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Posts Tagged ‘governance’

The Case Against Passive Shareholder Voting, by Dorothy Shapiro Lund

The increase in the power of shareholders faces big challenges as regulation is not necessarily followed by a correct valuation of voting (the most powerful of their capacities), by them. The One Share One Vote principle is affected by dual-class share systems and no voting shares; but shareholders also suffer from rational apathy and collective action problems, so that the objective of empowering shareholders is not easily reached. See my previous posts on the topic here (1)

Dorothy Shapiro Lund from the University of Chicago recently published an article in which she analyzes the effect on rational voting practices stemming from the shift of investors (American in her study) from actively managed funds investing into (indexed) passive funds. (2) She states this trend will damage the market for corporate influence, thus lowering the discipline imposed on managers. Their investment in Corporate Governance (CG from now on) and/or in gathering firm-specific information leaves them with the cost and only a small fraction of the eventual profit…so they lack the financial incentive to invest. Furthermore, passive funds are less likely to channel funds to hedge funds, (which could help correct the problem, -see (3)), and will adhere to low-cost governance solutions, following proxy advisors or simple-not-so-smart criteria).

150331130735-motley-index-funds-780x439 Read more…

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The US Corporate Governance Framework

Literature on Corporate Governance (Corpgov) often comes from the US; many Corpgov institutions have been born in the US; the big controversies regarding board effectiveness, executive pay, and any other Corpgov matter are often raised in the US…..but what is the Corpgov framework in the US? I have ofter read about the US Corpgov without having a systemic knowledge about the framework that defines it. I will try to learn and offer a view of that in the present post. (1)

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The era after SOX (Sarbanes Oxley Act in 2002) unveils differences between the USA Corpgov system, (regulatory or hard law and “one size fits all” regime) and the UK one, (based on soft law or codes, and the “Comply or Explain” principle). Differences also affect gatekeepers, (subject to regulation by Agencies such as the SEC) and the market for corporate control.

 

  1. Peter V. Letsou describes the shared regulatory responsibility in the USA by the States and the Federal Government.

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Overview of the main Corporate Governance topics

Included as a preface in their forthcoming book “Understanding the company: Corporate Governance and Theory”, Barnali Choudhury and Martin Petrin offer a brief summary (1) of academic debates on the topic, mainly regarding:

  • The nature of the firm. A debate that started at the Roman times and gained intensity in the XIXth century. Although scholars and courts have given up in their effort to define the “nature of the firm”, two opposite views dominate the debate; on the one hand, the nexus of contracts model describes the firm as a set of contracts between different constituencies which so aim to produce goods and services, and thus constitute a firm. The Director Primacy theory extends this view, defining the firm not as a nexus of contracts but having a central nexus, the board of directors. Corporate law consequently intends to reduce the cost of negotiating, settling the concepts and basis for it. The nexus of contracts theory is connected with the Shareholder Primacy theory and the idea that shareholders´ interest should precede other constituencies´ones, and that corporations have no social or moral duties. (A recent decision by Google based on moral or social reasons recently generated some criticism as for the possibility that shareholders could sue directors for having breached their fiduciary duties, (2)).

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Is Bad Governance Chronic?

Once again Larcker and Tayan (Stanford Graduate School of Business and Stanford Closer Look Series, Corporate Governance Research Initiative (CGRI), April 14, 2016) offer us their insightful views on Corporate Governance, and we will briefly draft their contribution in this post.

In their brief article “Governance Aches and Pains: is bad governance chronic?”(1) they present us their view on Bad Governance as a common species, and particularly their perception that Bad Governance is often discovered only once bad decisions (damaging the interest of the corporation and its shareholders) have been adopted. They argue that governance quality is not easy to assess for shareholders and advisors.

In brief they advocate for a bigger awareness by shareholders of the relevance of corporate governance and the need for better discerning tools by them in order to use corporate governance more as an indicator for future bad performance than as a proof that there was a something that had to be tackled before the damage happened.

Larcker and Tayan describe some cases that help them expose their views: Read more…

Deloitte on the ingredients boards need for success (in 2016)

February 13, 2016 Leave a comment

In a recently published report, Deloitte highlights some concerns boards should have in order to maximize their performance, given the economic and investment environment, and also the current trends relevant shareholders are focusing on these days.

 You can download the report here, (1), but I will in this post refer to one of the topics they deal with, “Innovation”.

 Marc Van Caeneghem and Takeshi Fujii refer to changes in the environment coming from the technological side, (not always but eventually in the shape of disruptive new business models), and from the new relationship among employees and between them and the firm.

 They state that boards need to prepare their organizations to identify and seize opportunities to increase their market share and brand power. And there are two ways boards need to tackle the challenge: (i) they need to assure the firm is aware of how technology helps them do more, (new markets, or more share), and (ii) they should also consider the risk of the no-innovation option.

 In order to do this, Van Caeneghem and Fujii list a number of tasks: Read more…

The international evolution of activism

News on activists and their campaigns have multiplied in the last years, and concerns among possible targets has also risen, which may have fostered consultations and analysis on how to prevent an attack and how to react to it when it comes.

In a recent paper, Angela Giovinco, a Sodali executive, tried to understand all these trends. (1)

 

She refers to some stylized facts:

  • Target companies have become bigger,
  • Activists don`t only focus in unlocking value by replacing managers and directors, or alter the financial strategies in the company. Their strategies have become much more complex.
  • Target companies are not necessarily underperforming companies; they don`t need to be in crisis or restructuring situations, (see Dupont`s case in 2015).
  • Money has recently poured into activist tools, such as hedge funds.
  • Activism started in the USA, in the 1980`s, but since then it has spread to Canada, UK and other European countries.

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What do investors expect from a proxy statement? How should it be?

What would proxy readers like to get rid of?

 

According to Nicholas Rummell, (1), size is the first obstacle to a useful proxy statement. Complex language and structure could be the following. Poor design and graphing also hinders an easy reading. Inconsistency through time is a noise too.

What changes could help? A good skills and capacities matrix for directors and their photos would help understand board quality, composition and diversity. Proxy design also helps: tables, colours, different fonts, etc. Remarking particular features that have been newly adopted or abandoned is a good idea also, according to Rummell.
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