Shareholder Power Research Articles

Brokerage and Closure in Corporate Control: Shifting Sources of Power for a Fractured Corporate Board Network

Structural sources of power have shifted dramatically in corporate America. Recently, the fracturing of the corporate interlock network threatens corporate managers’ capacity to act as a unified group in support of their shared interests, potentially destroying managerialism and elevating shareholder power. Paradoxically, however, the fracturing of the corporate elite has not led to a widespread retreat of managerialism. Corporate managers have replaced their collective structural resources, embedded in their board interlock network, with organizational structural resources located within their firms. By adopting lone-insider board structures where the CEO is the only employee on the board of directors, CEOs establish brokerage positions within their focal firms, allowing them to preserve their autonomy even as the broader network withers. Firms nested in cohesive communities were the first to adopt lone-insider boards, supplementing and eventually replacing closure with brokerage as a structural resource. These alternative structural resources operated to preserve managerialism during different times. Network closure traditionally helped to preserve managerialism against shareholder pressure, but this effect disappeared as the network fragmented in the mid-2000s. In its absence, managers increasingly relied on organizational brokerage positions to maintain their autonomy. Consequently, managerialism remains surprisingly robust in the era of a fractured corporate board interlock network because top managers have become more focused on establishing positions of power within their own firms.

The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity

As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.

Labor Unions and Strategic Corporate Governance: A Balancing Act of Managerial Power and Entrenchment

This paper investigates the relation between unionization and corporate governance practices in the United States. For unionized firms to secure a bargaining advantage, we hypothesize that the managers of such firms will optimally adopt structures of governance that increase managerial power and reduce the influence of union-backed dissident shareholders. We also recognize a force that counteracts this power and avoids provoking quiet-life problems, leading to the prediction that unionized CEOs will face greater exposure to external discipline. Using a matching estimator with hand-collected data on unionization, we find support for our hypotheses. Unionized firms are more likely to unify the CEO and chairman positions, avoid voting mechanisms that increase the power of minority shareholders (e.g., cumulative voting), and install a younger board (i.e., a board that is more exposed to the market for directors). Finally, unionized firms are less likely to adopt golden parachutes and/or poison pills.

When Principals Conflict: Stakeholder Power, Executive Decision-Making, and the Manipulation of Pension Assumptions

Whereas the dominant theoretical perspective in corporate governance research attends to the conflicting interests between shareholders and executives, in practice executives must frequently adjudicate between the demands of multiple principals with conflicting interests. To investigate how executives cope with these conflicts, I examine how much firms claim they will earn on the assets in their defined benefit (DB) pension plans. In a DB arrangement, participating employees forgo wages in the present in order to receive post-retirement income and they rely on executives to properly fund and manage plan assets for future payout. Executives, however, can act opportunistically by increasing the amount they expect the firm to earn on plan assets, effectively lowering their pension expenses and boosting the firm’s earnings. Whether executives do so, I argue, is determined in part by the power and interests of employees and shareholders as well as the decision-making schemas of the CEO. Through a detailed analysis, I show that equity ownership by bank trusts and public pension funds and the presence of a CEO with a background in finance are associated with higher expected rates, while higher rates of firm unionization are associated with lower expected rates of return on such assets.

What Drives Shareholder Reaction and Wealth Effect in Block Trades? Evidence from the Warsaw Stock Exchange

ABSTRACTThe main objective of this article is to present the determinants of shareholder reaction to block trades and their wealth effect on the Warsaw Stock Exchange. The positive abnormal returns obtained for the entire sample indicate that block trades create shareholder value. Shareholders reacted positively to block trades without a control transfer in the Polish market, and their reaction was stronger than in the US market. Abnormal returns of block trades concluded at a discount were twice as high as those for the entire sample. Moreover, cross-border block trades had a negative impact on shareholder value creation, as did financial investors as an acquirer. However, cumulative average abnormal returns (CAARs) were driven up by the relative power of minority shareholders (ocean) prior to the transaction. The absolute size of the block acquired by an investor was also observed to have a positive impact on price rises and abnormal returns.

Governing the Good State Shareholder: The Case of the OECD Guidelines on Corporate Governance of State-Owned Enterprises

The newly revised Guidelines on Corporate Governance of State-Owned Enterprises (2015) by the OECD are fast emerging as a new regulatory paradigm for the administration of State-owned enterprises and the organization of the State ownership function. This article analyses the Guidelines’ policy prescriptions, governance strategies, and integration into global governance. Noting that the instrument operates by governing the shareholder’s internal make-up, decision-making and objective setting, the article argues that the Guidelines amount to a robust model for an ideal State shareholder – the Good State Shareholder. Efficient, engaged, and accountable, the Good State Shareholder emerges as a critical actor in the contemporary global economy, where States continue to amass and command immense shareholder power. However, when juxtaposed with the recent attempts by the UN to adopt State ownership as an instrument of human rights governance, the fault lines of the Good State Shareholder model, as well as the emerging techniques of shareholder governance, are exposed.

