Long-term Shareholder Research Articles

Does mandatory CSR provide long-term benefits to shareholders?

PurposeMandatory corporate social responsibility (CSR) aims to protect the long-term benefit of shareholders; therefore, this study aims to seek empirical evidence for the benefit of mandatory CSR from the perspective of shareholders.Design/methodology/approachConsistent with the objective of this study, the long-term shareholder benefit is measured using the sustainability perspective. Companies listed on the Indonesia Stock Exchange that have at least five years of CSR implementation, as its mandate and have retroactive earnings data for minimum six years before the observation year are selected as the study’s sample.FindingsThe findings support that mandated CSR protects long-term shareholder value; there is a significant association between CSR and sustainable shareholder value. Industry profiles are an essential aspect of the association model. The results are robust through testing the association for various scenarios of time.Research limitations/implicationsThis study uses a single measurement of shareholder value based only on accounting measurement. Further, due to limitations in accessing internal company data, this study relies on annual reporting information to measure CSR implementation.Originality/valueThis study is the first to provide empirical evidence of the long-term benefit of mandatory CSR from the shareholders' perspective. This study also contributes to the existing literature by evaluating the success of mandatory CSR in developing countries. Those that successfully implemented mandatory CSR can serve as a model for other developing countries interested in creating similar policies to encourage socially responsible companies.

Extreme Stock Market Performers, Part I: Expect Some Drawdowns

Even those long-term shareholders who were rewarded with the greatest cumulative returns endured large price declines over shorter intervals. I study shareholder wealth creation for all publicly-listed U.S. common stocks during each of the seven decades since 1950. Focusing on the 100 most successful stock/decades in terms of shareholder wealth creation, I document even within the highly successful decade, shareholders experienced draw-downs that lasted an average of 10 months and involved an average loss of 32.5%. During the immediately preceding decade, draw-downs for these highly successful stocks lasted an average of 22 months and involved an average cumulative loss of 51.6%.

Shareholderism Versus Stakeholderism – a Misconceived Contradiction. A Comment on 'The Illusory Promise of Stakeholder Governance' by Lucian Bebchuk and Roberto Tallarita

This paper critiques an assessment by Bebchuk and Tallarita (BT) of the relative merits of shareholder and stakeholder governance. BT’s paper argues that stakeholder governance is either nothing more than enlightened shareholder value, or it imposes unmanageable tradeoffs on directors of companies. But trade-offs are ubiquitous not just in stakeholder but also in shareholder governance, and the resulting judgments that are required of directors should not be viewed as an anathema but a fundamental function of a board, without which untenable outcomes result. The complexity that BT see in implementing a stakeholder system reflects a failure to recognize the way in which business routinely makes judgments based on its purposes and values. Purpose and values hold management to account to a degree that enlightened long-term shareholder value cannot. In seeking to demonstrate that directors are not motivated or able to promote anything other than shareholder value in a shareholder-oriented system, BT merely describe the system that they see rather than analyse what it could or should be. The paper therefore fails to provide a benchmark against which it is possible to evaluate either the comparative merits of shareholder and stakeholder systems, or alternative proposals for reform.

Institutional investors' horizons and corporate employment decisions

Monitoring by long-term investors should reduce agency conflicts in firms' labor investment choices. Consistent with this argument, we find that abnormal net hiring, measured as the absolute deviation from optimal net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment (under-hiring) in employees. The monitoring role of long-term investors is stronger for firms facing higher labor adjustment costs both in absolute terms and relative to capital adjustment costs, and those for which human capital is regarded as more important. The effect is also more pronounced for firms that have stronger incentives and/or more opportunities to deviate from expected net hiring. We address endogeneity concerns by exploiting exogenous changes to long-term institutional ownership resulting from annual reconstitutions of the Russell indexes.

ENTERPRISE RISK MANAGEMENT PRACTICES AND ITS IMPACT ON FIRM PERFORMANCE: EVIDENCE FROM SRI LANKAN INSURANCE INDUSTRY

Enterprise risk management (ERM) has gained an increased attention among the corporate managers in the recent past as a strategic approach to managing risk. This study empirically verifies whether the adoption of ERM has an impact on firm performance and uses both primary and the secondary data relating to the insurance companies listed on the Colombo Stock Exchange. Return on equity (ROE) is used as a proxy to measure the firm performance and multivariate regression analysis is used to analyze data. The findings of this study suggest that there is a weak positive relationship between the adoption of ERM practice and the return on equity. Out of the eight ERM functions assessed, only ‘event identification’ and ‘control activities’ show a weak positive relationship with ROE. Other ERM functions indicate that there is a weak negative relationship with ROE. The findings of this study contradict with some scholars who find there is a significant positive relationship between adoption of ERM and firm performance. Owing to the contradictory nature of the findings, this study induces corporate managers to pay a close attention to the cost-benefits analysis when designing and implementing ERM system and not to heavily invest and extensively relied upon ERM as a vehicle for creating long-term shareholder value.

