Who should own Sweden’s banks in the future? Who should influence how they are run? And who should take responsibility for the effectiveness of their operations? Is the government’s decision to keep members of Proventus’ management off the boards of GotaGruppen’s subsidiaries not undemocratic and directly illegal? These are two central discussions that greatly affect Proventus’ strategic planning.

In this article, we wish to present our opinion about possible limitations on the ownership of banks and the government’s decision to prohibit us from becoming members of the boards of GotaGruppen’s subsidiaries. On January 21, 1988 the Swedish government approved GotaGruppen’s exemption from the new banking laws, thereby allowing Gotabanken and Wermlandsbanken to remain subsidiaries of the group although the parent company is not a bank. The approval was given under four conditions. One was that Proventus AB, as the dominant owner of GotaGruppen AB, could not be represented on the boards of GotaGruppen’s subsidiaries.

DISCRIMINATING AND ILLEGAL

We have not been able to follow the government’s discussion on the matter of our representation on GotaGruppen’ s boards and at no time have received an explanation for the decision. Nevertheless, we suggest that it is highly discriminating and illegal. We asked the most highly qualified legal counsel in the country for their opinion. They maintain that the government clearly has no right to prohibit particular individuals from becoming members of a corporation’s or a bank’s board of directors. The current laws contain no restrictions that deny representatives of Proventus from participating in the work of the boards of GotaGruppen’s subsidiaries. Legal experts claim the government has no right to exclude us from GotaGruppen’s boards. By setting such conditions the government has exceeded its authority. True power would not be reduced, only removed from the open.

SIX IMPORTANT QUESTIONS TO THE GOVERNMENT

Riksdagen, the Swedish parliament, has given the administration the right to authorize exemptions from the rule that a bank may only be a subsidiary of another bank. This right to approve exemptions does not, however, give the government authority to attach restrictions or special demands. Obviously the government has overextended itself in this case. The condition prohibiting Proventus’ representation exceeds its authority in administering the new banking laws. The government’s restriction naturally leads to a number of questions that it alone can answer. We would like to ask a few of them.

Is it not better from society’s point of view that real and formal decision-making power is in the same hands? As the largest owner of GotaGruppen, Proventus has real decision-making power. Prohibiting representatives from Proventus from being elected to the boards of directors of GotaGruppen’s subsidiaries does not mean that real decision-making power is reduced, only removed from the open.

In what possible way would it be damaging for Proventus to be represented, for instance, on the board of Gotabanken, which consists of more than 20 people including two public officials and a chairman approved by the government? Why would a Proventus representative on this board be an improper exercise of power? How could such a person improperly influence the board’ s work?

Exactly how much would we have to own of GotaGruppen for it to be acceptable for its board to nominate our representatives to the boards of directors of its subsidiaries?

GotaGruppen’s second and third largest owners, each of whom holds five percent of the group’s shares, are today represented on the boards of the parent Company and Gotabanken. Proventus, which owns 46 percent of GotaGruppen’s shares, is only represented on the parent company’s board. With its largest owner represented only on the parent company’s board, there is a risk that decision-making authority at GotaGruppen will become centralized in the parent company. Doesn’t that conflict with the government intentions? And doesn’t it conflict with current efforts to increase efficiency in Swedish business circles by decentralizing responsibility and decision-making authority?

The government’s decision prevents stockholders from selecting the directors of their choice. The annual meeting no longer has the sovereignty to hold a free election of board members. This runs contradictory to the time honored principles of Swedish corporate law. Why was such an action taken without prior discussion? And why wasn’t it subject to the normal legal processes? The second and third largest owners are represented on the boards of the parent company and at least one subsidiary.

Laws may not be instituted against individuals. This is an important tenet of the Swedish judicial system. Does the de facto exemption made in GotaGruppen’s case not mean that the government instituted a law specifically against Proventus? Other cases where the principal owners of established Swedish banking groups are represented on subsidiaries’ boards obviously do not concern the government. Doesn’t this decision run counter to the principle of equal treatment before the law? Why should we be singled out from becoming directors on the boards of Hagglof & Ponsbach, Gota Finans, Gigab, Gotabanken or Wermlandsbanken?

In theory the government’s decision also affects other stockholders in Wermlandsbanken and Gotabanken. GotaGruppen may now only vote for 20 percent of the shares represented at the annual meeting. The stockholders who represent 80 percent of the voting power are prevented from voting for the individuals they are confident in and whom they feel are suitable if they happen to be representatives from Proventus. The government is infringing on the rights of other stockholders as well.

A DIRECT THREAT

We also discussed bank ownership in Sweden in last year’s annual report. We would now like to return to this question since the current government committee on credit markets, under the leadership of chairman Nils Horjel, made public in the fall of 1987 its intention to propose a limitation on the ownership of Sweden’s commercial banks. We expect such a proposal would limit ownership to a maximum of 10 percent of the shares or five percent of the voting power of a bank or financial holding company.

Back in the spring of 1986, in a letter to the government, the Swedish Bank Inspection Board suggested that ownership limitations be introduced. Proventus’ growing interest in Gotabanken was one of the examples on which the Bank Inspection Board based its proposal. A draft was sent out for consideration to a large number of institutions, organizations and authorities. The idea was heavily criticized, after which the proposal was put aside and debate died down. Now that the matter has again come into focus, we would like to express our views.

There are two central arguments in favor of limiting bank ownership. One is that a large owner can abuse his position by using bank credits to benefit his own interests. The second is that banks play a central role in the economy, so they should be protected against speculation or unfriendly takeovers.

MANY CONTROLS

Owning a bank is a big responsibility. On that, we can agree with the proponents of regulating ownership. Through the years, however, society has established a number of controls that ensure the security of the bank. The most important are as follows:

It is highly unlikely that stricter regulation of the ownership of Swedish banks would have a positive effect on the economy or society as a whole. On the contrary, there is a great risk that banks, without pressure from their owners, would become half public, half private institutions in which their management receives its mandate from public authorities and the government. When the link is cut between ownership and an interest in profitability, there is a risk that efficiency and development would receive less emphasis.

Limiting ownership to 10 percent would in reality do away with the role of the owner. As a result, banks would no longer be corporations in the true sense. What would happen in such a system if a bank floundered on the brink of bankruptcy? Under some circumstances an individual bank might require contributions from its stockholders. A major owner must be prepared to take such responsibility. But it is hardly likely that he would be willing to do so if he did not have a say in the bank’ s operations.

OWNERS MORE ARE BECOMING IMPORTANT

Since deregulation of Swedish banking began in 1985, the role of the banks has changed dramatically. Earlier they operated in a market with strict regulation, in a protected sector of the economy. Today they operate in an environment more similar to that of most industrial corporations. Banks are competing in completely new areas, which creates opportunities as well as threats. More than ever before, every bank must have a strategy and identify their niche in the market.

Owners are playing an increasingly important role in this respect. Ownership limitations are naturally a threat to current, large owners. If a 10 percent cap were placed on bank ownership, stockholdings with a total market value of SEK 3 billion (March 1988) would be affected, and stocks worth SEK 2.2 billion would have be placed on the market. Who would buy all this stock?

Ownership limitations are not just a threat to current owners such as Proventus, however. They would also upset a very important mechanism in Sweden’s mixed economy. This would isolate Sweden. No other country in the western world limits the ownership of banks, with the exception of Canada, which in the 1960s introduced limitations to protect Canadian banks from being taken over by their American counterparts.

Annual report 1987