Shareholder Pressure Research Articles

A systems thinking review for solving short‐termism

PurposeThe purpose of this paper is to review proposed methods to reduce corporate short‐termism – a private sector obsession with short‐term profit and a neglect of true long‐term value creation – via a systems thinking analytical framework.Design/methodology/approachThis paper identifies five often cited causes of corporate short‐termism directly affecting managers, including: pressure from Wall Street; ill‐aligned executive compensation; arrested executive capabilities; weak corporate governance; and ill‐aligned regulatory policy. It then compares those issues to generic system archetypes, and evaluates proposed solutions by contrasting them with typical solutions relating to specific archetypes.FindingsThis study suggests a majority of the solutions are well proposed and identifies strong leverage points where managers may intervene. It also finds that several proposed solutions are susceptible to complications, especially those relating to executive compensation, board empowerment, and regulatory structures. It also notes several additional points of leverage not yet fully explored, especially relating to deterring shareholder pressure and executive compensation structures. Finally, it suggests too little attention is being given toward a culture supportive of short‐termism, and argues that emphasizing solutions that engage stakeholders is important for sustained success.Practical implicationsFor managers seeking to reduce corporate short‐termism, this paper suggests several key levers that may be used to intervene within their environment.Originality/valueFew works have tested system‐wide solutions to corporate short‐termism using a system thinking foundation. This original work fills that unmet need.

The Impact of the Dodd-Frank Act on Executive Compensation

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21, 2010, which became effective for shareholder meetings held on, or after January 21, 2011. The Dodd-Frank Act requires U.S. public companies to conduct an initial advisory, non-binding vote on executive compensation called say-on-pay and a subsequent vote on the frequency of say-on-pay. This study investigates the voting pattern of the say-on-pay and the say-on-frequency and examines the impact of the Dodd-Frank Act on the amount and structure of executive compensation. The say-on-pay and say-on-frequency patterns of over 1,700 companies from the ExecuComp database are investigated using the U.S. Securities and Exchange Commission Forms DEF 14A, 8-K, and 10-Q. A further study of S&P 500 companies, from 1992 – 2009, found in the Wharton Research Data Services is used in the regression analysis to forecast executive compensation. Results show that 98% of the sample firms are supported by a majority of shareholders who voted on executive compensation, while 2% of the sample firms failed the say-on-pay. Preliminary results show that 60% of companies initially recommended every three years as the preferred say-on-frequency, while the shareholders voted in favor of every one year (90% of the companies). However, company recommendations for say-on-frequency have grown from 60% in favor of every three years in March 2011 to 63% in favor of every one year in December 2011, suggesting that companies are responding to shareholder pressure. Further results indicate that executive total cash compensation (salary plus bonus) has been decreasing since 2006. Additional analyses, comparing 2010 to 2009 total cash compensation, show that firms reduced total cash compensation in 2010 prior to the advisory vote on executive compensation.

Risk, shareholder pressure and short-termism in financial institutions: does enlightened shareholder value offer a panacea?

Several reasons have been given for the advent of the global financial crisis in 2007. This paper takes one of the reasons, namely the fact that over-leverage and excessive risks were embraced by many financial institutions, and enquires as to why these institutions engaged in such practice. The paper suggests that one of the primary catalysts for this action was a focus on short-termism. The study focuses on two particular elements that led to short-termism, namely an emphasis on quarterly earnings and pressure from shareholders. Consideration is given to the fact that the UK government has endeavoured to encourage less of a focus on short-termism and a greater focus on long-term approach. The paper discusses the government?s attempt to do this via the principle of ?enlightened shareholder value?. The paper then examines whether developments in UK company law and the government?s implementation of enlightened shareholder value in the Companies Act 2006 is likely to provide a sufficient measure that will go some way to ensuring that boards will not engage in excessive risk-taking in the future and will refrain from embracing short-termism.