Should the Modern Corporation Maximize Shareholder Value?

Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder value remains controversial. We argue that under certain broad assumptions, the admonition remains a good place to start. To strengthen the prospects for success of long-term shareholder value maximization, we suggest steps to align shareholder wealth maximization with stakeholder interests. First, antitrust public policies should be vigorously enforced to maintain and enhance competition in product markets and labor markets. Second, management and board compensation should be reformed to focus on creating and sustaining long-term shareholder value. Finally, and more importantly, for many of society’s serious challenges, corporations do not represent the appropriate level of action. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Turning more to corporations because the political process seems broken will not do.

Managerial Market Timing: What Is the Pot Size for Long-Term Shareholders Assuming Firm Management Acts in Their Best Interest and Does Have an Informational Advantage?

Assumed managers act in best interest of their long-term shareholders and do have superior information, within this paper the potential value gain from the perspective of a diversified investor is quantified with a stochastic model. If firms have flexibility and are able to issue or buyback shares up to 25% of their market capitalization an annualized average value gain between 0.08% (fair low-opportunity market) and 14.41% (fair high-opportunity market) can be realized in case firms' management perfectly exploit the Market Timing opportunities. In case firms' management err in 5% of their equity transactions the corresponding annual gains amount to -0.13% and 5.41%. We conclude that managerial Market Timing provides significant potential for long-term shareholders with equity market characteristics, flexibility and firms' management skill being the key determinants. Long-term investors should grant limited flexibility to firm management and firm management should avoid too prompt exploitation of opportunities due to price pressure effects.

Siemens and Healthineers: Valuing the IPO

This case covers the initial public offering (IPO) of the Siemens AG subsidiary Healthineers. The case offers the opportunity to discuss IPOs and to value the company. In contrast to A Strategic (UVA-F-1881), which provides some base case valuation analysis, this version of the case is designed to be used when a primary teaching objective is to have students perform more of the analysis. The material is set in 2018, when CEO Joe Kaeser and the management board of Siemens planned an IPO of its Healthineers subsidiary to support the company's continued success and spur entrepreneurial independence. The IPO would position Healthineers to compete successfully in the global health care market, which was quite different from other sectors in which Siemens, a global technology conglomerate, operated. While Siemens would maintain a substantial equity interest, Healthineers would become a separate public company with increased flexibility and autonomy. In the immediate term, the management team was especially interested in what value financial markets would place on Healthineers once it was a public company. Excerpt UVA-F-1913 Rev. Feb. 24, 2020 Siemens and Healthineers: Valuing the IPO By early March 2018, CEO Joe Kaeser and the management board of Siemens AG (Siemens) had been focused on the progress of its Healthineers subsidiary for several years. Management planned an initial public offering (IPO) of Healthineers in mid-March to support the company's continued success and spur entrepreneurial independence. The IPO would position Healthineers to compete successfully in the global health care market, which was quite different from other sectors in which Siemens—a global technology conglomerate—operated (see Exhibit 1). Though Siemens would maintain a substantial equity interest, Healthineers would become a separate public company with increased flexibility and autonomy. Because Siemens would be a long-term shareholder, Kaeser and the board had a keen interest in Healthineers's strategy and performance. Would the company continue to drive profitable growth in the short term? Tap into adjacent growth markets in the medium term? Be a market leader in health care? In the immediate term, the board was especially interested in what value financial markets would place on Healthineers once it was a public company. Siemens Healthineers AG . . .

Shifting Sands Whilst Sifting for Profits: Evolving Patterns of Firm Size and Performance in the U.S. Economy

Research Summary: Firm size has long been recognized as a source of competitive advantage. However, the disruptions arising from the knowledge-based global economy are decoupling the link between firm size and profitability. We demonstrate in this article, the structural shifts and evolving patterns in the U.S. industrial economy by capturing the emerging disconnect in the relationships between firm size, growth, and financial performance across multiple industries with a long-range COMPUSTAT panel data. We highlight the emerging challenges to the field of management from the paradigm shifts occurring due to the disruptive technologies, broadening global competition, dynamic consumer trends, and volatile financial markets for the past three decades. We further discuss the implications for corporate strategy, governance, and organization. Managerial Implications: Although it has been a well-established notion that large organizations with more capital and assets will enjoy the advantages of high profitability, in recent times, the large firms are increasingly experiencing the financial crisis. The widening gap between firm size, capital structure and, profitability for the past three decades implies increased risk to long-term investors. The trodden path of mergers and acquisitions for quick growth, consolidation, or diversification is not translating into long-term shareholder value. Given the disruptive technologies, shortened product life cycles, and continuously changing industry structures, firms’ growth strategy must incorporate the agility, speed, and responsiveness. Firms need to build trust-driven, symbiotic, and dis-aggregated form of organization and reconfigure the value chain to reduce both coordination cost and investment risk.

