What are the Agency Problems raised by Institutional Investors?

In this post we will analyze the contributions made by Bebchuk, Cohen and Hirst (1) and Fisch, Hamdani and Davidoff (2) regarding institutional (passive or active) investors and their (eventual) incentives to use the “voice” corporate governance (CG) mechanism.

Bebchuk et al. find the (generally accepted) result that investment managers capture just a fraction of the profits deriving from their costly research thus suffering from “free riding”. Competition with other managers does not solve this, and finally they may also face conflicts of interest that make them closer to managers than desired.

They also support the reasoning that active (and mainly activist) investors have more incentives to use their “voice”. Bebchuk at al. basically try to draft a model showing how managers`behavior can deviate from the best stewardship standards, (3).

Read more…


Fundamental or long-term focused investors

In (1) we exposed the pros and cons of loyalty shares as a tool that would help avoid short-termism. Other systems such as better engagement and compensation frameworks, or longer time horizons for investment analysis were proposed.

In 2016 Alexandre Garel and Jean Florent Rérolle (2) don´t see a positive result of loyalty shares, (double voting rights for long-term owners, as granted by the Florange law in 2014) on French companies short-termism. They alternatively define fundamental investors as those that (i) on average hold their shares for more than two years, (ii) qualify in the top quartile of a firm ownership, and (iii) have an active allocation strategy. To some extent they resemble to value investors in theoretical terms.

Image long Term

The fact is what markets consider valuable may not be what maximizes shareholder value, that is intrinsic value (net present value of future expected cash-flows), so that managers could eventually receive and follow the wrong incentives, and destroy value. Overreaction to earnings announcements, temporary mispricing or simply said, market inefficiencies and short-term focus affect corporate decisions this way. Read more…

Stewardship and Engagement

May 11, 2018 1 comment

Dr John Mellor, FGRE’s (Foundation for Governance Research and Education ) Founder and Director of Research, published in May 2013 an article the topic, in cooperation with several institutions such as Schroeders and other asset management houses, (1). In June 2011 he had also published a report on stewardship together with Charles Cronin, (2), in which they stated the very relevant role asset managers may have in developing the engagement activity, without introducing though a regulatory recommendation.

In the 2013 article their insights consider the engagement managers´role in light of the directors´fiduciary duties, looking not only at equity holders but also at debt holders.

The UK Stewarship Code (3) defines stewardship as ”Stewardship aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.” Nevertheless, the 2013 updated code (4) goes beyond engagement and even accepts stewarshhip could be a different thing: “Stewardship aims to promote the long-term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole.” This takes into account for instance the nature of short-term focused investors or funds. Read more…

Information distribution to directors: the Netflix case by Larcker-Tayan

Mark Edge (1) recently wrote an article on the influence that board papers could have on the effectiveness of boards. The idea appeared to be simple: a good pack of documents help the board achieve good decision-making processes. Companies though need to chase contributors, organize the materials, send them (email -weight, security…- or other channels),  grant directors enough time to review the materials and build their opinions, include analysis beyond data, etc.

Edge outlined the following problems related to the packs:

          Excess of weight.

          Lack of consistent structure, (bad user experience to use a current term).

          Lack of an executive summary

          Lack of clearly proposed resolutions and visual aids, (charts and the like).

          Not always there is enough context, relevance, concise focus, etc.

          Finally, digitization is needed, (there are numerous platforms already in the market).

In May 2018 David F. Larcker and Brian Tayan (2) wrote a small article related to the topic, with a very particular example: Netflix. Larcker and Tayan describe some of the problems also described above and others, such as the restrictions arising to content distribution where a dominant CEO wants to keep an information gap (and stemming control) this way, -either in the packages or in the cooperation by managers-. We will follow their insights in what follows.

Blog-1-Stay-Informed-495x400[1] Read more…

Directors´s Fiduciary Duties in an insolvent company

How should directors behave in the wake of insolvency? Should they still pursue the shareholders` value maximization? Are there other interests that should prevail instead?

This is the topic a March 2018 consultation by the British government tries to clarify, (1). The government seeks to maintain and reinforce a fair, open and attractive environment for businesses, which has benefited from an adequate and updated corporate governance framework. A good insolvency regime includes governance elements so that the events of insolvency due to failures in governance or to a reduced responsibility by directors when approaching difficult times are reduced to a minimum number.

The consultation aims at producing the tools that would help preserve the creditors´ ability to remain in business when debtors face insolvency situations.


 Previous status and context. (3) Read more…

Perpetual Dual-Class Stock, by Commissioner Jackson

February 17, 2018 1 comment

Recently elected commissioner of US SEC Robert J. Jackson Jr. recently shared certain personal remarks regarding the system of perpetual dual-class shares, (1) and (2).

I will simply refer to them in a very short post today, as the argument is very clear.

He first considers the constitutional principles in the US, which led to complete democracy, and rejects the idea that perpetual systems can be used by an elite to keep power and wealth or privileges forever (even after death so that their heirs inherit that package). Read more…

Arguments in favor of Intergenerational Equity as a fiduciary duty by Directors.

January 21, 2018 Leave a comment

Survival. Success. Long-term interests of shareholders (or/and stakeholders). Intergenerational equity.

When analysts consider climate change, the use and (present and future) availability of resources, the population growth, urbanization in modern and developed societies, all above-mentioned concepts naturally arise.

Arjya B. Majumdar (Associate Professor at Jindal Global Law School) reviews this topic in a recently published article, (1).

Every international meeting recognizes our obligations to preserve environment and create broader prospects for future generations. Rawls considered this a matter of justice, (2), and this helps understand a moral duty we all may feel to save (so, sacrifice) and contribute for the future of new generations, (Meyer ,(3)).

What the author tries to unveil though is whether there is a law case in favor of intergenerational equity.

Directors´duties towards future shareholders. Read more…