SHAREHOLDERS AND CORPORATE GOVERNANCE: A RESEARCH AGENDA AND CONFERENCE
Yale University – Yale School of Management
Oxford University – Saïd Business School
CONFERENCE SUMMARY: By Jonathan GS Koppell
In the seventy-five years since Berle and Means considered the separation between ownership and control in large business organizations, markets around the world have experienced continuous change in securities statutes, corporation laws, investor profiles, trading systems, management of investment capital, distribution of ownership rights, information technologies, and the structure of enterprises themselves. The pace and power of change is accelerating, giving rise to demand for insights that can inform decision making among players such as regulators, lawmakers, corporate directors and investment professionals.
With the generous support of Broadridge, the Yale School of Management’s Millstein Center for Corporate Governance and Performance and the University of Oxford’s Saïd Business School co-sponsored a conference to consider the consequences of these changes in comparative perspective. In response to an open call, ten papers were selected for presentation in October 2007 at Oxford University.
Collectively the papers considered the evolving role of shareholders in the governance and performance of the corporation. They did so by focusing on specific aspects of the shareholder's relationship to the corporation. From hedge fund activism to shareholder voting to private litigation as an enforcement strategy, the topics provide an indication of the breadth of issues to be considered in future corporate governance research.
The most striking cross-cutting theme of the conference concerned the complex role of institutional investors in corporate governance. Several studies demonstrated the potential positive impact institutional investors can have on corporations, affecting compensation and overall performance through interaction with management and even proxy proposals. But the papers also reveal conflicts of interest inherent in the position of some institutional investors, such as mutual funds. There are times when investors face conflicts between their fiduciary obligation and business interests, for example. Thus the papers as a whole call attention to the importance of an in-depth understanding of the different types of institutional investors, and their impact, as the study of corporate governance moves forward.
The conference facilitated constructive exchanges between scholars in the international corporate governance field. Studying different jurisdictions, the authors provided commentary and feedback for each other's papers and suggested avenues for improvement. Conference versions of most papers are now available on the Millstein Center website. Final versions are expected to be published in various academic outlets.
Many of the Yale-Oxford papers proved path breaking in their ambitions and germane to important corporate governance policy debates. Where appropriate, the Millstein Center served as a bridge between scholar-authors on the one hand and policy makers and market players on the other. Resulting two-way exchanges carried mutual benefits. Researchers aiming to extend or finalize studies gained access to timely sources of information and perspective, while practitioners were able to shape stances with latest empirical analysis.
Paper summaries:
“Institutional Investor Activism: Evidence from Voting and Daily Trading
Around Mergers and Acquisitions” by Jennifer Bethel, Associate Professor, Babson College; Gang Hu, Associate Professor, Babson College; Qinghai Wang, Assistant Professor, College of Management, Georgia Institute of Technology
The authors document an active market for shareholder voting rights. By examining institutional-investor trading and voting behavior around mergers and acquisitions they find a positive relationship between institutional buying and voting, a negative relationship between institutional buying and approval of merger proposals. The institutional investors purchasing shares after the announcement of proposed mergers generally vote against mergers. Their votes increase the likelihood, however small, that mergers fail and publicly communicate displeasure to management.
“An Alternative Strategy for Institutional Investors: Using Debt Rather Than Equity to Influence Corporate Governance” by Michelle Harner, Assistant Professor, College of Law, University of Nebraska
Institutional investor activism no longer is confined to a company’s shareholders. An investor now has an alternative, and additional, avenue for activism—distressed debt. An investor can purchase the debt of a financially troubled company and then try to influence corporate matters by exercising or threatening to exercise its contractual and statutory rights as a debtholder. Such “activist distressed debt investing” is the subject of this paper. It sheds light on the use of distressed debt holdings to monitor and influence corporate governance, a topic that has received little attention in legal scholarship regarding institutional investor activism.
Using a combination of empirical data, compiled from a written survey and interviews of distressed debt investors, and selected case studies, the author offers two observations: First, some institutional investors are use distressed debt investments strategically to influence corporate governance and, in some instances, acquire the company. Second, activist distressed debt investing is causing a slow, but noticeable, convergence of the U.S. and the U.K. on a “management-neutral” corporate restructuring process. This represents a shift from the “management-driven” process historically associated with U.S. bankruptcy laws and the “management-displacing” approach associated with U.K. bankruptcy laws process.
“Private Enforcement of Corporate and Securities Law: An Empirical Comparison of the US and UK” by John Armour, Lovell’s Professor of Law and Finance, University of Oxford; Bernard Black, Professor of Law, University of Texas Law School; Brian Cheffins, S.J. Berwin Professor of Corporate Law, University of Cambridge; Richard Nolan, Reader in Corporate and Trust Law, University of Cambridge
The authors find that neither risk of personal liability nor frequent securities litigation (private enforcement) is a necessary precondition for strong securities markets. This undermines the claim that good protection of minority shareholders is an absolute requirement. This conclusion is based on a comparative examination of the extent to which inside and outside directors of public companies are targeted by shareholder or creditor lawsuits, and the outcomes of those suits, in the U.S. and U.K. Litigation is almost non-existent in the UK but even in the U.S., only a small number of corporate lawsuits generate a judicial decision. Damages are paid principally by the company and D&O insurers meaning directors’ risk of personal payment is small.
