says Johannes Wingborg.

The biggest risk is if the company were to get a member who has a calculated intent to infiltrate and act disloyally in a more malicious way. More common is the risk of reputational damages due to past personal events. For Anders Oscarsson, it is important that any potential problems in a candidate's background come up early in the process:

– I usually ask if there is anything that could end up on the front page of Dagens Industri or anything else that might be good to know before we proceed. Everyone usually says no to that question, but at least they've had to think about it. The worst thing that can happen for all parties is that we proceed with a candidate, and then this old conviction or whatever it might be, comes up afterward in some news article. It damages the trust in both us in the election committee and, of course, also in the company.

Johannes Wingborg also places extra emphasis on examining how the board candidate has historically acted on matters related to benefits and transactions with related parties:

– For example, if one has been part of boards where there is a history of multiple related-party transactions, employee stock option programs, or directed share issues with large discounts, it is an immediate red flag for me.

"Being on the board is somewhat like putting your brand at stake"

In the hunt for new candidates, it is now also common for the company itself to be scrutinized. The most sought-after candidates are often courted by several companies, and a negative public perception can make the election committee's work more difficult. Examples exist, for instance, in the real estate sector, where board assignments have turned into nearly full-time jobs when companies have been in crisis.

– If something is happening in the company that is controversial, maybe a lot of negative press, then it becomes more difficult to recruit to that company. Being on the board is somewhat like putting your brand at stake. At the same time, it is often the case that we as owners in the company want to bring in someone who has high integrity and can straighten things out. So, it can be a difficult situation, says Johannes Wingborg.

In the long run, the Swedish self-regulation model, with election committees as a crucial piece of the governance process, is challenged by new regulations and market trends both in the EU and the USA. Sweden has so far been able to retain the model, but this spring, for example, the issue of multiple share classes with different voting rights, has once again come up on the agenda in several large companies, driven by the powerful shareholder advisor ISS, which has repeatedly criticized it.

– Having multiple share classes has served Sweden well. I think many of the large companies would have been bought out today if the system with superior voting rights for the class A shares didn't exist. I think for us as a small country, it has been beneficial both in terms of jobs and overall welfare. The Swedish model, in turn, relies on the major owners participating and taking responsibility, including working in the election committees. If we don't take that responsibility, it wouldn't work, says Anders Oscarsson.


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