Author Archive

Why do boards exist? The board as a team and its superiority.

The post follows an article by Stephen Bainbridge, William D. Warren Distinguished Professor of Law at the UCLA School of Law in Los Angeles, (1).

A) The board statutory role.

Boards are given by Corporate Law the power to manage companies, while shareholders are only entitled to vote a few things and react in a limited number of situations. Decisions at the board (or any other group) should be done through “consensus”, efficient when members of an organization have very similar information and interests, or “authority”, efficient when this is not the case and somebody gathers information and adopts the correct decisions, (see (2)).

Boards nevertheless are not there to manage day-to-day operations as Corporate Law grants the role of those under whose authority companies are run (by managers nominated by boards), in a waterfall of authority and power delegation. Companies have nevertheless become more a hierarchy of teams than of individuals.


Although hierarchies are accepted as more efficient in complex organizations, both New Institutional Economics (3) and Behavioral Economics (4) accept their members to be only rationally bounded individuals. Branching hierarchies (waterfall of small groups) are an efficient solution to this reality, (both in production and transfer of information and in limiting agency costs –though with the problems of incomplete contracts, collective action problems, etc-). Contracting is an efficient ex-ante mechanism and governance an ex-post one, leading to reduce shirking and punish it, (see for example the M-form corporation).

At the top though there is a team, the board, not an individual. As there are problems arising for that, (individual input measurement, task often being even non separable, the creation of intra-team specific human capital, social loafing due to coordination, motivation difficulties, etc), the questions arises as to why a collective body at the top has been chosen. Read more…

Agency Costs and Institutional dominated share ownership: activists and governance

Summary: Institutional Investors (II) -such as mutual funds- are rational while not doing research and issuing shareholder proposals; activists and hedge funds may have a role issuing those proposals, so that others have an option to increase their voting value. (See (1) and (2) by Gilson, Ronald J. and Gordon, Jeffrey N. and by Bebchuk, Lucian A. and Cohen, Alma and Hirst, Scott respectively.

The fact that property is concentrated in II makes the world of Berle and Means outdated. A new agency problem arises between record owners, (II now) and managers, but also between record owners and beneficial owners, (this is what they call “Agency Capitalism”, where II or agents hold investments on behalf of final or beneficial owners).

Read more…

Voice: the perspective of Minority Shareholders

In firms with concentrated structure, (be it because of the economic stake or as a result of multiple-share capital structures, or as a result of the retail shareholders´apathy), the fact that controlling shareholders can extract private benefits from other shareholders, who still remain passive is appealing, and constitutes the theme for Dov Solomon´s “The voice: the minority shareholder´s perspective”, published in May 2017, (1).


Rational apathy (2) has been identified as a main factor for the passive attitude, and measures addressing it try to (i) increase the benefits arising from participating and voting: rising the influence in the voting outcome pushing institutional investors to vote; (ii) decrease the costs of voting, introducing online voting for instance. If voting reality improved, all other activism tools would be enhanced also, thus its relevance. Read more…

Controlled Companies and Independent Directors

Lucien Bebchuk and Assaf Hamdani have recently published an article, (1) in which they present an alternative to current director elections so that true independence is assured, in particular at controlled companies, where beyond the fact that Nomination Committees are responsible for the selection, controller shareholders usually de facto fully control the procedures so that independence does no actually happen, (as it may be thought to be the case at widely held companies).

Enhanced Independence (as they call it) may emerge if directors are held accountable by public investors; Bebchuk and Hamdani think that not only controller shareholders are to be dispossessed of their complete influence in the nomination process, but that some influence must be granted to public investors, at least regarding some of the independent directors. Their influence can be executed in appointment, reelection and termination decisions.

Bebchuk and Hamdani state that even with director nomination restricted to Nomination Committees populated only with independent directors, controller shareholders have a big say in the process. Independent directors cannot be elected or reelected without their decisive voting rights as shareholders, and also find it difficult to remain when controlling shareholders leave the company. Apart from the social gratitude stemming from having been elected, directors very often suffer the direct or indirect, explicit or not pressure from controller shareholders regarding decisions that affect them and value, particularly related-party transactions. Read more…

Corporate Governance and the Sharing Economy

In a world of robots interacting with humans and learning out of the process, while connected with all other robots in a network; in a world of artificial intelligence, disruptive technologies and new business models arising from them; in this world regulation starts to change: why do we need CFA`s in a world where financial advise is produced with algorithms? In this world firms also start to reject IPOs fearing their innovation capacities would fade away, (Uber, Airbnb, …), or introduce dual-class share systems to keep control on it and the long-term perspective.

Mark Fenwick and Erik P.M. Vermeulen in a paper called “How the Sharing Economy is Transforming “Corporate Governance”, (1) refer to the new changes Corporate Governance faces and needs if boards are to gather survival and success for their companies.

For them what is relevant is whether these new big companies are able to develop a system that is inclusive of all stakeholders, (shareholders interests, oversight, and other currently accepted needs fall apart).

Screenshot - 14_05_2017 , 21_05_35

(Source (1)) Read more…

How to conquer a rational long-term growth path, by Juan María Nin.

With a Neo-Austrian economic background and a deep knowledge of the roots of the Great Recession started in 2008, (dated well before though) Juan María Nin explains in his recently published book, titled “For a rational (economic) growth” and subtitled “From the Great Recession to Stagnation: Solutions to compete un a Digital World”(1), his recommendations for structural change. He states thar our economies need to escape from the current low-growth or recession situation and from the institutions and structures that generated it since we accepted: (i) A money generation monopoly by Central banks or similar institutions, (Fed); (ii) a fractionary reserve banking system and the subsequent working capital structural deficit in the banking industry; (iii) a monetary policy-led constant inflationary pressure, the bubbles arising from them, and the banking failures emerging from them; (iv) the necessary last resort lender role of central banks and the public support when things go bad for the private bank balances, (v) a tacit agreement in exchange for the loans granted to the public sector in his unstoppable growth path.

He suggests some structural and institutional changes if a rational path for growth not blindly based in debt, inflation and low interest rates is to be pursued: Read more…

Economic consequences of Shareholder Value Maximization (SVM)

Insead has recently published a short article (1) in which they try to draft the economic consequences of the SVM principle first made explicit by Milton Friedman. (2)

I will here only made some brief comments on several statements that I consider not rigorously introduced. Read more…