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Stewardship and Engagement

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…

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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.

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 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…

Increasing shareholder concentration, voice and exit

November 26, 2017 Leave a comment

In my 2017 July 9th post (1) and following Gilson, Ronald J. and Gordon, Jeffrey N., (2) I suggested that the increase of the role of Institutional Investors as well as the concentration in their industry operated against voice as a control mechanism by shareholders. According to them, this also fueled the role of activist investors in assessing performance (Corporate governance, strategy, capital allocation, etc.) and using voice to improve it, (their success needing support from institutional investors when voting is required).

I also tried to understand why and when II prefer exit to voice in certain circumstances, (as in small firms providing wider and cheaper information, or when blockholders prevent voice from being effective), in (3) and following (4). Read more…

The Stakeholder Theory of the Firm. Concepts, Evidence, Implications.

November 12, 2017 Leave a comment

Back in 1932, E. Merrick Dodd Jr. wrote in the Harvard Law Review: “If the unity of the corporate body is real, then there is reality and not simply legal fiction in the proposition that the managers of the unit are fiduciaries for it and not merely for its individual members, that they are . . . trustees for an institution [with multiple constituents] rather than attorneys for the stockholders.”

In 1995 in the Academy of Management Review, Thomas Donaldson (Georgetown Univ.) and Lee E. Preston (U. Maryland) published a remarkable article on the Stakeholder Theory of the Corporation, (1), where they focused in the theory`s descriptive, instrumental and normative validity. They asserted the normative approach to be supportive of the other two.

In this post, we will review the article in order to expose the basics of the Stakeholder theory and its practical implications. The theory could be said to be firstly proposed in 1984, when R.E.Freeman published his book “Strategic Management: a stakeholder approach”, (2). A huge body of literature followed, which Donaldson and Preston try to codify. Read more…