How Should States Own? Human Rights and the Fiduciary State Shareholder

This research tackles a deceivingly simple question: How should states own companies in the global economy? A legal intervention into a perennial question of economic policy and political theory, the research examines the international regulation of state ownership across four key regimes that create, shape, and maintain state shareholders. Focused on European law, transnational corporate governance, international investment law, and human rights law, the research suggests the emergence of a distinct international set of rules pertaining to state shareholder power — the global law of state shareholders. Positioned against the rise of state ownership during the past decade, the research unearths a range of commonalities in this budding body of law but ultimately submits that the novel regulatory interventions extended within the human rights regime expose an emerging normative rift in the superstructure of state shareholder regulation. When compared to techniques and normative positions undergirding the more established regulatory regimes, a human rights reading of state ownership seems to enable a policy entry-point for using state shareholder power to mitigate pressing global externalities such as corporate human rights violations or climate change. Because the national state ownership arrangements are inherently complex, they have been heavily scrutinized already before the contemporary ascent of state capitalism. As a response to this empirical, methodological and normative plurality, the research relies on a three-tiered fiduciary metaphor to probe and simplify the descriptive, analytical, and normative dimensions of state ownership and its regulation. The descriptive metaphor, the fiduciary state, recounts the empirical changes in the form of state ownership and teases out the empowered state shareholder as the key actor in the contemporary global economy. The analytical metaphor, the fiduciary state shareholder, builds on this insight and deploys a scheme where the international regulation of state ownership is understood as an upshot of shareholder duties. Finally, the normative metaphor, fiduciary sovereignty, connects the reality of contemporary state ownership and its regulation with the recent theorization of the state as a fiduciary of humanity. The fiduciary metaphor suggests that the category of the state shareholder, as an instrument of both simplification and theoretical development, is emerging as an attractive descriptive, analytical, and normative lynchpin to gauge the vast terrain of new modes of state ownership. It provides a macro view on the abounding forms of state shareholder power that characterize the current global economy, taps into the concomitant projects that emphasize the economic and social potential of state ownership, and suggests a principled, if yet underdeveloped and diffuse, way to explain how states should own companies for the benefit of the global beneficiaries that ultimately amount to humanity.

Innovative Enterprise Solves the Agency Problem: The Theory of the Firm, Financial Flows, and Economic Performance

Since the late 1980s, the dominant ideology of corporate governance in the United States has been that, for the sake of superior economic performance, companies should “maximize shareholder value” (MSV). As promulgated by agency theorists, however, MSV is an ideology of value extraction that lacks a theory of value creation. As a theory of value creation, I have constructed “The Theory of Innovative Enterprise” — an analytical framework for understanding how a business enterprise can generate a good or service that is of higher quality and lower cost than products previously available. In this essay, I use innovation theory to provide both a general theoretical critique and a selective empirical critique of agency theory. In Section 2, reviewing Bebchuk and Fried, Pay Without Performance (2004), I argue that the authors fail in their objective to demonstrate that U.S.-style stock-based pay undermines “shareholder value,” while I contend that, from the perspective of innovation theory, shareholder value is an illegitimate measure of corporate performance. In Section 3, focusing on Bebchuk, Brav, and Jiang, “The Long-Term Effects of Hedge-Fund Activism” (2015), which purports to demonstrate empirically that the exercise of shareholder power improves corporate operating performance, return on assets, and stock returns over periods of as long as five years, I argue that innovation theory casts serious doubt on their findings because the supposed long-term improvements in corporate performance could very well have resulted from cost-cutting that increased profits at the expense of the labor force rather than from productivity gains from the generation of higher quality products at lower unit costs — gains of innovative enterprise that are typically shared with the firm’s employees. In Section 4, I turn to a step-by-step critique of Fried and Wang, “Short- Termism and Capital Flows” (2017), which, taking issue with the central argument in my article “Profits Without Prosperity” (2014) that massive distributions to shareholders in the forms of dividends and buybacks have come at the expense of investment in innovation and higher wages, claims that a number of other sources of funds (debt issues, stock issues) and uses of funds (remuneration, R&D, acquisitions, venture capital) result in innovation and good wages. I demonstrate that Fried and Wang make a series of assertions about the economic impacts of financial flows — which they incorrectly call “capital flows” — that lack substance. I conclude the essay by arguing that, for analyzing the operation and performance of the economy, innovation theory should replace agency theory. Agency theorists do not address, let alone explain, why since the 1980s, the United States has experienced extreme concentration of income among the richest households and the erosion of middle-class employment opportunities. I contend that the ideology that corporations should be run to “maximize shareholder value” as promulgated by agency theorists has contributed to inferior economic performance. I argue that the critical issue for understanding the role of corporate governance in supporting or undermining economic performance is the relation between value creation and value extraction for those “stakeholders” engaged in the development and utilization of the company’s productive capabilities. Innovative enterprise solves the agency problem. By incentivizing and rewarding the real value creators, the innovative enterprise can mobilize the skill, effort, and finance that, by generating high-quality, low-cost products, can improve the performance of the economy — defined in terms of stable and equitable economic growth.