The Jobs Act Did Not Raise IPO Underpricing

While the intended goal of the 2012 JOBS Act was to ease access to capital for Emerging Growth Companies (EGCs), prior studies, notably Barth et al. (2017), find evidence of an increase in IPO underpricing and a higher cost of equity capital for EGC issuers. Using a difference-in-differences design, we find that changes in overall IPO market conditions explain the seeming increase in IPO underpricing. In fact, EGC issuers that take advantage of the accounting disclosure relief afforded by the Act raise capital at higher pre-IPO multiples. These reduced-accounting disclosure EGCs have more speculative valuation profiles and lower institutional ownership and are more likely to destroy long-term shareholder value in the IPO aftermarket. Overall, our paper offers an alternative perspective on the effect of the JOBS Act on IPO pricing.

The Real Effects of Environmental Activist Investing

We study the real effects of environmental activist investing. Using plant-level data, we find that targeted firms reduce their toxic releases, greenhouse gas emissions, and cancer-causing pollution. Improvements in air quality within a one-mile radius of targeted plants suggest potentially important externalities to local economies. These improvements come through increased capital expenditures on new abatement initiatives. We rule out alternative explanations of decline in production, reporting biases, and forms of selection, while also providing evidence supporting the external validity of environmental activism. Overall, our study suggests that engagements are an effective tool for long-term shareholders to address climate change risks.

DIREKTIVA (EU) 2017/828 O IZMJENI DIREKTIVE 2007/36/EZ U POGLEDU POTICANJA DUGOROČNOG SUDJELOVANJA DIONIČARA I NJEZINA IMPLEMENTACIJA U HRVATSKO PRAVO DRUŠTAVA

Izmjenama i dopunama Zakona o trgovackim drustvima iz travnja 2019. godine usklađuju se njegove odredbe s odredbama Direktive (EU) 2017/828 o izmjeni Direktive 2007/36/EZ u pogledu poticanja dugorocnog sudjelovanja dionicara. Time se uvode novi regulatorni zahtjevi za uvrstena dionicka drustva radi poticanja dionicara sudjelovati u radu glavnih skupstina kada za njih dionice pohranjuju i prava iz njih ostvaruju posrednici. Uvodi se transparentnost institucionalnih ulagaca, upravitelja imovinom i savjetnika pri glasovanju o njihovoj politici sudjelovanja, dogovorima i pružanju usluga na glavnim skupstinama drustava. U određivanje politike primitaka clanovima uprave, odnosno izvrsnim direktorima tih drustava ukljucuju se dionicari te se propisuje obveza izrade godisnjeg izvjesca o primitcima clanova upravnih, odnosno nadzornih tijela te izvrsnih direktora. Poslove drustva s povezanim osobama mora prethodno odobriti nadzorni, odnosno upravni odbor drustva te se oni objavljuju na mrežnim stranicama drustva.

Corporate Finance and Sustainability: A Teaching Note

In the transition to a sustainable economy, companies are increasingly adopting the goal of In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. That raises the fundamental question in corporate finance about the objective of the corporation. The current objective is maximising profit, which boils down to maximising shareholder value. But the shareholder model is holding companies back from sustainable business practices. An enhanced shareholder view recognises that it is instrumental to treat the other stakeholders well in order to preserve long-term shareholder value. An alternative view is to broaden the objective of the corporate to optimising the integrated value, which combines the financial, social and environmental value. In that way, the interests of stakeholders are ranked equally. Such a move to the stakeholder model requires new rules for corporate governance and decision-making on corporate investments to deal with the various interests of current and future stakeholders. This Teaching Note can be used in courses on corporate finance. It complements corporate finance textbooks, which usually adopt the shareholder model.