“Solving the Executive Compensation Problem Through Shareholder Votes? Evidence from the U.K.” by Sudhakar Balachandran, Associate Professor of Accounting, Columbia Business School; Fabrizio Ferri, Assistant Professor, Harvard Business School; David Maber, Doctoral Candidate, Harvard Business School
The authors find that U.K. legislation introduced 2002 requiring publicly traded firms to submit an executive remuneration report to a non-binding shareholder vote does have an effect on executive compensation. Analysis of a large sample of firms reveals evidence of enhanced sensitivity of CEO cash compensation to negative operating performance and enhanced sensitivity of CEO total compensation to negative operating and stock performance after the new rule. The findings may be of interest to regulators and investors who are currently pondering the merits of introducing a similar rule in the United States.
“Able But Not Willing: The Failure of Mutual Fund Advisers to Support Shareholders Rights” by Jennifer S. Taub, Lecturer/Coordinator of Business Law Program, Isenberg School of Management, University of Massachusetts at Amherst
This study finds that investment advisers (“Advisers”) to large mutual fund families cast proxy votes against shareholder-sponsored, corporate governance resolutions when the Advisers' firm manages the assets of the company's defined contribution (“DC”) retirement plan. This finding is consistent with prior research indicating that Advisers place interests in asset gathering for defined contribution plans ahead of their fiduciary duties. By implication, corporate governance reformers should not look to large fund families to support efforts to shift power from management to shareholders. Among the possible solutions is to borrow from British reforms by creating a uniform set of best practices for corporate governance. Fund Advisers would be required to explain all proxy votes (related to management or shareholder proposals) inconsistent with best practices.
“Elements of Effective Insider Trading Laws” by Bart Frijns, PhD Student, Faculty of Economics and Business Administration, Universitet Maastricht; Aaron Gilbert, PhD Candidate, Auckland University of Technology; Alireza Tourani-Rad, Professor and Discipline Chair of Finance, Auckland University of Technology
Trying to determine those most effective strategies to reduce insider trading, the authors find laws that impose financial rather than criminal penalties and those enforced by strong public regulators are most effective. The conclusion is based on a study 18 countries (including the US and UK) comparing features of the legal regime and costs associated with informed trading.
“Investment Preference of Institutional Investors: A Comparative Study of
Institutional Investment in the UK and the US” by Arif Khurshed, Senior Lecturer in Finance, Division of Accounting and Finance, Manchester Business School; Steve Lin, Associate Professor, School of Accounting, College of Business Administration, Florida International University; Mingzhu Wang, PhD Student, University of Manchester
Looking at differences in the investment preferences of UK and US institutional investors, the authors find the vast majority are active, long term shareholders (the holding period exceeds two years) in both countries. The study also provides empirical evidence suggesting that UK and US institutional investors have different impacts upon the financial performance of their investee companies. For both countries, institutional shareholding has positive and significant impact upon firms’ performance. However, when institutional ownership is broken down more carefully, there appears to be variable impact on performance.
“A Comparative Analysis of Shareholder Activism in the US and UK: Evidence from Shareholder Proposals” by Bonnie Buchanan, Clinical Assistant Professor, Moore School of Business, University of South Carolina; Tianxia Yang, Assistant Professor, College of Business, Clemson University
In contrast to prior empirical evidence, the authors find that the presence of shareholder proposals has a positive impact on firm performance and significant affect on corporate policies, board structure, and CEO turnover. Utilizing a comparative analysis of US and UK shareholder proposals, looking at 3,812 shareholder proposals presented at 764 US firms and 508 shareholder proposals filed with 85 UK firms, the authors find systematic differences in proposal types, proposal sponsors, and voting outcomes between the US and UK samples, which are attributable to the differences in the proxy rules of the two countries. Our findings have potential policy implications for the current debate on proxy rule reforms in the US and European Union.
"Institutional Trading, Information Production, and Corporate Spin-offs" by Thomas J. Chemmanur, Associate Professor of Finance, Boston College; Shan He, Associate Professor of Finance, E.J. Ourso College of Business, Louisiana State University
The authors analyze the role of institutional investors in corporate spin-offs. Their findings indicate that the relationship between management and institutional investors plays a significant role in determining the trading patterns for bother parent companies and spin-offs. The implication is that the access to information puts institutional investors in a privileged position relative to other investors.
“Hedge Fund Activism, Corporate Governance and Firm Performance”
by Alon Brav, Associate Professor of Finance, Fuqua School of Business, Duke University; Wei Jiang, Associate Professor Finance and Economics Division, Columbia University; Frank Partnoy, Professor of Law, University of San Diego; Randall Thomas, John S. Beasley II Professor of Law and Business, Vanderbilt University Law School
The authors first devise a means of identifying "activist hedge funds," distinguishing them from pools of capital that hold stakes very briefly, and then assess whether firms with large stakes held by such funds perform differently. Firms targeted by activist hedge funds so perform better – in terms of return and payout – while experiencing greater CEO turnover (an indication that the owners are exercising some influence). The evidence is drawn from US markets but the authors conclude that the effect is likely similar in European markets.