From a 'Two Thrust Approach' to a 'Two Sword One Thrust Strategy' to Combat Criminal Corruption: Government Enforcement of Compliance and Oversight by Sovereign Investors

The commitment of governments, international organizations and enterprises to combatting corruption appears to have intensified in recent years. The efforts of these institutions appear centered on a “Two Thrust Approach,” consisting of the simultaneous application of the development and enforcement of public legal regimes and the implementation and operation of private compliance systems. This system dies not produce regulatory coherence between the law making by the government and the compliance systems created by business are not coordinated well. However, recent regulatory and compliance trends suggest the emergence of a “Two Swords, On Thrust Strategy” as a supplemental approach to the enforcement of anti-corruption rules and norms. The Two Swords-One Thrust Strategy combines the power of state officials to exercise discretion in managing anti-corruption laws and the authority of financial institutions to control the access of enterprises to their investment universe or to exercise their shareholder authority to influence corporate behavior. The essay examines the possibility of developing this strategy. To that end, the essay first considers the emerging efforts to institutionalize rules for the exercise of prosecutorial discretion in criminal investigations to compel corporate governance reform. It then considers the “second sword”, the use of market power by sovereign investors to influence compliance oriented corporate governance reform that parallels those advanced by prosecutors. The essay ends by suggesting the utility of this strategy for Chinese anti-corruption efforts by considering the possibility of coordinating the work of the procuratorate with the financial power of Chinese sovereign wealth finds in the exercise of their shareholder power and their power to limit access to investment markets.

Hospitalitas: Barbarian settlements and constitutional foundations of medieval Europe

AbstractA rough balance of political power between monarchs and a militarized landed aristocracy characterized medieval Western Europe. Scholars have argued that this balance of power contributed to a tradition of limited government and constitutional bargaining. I argue that 5th- and 6th-century barbarian settlements created a foundation for this balance of power. The settlements provided barbarians with allotments of lands or taxes due from the lands. The allotments served to align the incentives of barbarian warriors and Roman landowners, and realign the incentives of barbarian warriors and their leadership elite. Barbarian military forces became decentralized and the warriors became political powerful shareholders of the realm.

Mecanismos de gobierno corporativo y capital intelectual

Purpose – The purpose of this paper is to identify the corporate governance characteristics of Spanish companies included in the Ibex35 stock price index that influence the voluntary information disclosure policy regarding their Intellectual Capital. Design/methodology/approach – The methodology used was content analysis of 115 annual reports from 23 Ibex35 companies over five years; this allowed for the development of an index to quantify Intellectual Capital information. Findings – Based on Agency-Stakeholders Theory postulates, the main results reveal that companies that disclose most information about their Intellectual Capital are those in which managers have greater managerial ownership, fewer independent directors, separation of functions between the chairman and the chief executive, and larger Boards of Directors. Originality/value – With this study, we contribute to agency-stakeholder theory by analyzing a non-Anglo-Saxon market (characterized by strong executive power and low protection of minority shareholders and other stakeholders), stating that certain characteristics of Corporate Governance condition the disclosure of Intellectual Capital.

