Posts Tagged ‘Voting Rights’

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…


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…

Agency Costs and Institutional dominated share ownership: activists and governance

July 9, 2017 1 comment

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).

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Voice: the perspective of Minority Shareholders

June 18, 2017 1 comment

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…

How are board directors elected? The Spanish case.

January 17, 2016 Leave a comment

In a previous post, (1) I briefly compared the US/Canada system to elect directors to a board with the Spanish case. Not being an expert in the North American system, I only considered the main difference with the Spanish system. In a very recent post (2) I again dealt with the Proxy Access failed legislation and the recent trend in US companies to receive shareholder proposals that aim at introducing it in a company by company case, (modifying the company bylaws).

In this post though, I will try to unveil the Spanish electing system, which in public companies combines proportionality with different majority systems.

First, we will refer to the different qualification of directors according to their origin, as described by the Spanish (CL) Corporate law`s article 529 duodecis (3): Read more…

Proxy Access and Proportional Election systems

January 16, 2016 2 comments

I will herein introduce a topic suggested by Prof. Bainbridge in its recent post “Does proxy access matter?”, (1).

 While the post refers to Proxy Access, which is currently a trendy topic in Corporate Governance discussions in the USA, we will deal with a side issue.

 Proxy access is a “mechanism that gives shareholders the right to nominate directors and have those nominees included in the company’s annual meeting proxy statement.” Read more…