Posts Tagged ‘long-term value creation’

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…


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…

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…

Performance Metrics and long term alignment (III)

January 24, 2015 5 comments

In this third and last post based on the IRRC Research Report, on The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design”, (1) and (2) , we will refer to the alignment between Compensation and Value Creation. See our previous posts here (3) and here (4).

The survey shows that there is a low correlation between performance and compensation, even when pay is measured as Realizable Pay, (thus including the value change in unvested equity). The authors explain that this is partly due to something slightly unavoidable: the fact that pay needs to be competitive, so that correlation with value drivers, economic returns and underlying five-year economic performance suffers.

In any case, the research (by Shareholder Value Advisors) considers 75% of change in Ceo pay is explained by certain known factors, only 12 points out of these 75% are tied to performance, (revenue size, industry and inflation account for 44 points and previous years`s compensation accounts for 19 points).

The authors then analyze the state of the art in Long-Term Compensation Design. Read more…

Performance Metrics and long term alignment (II)

January 17, 2015 5 comments

(continues from our previous post).

Using TSR to measure Long term Performance: other metrics.

 The authors identify (see graph below) a large percentage of firms in their sample that while having a positive 5-year relative TSR, achieved a negative cumulative 5-year Economic Profit (EP), and a return on invested capital lower that their respective Wacc. These firms seemed to have a value destroying business model; they also identify 17% of firms where the opposite happened. 65% of firms in the sample had aligned TSR and Economic Profit in a 5-year period. 42% of the sample consisted in firms that had cumulative negative EP in the period.


What should managers conclude from this TSR-EP analysis? Read more…

Visionary Board leadership. Stewardship for the Long term.

December 11, 2013 Leave a comment

What are the areas where boards need to focus on to help the company increase its long-term value?

In this post we will comment the article by the CFA Institute “Visionary Board leadership. Stewardship for the Long term”, by Matthew Orsagh, CFA, CIPM. (1)

They try to describe Visionary Directors: directors that are “committed to working with management to make a company successful in the long-term”. In other words, a Visionary Director does not allow for “corner-cutting strategies to meet fleeting short-term expectations”. Directors, (if properly embedded in visionary boards) strengthen leadership and foresight to fight against the short-termism reigning in the boardroom.

There are some areas in which a director can make a difference; (i) for instance, if he/she develops and appropriate role in strategic planning and oversight; (ii) if they correctly define the risk appetite of the firm, if they ensure an Enterprise Risk Management system is in place and they oversee its execution; (iii) if they establish Compensation systems that push employees and managers to long-term value creation; (iv) or if they define the correct long-term culture of the firm. Read more…