Framed! The Failure of Traditional Agency Cost Explanations for Executive Pay Practices

This is the second article in a series exploring the empirical evidence arising from the increasing use of certain executive compensation best practices. The first article, “How Good Are Our ‘Best Practices’ When It Comes to Executive Compensation?” summarizes research findings that these best practices are responsible for most of the growth in executive compensation, and lead to suboptimal corporate performance. It also suggests that the best practices currently in widespread use contradict practices that are often very helpful to directors in setting appropriate incentives in real world circumstances.This article goes on to argue that failures in executive compensation are the result, not of overly powerful CEOs confronting supine boards, but rather of directors and management earnestly striving to follow bad “best practices” promulgated by the corporate governance industry. This can be seen in: (1) the pattern of cause and effect distinguishable in the history of changing North American and British pay practices; (2) the link between these questionable pay practices and various measures of board independence and managerial weakness; and (3) the increasing use of these pay practices in circumstances of increased shareholder power. The most obvious solution is to increase board autonomy in setting pay. Regulatory steps for doing so lay close at hand, and in some cases have been discussed for years.

Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk

AbstractSince 2008, a massive shift has occurred from active toward passive investment strategies. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the “Big Three.” We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P 500 firms. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions. This has led to opposing views on incentives and possibilities to actively exert shareholder power. Some argue passive investors have little shareholder power because they cannot “exit,” while others point out this gives them stronger incentives to actively influence corporations. Through an analysis of proxy vote records we find that the Big Three do utilize coordinated voting strategies and hence follow a centralized corporate governance strategy. However, they generally vote with management, except at director (re-)elections. Moreover, the Big Three may exert “hidden power” through two channels: First, via private engagements with management of invested companies; and second, because company executives could be prone to internalizing the objectives of the Big Three. We discuss how this development entails new forms of financial risk.

Institutional Investors Blessing or Curse?

After Snap Inc. issued shares without voting rights, shareholders’ potential monitoring function was put into spotlight once more. Being representative of powerful shareholders, institutional investors unsurprisingly objected to Snap’s corporate governance structure. Therefore, this paper will analyse the benefits and detriments of institutional investing employing a four-dimensional framework: a) the firm itself b) shareholder(s) c) society’s welfare d) other stakeholders. This approach shows the effects of institutional investing on each dimension whilst appreciating that they are not mutually exclusive but intertwined. Consequently, this paper inquires whether the findings can be reconciled with the OECD recommendations for corporate governance. It is argued that the phenomenon of institutional investors could be a powerful asset for corporate governance, however steps need to be taken to prevent abuse by powerful shareholders to the detriment of others.

Why Delaware Must Retain its Corporate Dominance and Why it May Not

Delaware’s preeminent role in corporate regulation has endured for several important reasons. Most importantly, the state’s entire approach to the corporate law has been centered on investor protection. Although, through the years the ways by which it has tried to achieve this protection have changed, it is this animating principle that defines its laws. Investors are keenly aware of this fact and seek and respect the approach. Delaware’s primary industry is corporate regulation and to maintain its franchise, it must carry out its responsibilities fairly, intelligently and responsibly. Its corporate code is the most advanced in the country. Its judiciary has unusual expertise in the field and is highly respected in the resolution of corporate disputes. In recent years, it has maintained a delicate balance between upholding shareholder power and board prerogative. It is favored as the nation’s best forum for corporate dispute resolution by both investors and managers. It possesses a powerful franchise that would be difficult for other states to reproduce both judicially and, because of the influence in other jurisdictions of local corporate interests, practically. However, Delaware’s dominance is not assured and several recent developments may ultimately reduce its power and influence. First, while the chances of enactment of a federal corporate code are slim, federal intrusion into corporate governance regulation through the Sarbanes-Oxley and Dodd-Frank Acts has been harmful to the state. A significant portion of Delaware’s influence in areas such as audit oversight and executive compensation has been superseded by federal regulation. The benefit of a Delaware court’s resolution of these types of issues is therefore diminished and the attractiveness of simply incorporating in a company’s home state at lesser cost is increased significantly. If one incorporates in Delaware for a sensible regulation of corporate issues and that regulation has shifted to the federal regime, there is little point in incorporating in Delaware. Any increased federal intervention in this area only heightens the potential for this shift. The argument for federal regulation has revolved around creating a progressive national regulatory standard. But because local federal district courts, with little corporate expertise and local corporate political pressures, will ultimately decide regulatory disputes, this may lead to the balkanization of corporate law. Delaware, oddly enough, offers a coherent national approach. Still today, Delaware regulates much corporate conduct and a shift to other states is far off, but not inconceivable. The second major threat to Delaware’s dominance may be self-inflicted. For years the process by which Delaware courts are constituted and corporate law made has been considered above partisan politics and local interests. Any action that compromises its courts or the corporate law process due to local political considerations may diminish the state’s reputation for neutrality and credibility and lead to incorporation elsewhere. This is something that the state’s leaders must be highly cognizant of and sensitive to. Delaware’s potential downfall may not come from outside the state, but from within.

