Rocío Valdivielso del Real

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 Series 20 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

ResearchInquiries • Differences in the prominence of takeovers in the British and Spanish electricity sector • Britain: high prominence and foreign presence • Spain: 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 for • The 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

Research Design • Cross-Country Variation • Britain (Liberal Market Economy) • Spain (Coordinated Market Economy: for several features of its system of corporate governance, although experiencing change) • Within-Country Variation Spain • UniónFenosaownership concentration • Iberdrola  effectiveness of deviations from one share-one vote • Endesa dispersed ownership  reduced effectiveness of deviations from one share-one vote

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).

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)

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

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)

Institutional Diversity of Corporate Governance • The 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).

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 regulation

Britain and the EU Liberalising Directives • Britain • happened earlier but inconsequential for the argument (institutions and the choices of policy makers) • EU Directives • Member 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

Britain • Before Privatisation • Tariff setting and contributions to the Treasury • Mission: keep lights on • After Privatisation • From monopoly to competitive markets • Separation of generation and distribution • Privatization of Powergen, National Power and 12 Regional Electricity Companies (RECs)

Britain • Two Waves of Takeovers • 12 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

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.

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

Britain • Ownership Structure • dispersed, 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 investors • Regulatory Authorities • City Code and protection of minority investors

Spain • Ownership 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

Spain • Deviations 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 powers • Strengthen by Zapatero government in context of board composed of political appointees. Future??

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 Structure Absence 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 Rights Use 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 Approval Central 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 Structure Presence ofownership 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. . Institutional Diversity and Varieties of Takeovers(Summary)

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

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 Endesa • Changing voting rules for one share-one vote during takeovers bids • Government 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

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

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.

Many Thanks! R.Valdivielso@warwick.ac.uk rovaldivielso@gmail.com

Rocío Valdivielso del Real