Partnership, Ownership and Control: The Impact of Corporate Governance on Employment Relations

Most large UK private-sector organizations are listed companies that are subject to intense pressures to enhance shareholder value. The question arises of whether this constrains the ability of UK managers to pursue genuine partnership arrangements with long-term stakeholders, including employees. Empirical evidence is presented in the form of case studies of partnership relations between labor and management since the mid-1990s in companies operating under different forms of ownership. While some companies have been able to reconcile shareholder demands with a ‘partnership’ approach, in other cases, shareholder pressure has undermined partnership relations of the kind which have endured under more concentrated forms of ownership. Where the corporate governance system can be seen to support partnership, it is in conjunction with market regulation underpinning quality standards, relative stability in product markets, and a willingness on the part of senior management to mediate between the claims of different stakeholder groups.

It's Showtime: Do Managers Report Better News Before Annual Shareholder Meetings?

Annual shareholder meetings provide an opportunity for shareholders to express their concerns with corporate performance, pressuring managers to demonstrate good performance. We show that managers respond to the shareholder pressure by reporting positive corporate news before the annual shareholder meetings. Specifically, we find significantly positive average cumulative abnormal returns (CARs) during the 40 days before the annual meeting date. The premeeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average CARs of 3.4% and buy-and-hold returns of 7.0% during the 40-day premeeting period. Companies with poor past performance exhibit even higher premeeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.

How to Enhance Value? A Comparative Approach between Marketing and Finance

What people do with brands has always been considered a source of value for them. Nonetheless, during the last decade, this phenomenon has been accelerated by the rising power of consumer communities, backed by the development of the internet and social media. It has been shown today that the success of a brand increasingly relies on the existence of a community of totally captive and loyal fans who co-create the value of that brand through their numerous practices. This paper seeks to respond to both these questions on brand value by drawing relationships between three worlds still unknown to each other: the world of the brand communities, the world of brand management and the world of brand valuation. One of the challenges is thus to avoid creating adverse effects by exercising too much shareholder pressure on the company-consumer relationship, while at the same time ensuring that the exchange value created is well-redistributed to the shareholders and not deviated to other ends of common knowledge or reputation, to the detriment of the wealth distributed to the owners of the company. On the other hand, it is also necessary to ensure that shareholder and financial demands do not jeopardise the means deployed for brand orchestration in order to acquire practices likely to carry exchange value.

The Global Financial Crisis: Risk, Shareholder Pressure, and Short-Termism in Financial Institutions - Does Enlightened Shareholder Value Offer a Panacea?

There have been several reasons given for the advent of the Global Financial Crisis (GFC) in 2007. It is likely that most, if not all, of those that have been identified contributed in some way to what occurred in financial markets. This paper identifies a number of them and takes one of the reasons, namely the fact that over-leverage and excessive risks were embraced by many financial institutions, and inquires why these institutions engaged in such practice. The paper suggests that one of the primary catalysts for this action was a focus on short-termism, and the issue and the problems which it poses are discussed. Several factors that led to a short-termist approach are mentioned in the paper, but the study focuses on two particular elements, namely, an emphasis on quarterly earnings and pressure from shareholders, and it discusses these factors. It then considers the fact that the UK government has endeavoured to encourage less of a focus on short-termism and a greater focus on long-term approach. The paper discusses the fact that the Government has sought to do this via its relatively new companies legislation, and particular through the employment of the principle which is known as ‘enlightened shareholder value.’ The paper traces the emergence of this principle from its consideration in policy reviews to the Government’s embrace of it in White Papers. In light of the fact that the GFC was caused by, inter alia, short-termism, the paper then examines whether developments in UK company law and the Government’s implementation of the principle of enlightened shareholder value in the Companies Act 2006 through sections 172 and 417, is likely to provide a sufficient measure that will go some way to ensuring that boards will not engage in excessive risk-taking in the future and will refrain from embracing short-termism.