Governance by Contract: The Implications for Corporate Bylaws

Boards and shareholders are increasing using charter and bylaw provisions to customize their corporate governance. Recent examples include forum selection bylaws, majority voting bylaws and advance notice bylaws. Relying on the contractual conception of the corporation, Delaware courts have accorded substantial deference to board-adopted bylaw provisions, even those that limit shareholder rights. This Article challenges the rationale for deference under the contractual approach. With respect to corporate bylaws, the Article demonstrates that shareholder power to adopt and amend the bylaws is, under Delaware law, more limited than the board’s power to do so. As a result, shareholders cannot effectively constrain the board’s adoption of bylaws with which they disagree. The resulting power imbalance offers reasons to question the scope of the contract paradigm. This analysis has two implications. First, it suggests that the Delaware courts and possibly the legislature may want to re-consider existing constraints on shareholder power in order to realize the contractual paradigm fully. In so doing, they will have to consider the normative implications of greater shareholder empowerment. Second, to the extent that Delaware law retains the existing limitations on shareholder power, this analysis suggests that courts should scrutinize board-adopted bylaws more closely.

Hospitalitas: Barbarian Settlements and Constitutional Foundations of Medieval Europe

A rough balance of political power between monarchs and a militarized landed aristocracy characterized medieval Western Europe. Scholars have argued that this balance of power contributed to a tradition of limited government and constitutional bargaining. I argue that fifth and sixth century barbarian settlements created foundations for this balance of power. The settlements provided barbarians with allotments of lands or taxes due from the lands. The allotments served to align the incentives of barbarian warriors and Roman landowners, and realign the incentives of barbarian warriors and their leadership elite. Barbarian military forces became decentralized and the warriors became political powerful shareholders of the realm.

Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading

Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms.

Managerial response to constitutional constraints on shareholder power

Research summary: We examine whether top managers engage in misconduct, such as illegal insider trading, illegal stock option backdating, bribery, and financial manipulation, in response to the presence, or absence, of governance provisions that impose constitutional constraints on shareholder power. Within the agency framework, shareholders typically oppose governance provisions that limit their power because those provisions could undermine shareholder influence and increase agency costs. However, when shareholders support provisions that constrain their power, managers could respond positively by refraining from self‐interested behavior in the form of managerial misconduct. We find this to be especially true in industries where these governance provisions are particularly relevant to managers and in scenarios where CEOs do not also serve as board chair.Managerial summary: In recent years, shareholders have become central to organizations and the managers who run them. Shareholders and managers establish a rapport with one another, such that the behavior of one affects the behavior of the other. One of the most consequential decisions shareholders can make pertains to the reach of their influence: They can choose to impose strict governance over firms they own or they can allow for constitutional constraints that limit shareholder power. When they act in the mutual interest of managers by allowing such constraints, we find that managers respond in kind by refraining from bad behavior, such as illegal stock options backdating, insider trading, and financial manipulation. This is especially true in industries and scenarios in which shareholder pressure is most relevant to managers. Copyright © 2016 John Wiley & Sons, Ltd.

Family ownership and dividend payout in Malaysia

Purpose– The purpose of this paper is to investigate the effects of family ownership on dividend payout from the perspective of agency costs in Malaysia.Design/methodology/approach– Annual financial, board and family ownership data of 160 firms listed on the Bursa Malaysia are collected for the period 2005-2010. Analyses are carried out using descriptive statistics,χ2 tests, Tobit regression and three-stage least square regression analysis.Findings– The empirical results suggest that family share ownership at the dispersed level from between 0 to 5 percent is negatively associated with dividend payout and positively associated from the 5 to 33 percent level with dividend payout. Consistent with the extant literature, the observed relationship between family share ownership and dividend payout is stronger in firms with smaller total assets (size), low debt and low-growth opportunities. Further examination of investment decisions lends support to arguments which attribute higher agency costs as a result of family ownerships.Research limitations/implications– The observed results at the different family ownership levels are attributed to the possible expropriation in family-owned firms and accordingly, to the proportional pressure by minority and other shareholders for dividend payout.Practical implications– For policy makers, findings from this study could serve to justify initiatives to further strengthen the institutional and regulatory architectures that would enhance the power of minority and other shareholders of public listed firms in Malaysia.Originality/value– This study contributes to the growing literature on dividend policy and family firms. Particularly, it provides further understanding of the effect of family ownership on dividend policy.