Shareholder Engagement for Corporate Governance in the Light of the Harmonization and Transposition

Purpose: This comparative study holistically assesses the EU harmonization and various transposition strategies embraced by EU member states to implement measures for corporate governance, namely for the sustainable corporate governance. Design/Methodology/Approach: The contribution and the relevant methodology is based on a duality of purposes. They are (i) on a review and analysis of EU harmonization endeavors designed to shape the exercise of shareholders rights and specifically encouraging a long-term shareholder engagement as the vehicle to increase corporate social responsibility (CSR) and (ii) on a pioneering critical comparative Meta-analysis of selected transposition strategies and their potential to testify about the genuiness of the underlying commitment. Findings: Based on the holistically implied arguments and yielded results, it is proposed that, despite rather clear EU harmonization measures, there are dramatic differences in transposition strategies testifying about deep differences in the approach to corporate governance and CSR across the EU. Practical implications: Based on addressing its dual purposes, this study sheds a new light on the perception and attitude to the corporate governance, shareholder long-term engagement, CSR and their framework in the EU. This leads to a set of recommendations to increase the effectiveness and efficiency of the current harmonization endeavors. Originality/Value: Although this study organically builds upon recent studies about corporate governance and CSR, it brings a pioneering comparative assessment of transposition strategies and an innovative idea to use it as a well founded instrument to understand and appreciate the harmonization potential in this field and to improve it.

Encouraging Long-Term Shareholders: The Effects of Loyalty Shares With Double Voting Rights

The 2014 passage of the Florange Act in France changed an opt-in provision for loyalty shares (allocating a second voting right for shares held at least two years) to an opt-out provision with shareholder approval. We find that before 2014, loyalty shares were popular among small family firms. Following the Act, firms with a one share – one vote structure that announced they would opt out of the law incurred a negative market reaction, suggesting that shareholders have a positive perception of loyalty shares. It appears that by encouraging costly monitoring by long-term shareholders, loyalty shares can potentially benefit all shareholders.

A Stakeholder Resource-based View of CSI: Evidence from Shareholder Value Destruction in China

Using the resource-based theory (RBT) and the stakeholder perspective of RBT (SRBT), this study examines the impact of corporate social irresponsibility (CSI) episodes on long-term shareholder valu...

Designing Business Forms to Pursue Social Goals

The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this Article argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries—rather than for shareholders. Because it is difficult to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms. While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This Article develops a social enterprise legal form that draws on the legal regime for community development financial institutions (CDFIs) and European legal forms for work-integration social enterprises (WISEs). This form would certify to investors, consumers, and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors. Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.

Promoting Long-Term Shareholder Value by “Competing” for Essential Stakeholders: A New, Multisided Market Logic for Top Managers

The single-minded pursuit of a short-term shareholder value maximization “mantra” by top managers often results in long-term value destruction for shareholders. We explain this paradox and develop ...

Three Dilemmas for Creating a Long-term Board

Arguably among a company’s biggest untapped strategic assets, a well-functioning corporate board of directors wields the power to meaningfully influence the purpose, culture, and direction of an organization. While many boards may display good corporate governance principles, the most effective boards at leading companies for long-term value creation are truly long-term boards. These long-term boards may look different around the world, but they share a few key characteristics: Time spent on Strategy – Long-term boards prioritize the future of the business, including spending significant time on strategy, business model, risks, and the company’s value creation proposition. Directors as Owners – Long-term boards build and perpetuate an effective board over time by acting like owners, aligning the board’s interests with shareholders, often via stock ownership. Board level Engagement with Shareholders – Long-term boards possess a strong understanding of the objectives of long-term shareholders and regularly engage with them on topics of strategic importance. However, achieving this combination of characteristics presents the board with three meaningful dilemmas: Should boards devote more time to strategy by spending less time on routine matters or do they need to spend more time on board work overall? Can board members be meaningful owners of the companies they serve without getting caught up in the short-term pressures caused by gyrations in market valuation and volatility? How do board members engage with shareholders without distracting or undermining management? Through a series of in-depth interviews with institutional investors, senior directors, and board consultants we gathered perspectives on how leading boards have tackled these challenges and found that getting these things right often creates a virtuous cycle that entrenches a long-term approach to value creation at the board level.

Decoupling management inefficiency: Myopia, hyperopia and takeover likelihood

Using combinations of accounting and stock market performance measures, we advance a comprehensive multidimensional framework for modelling management performance. This framework proposes “poor” management, “myopia”, “hyperopia” and “efficient” management, as four distinct attributes of performance. We show that these new attributes align with, and extend, existing frameworks for modelling management short-termism. We apply this framework to test the management inefficiency hypothesis using UK data over the period 1988 to 2017. We find that takeover likelihood increases with “poor” management and “myopia”, but declines with “hyperopia” and “efficient” management. Our results suggest that managers who focus on sustaining long-term shareholders' value, even at the expense of current profitability, are less likely to be disciplined through takeovers. By contrast, managers who pursue profitability at the expense of long-term shareholder value creation are more likely to face takeovers. Finally, we document the role of bidders as enforcers of market discipline.