Tackling Shareholder Short-Termism and Managerial Myopia

Market observers and legal commentators link the collapse, a few years ago, of giant energy company Enron and some fabled financial firms to the short-termism phenomenon – investors acting like traders and influencing corporate managers to make policy decisions based on quarterly earnings statements. Opponents of short-termism note that the future well-being of many investors, corporations, overall economy and society at large is in jeopardy if investors with a near-term horizon, especially hedge funds, enjoy a dominant role in corporate governance. Skeptics dismiss the concerns, insisting that the notion of pervasive short-term investing is a figment of opponents’ imagination. Moreover, short-term investors provide needed liquidity and stability to the markets. This paper evaluates three reform proposals to curb shareholder short-termism, namely a securities transaction tax, capital gains tax reform and loyalty dividends. It acknowledges their strengths but notes their weaknesses which caution against creating a situation in which the remedy becomes worse than the malady. Instead, it argues that greater emphasis should be placed on the management side of the equation. The appraisal suggests that effectively addressing short-termism requires an all-hands-on-deck approach that not only includes tackling managerial myopia but also empowers managers to resist shareholder pressure toward an excessive and destructive focus on the near-term. In practical terms, this will involve instituting a corporate norm of long-term shareholder primacy. The norm presents a framework that dissuades managers from their independent short-termism and protects them from shareholder pressure to engage in short-termist behavior.

Pre- And Post-Enron Learnings On Learning In M&A Environments - A Qualitative Study In Preparation Of A Dissertation On The Influence Of Management Andragogy On Executives Ability To Successfully Manage M&As

In a global economy characterized by convergence and consolidation, by shareholder pressure, by the war for talent, for knowledge and for customer bondage, Merger and Acquisition transactions (M&As) are seen as a fast, efficient and spectacular way to innovate. M&As are therefore a frequently used strategic tool for corporate development. However, as of now, more than 75% of all M&As fail to meet objectives and 50% even destroy shareholder value.M&As often fail due to poor leadership. Therefore M&As seem to require particular leadership and management competencies, namely the ability to lead through and manage transitions in which the manager him/herself maybe transitional (Sahl 1998). Management Andragogy, the self-directed, incentive-driven, intercultural interdisciplinary management training that builds on executives experience is known to develop managers leadership and management ability.In preparation of a dissertation on the influence of management andragogy on executives ability to successfully manage M&As this qualitative exploratory study investigates in the success and failure factors of M&As, the reasons for failures and success and the management and leadership competencies favoring success, It also looks at what skills need to be developed to achieve M&A success and explores how to develop them. The study was done before the Enron and WorldCom collapses and the Arthur Andersen failures had shaken the business community. In order to test the impact of these incidents on the investigated subject the author decided to return to the interviewees right after the WorldCom debacle to ask them the same questions again.

Shareholder activism and director retirement plans repeals

We study proposals to repeal a potentially non-incentive compatible feature of outside director compensation contracts - director retirement plans. The reason for concern is that the required vesting period to receive benefits may instill complacency in director oversight. In the past, such pension plans were a common feature of compensation contracts until the mid-1990’s when shareholder attention shifted away from governance and toward compensation issues. Many firms removed/amended their plans voluntarily or from shareholder pressure. In a sample of 70 firms targeted by shareholders, we find no appreciable benefit to activist efforts to remove director retirement plans. This result holds regardless of the sponsor type (individual, institution or coordinated activism). However, relative to a control group, sample firms display lower levels of outside director oversight. There is also evidence that higher institutional ownership and poor prior performance increases the likelihood of a firm amending/removing its director pension plan. In addition, target firms significantly underperform standard market benchmark and mirror returns of control sample prior to event period. These results generally persist in the post-event period. Collectively, these results are consistent with the majority of the activism literature in that no discernible improvement in performance is detected. Our results have important implications to policymakers about the role of shareholder activism.

Board of directors' responsiveness to shareholders: Evidence from shareholder proposals

In recent years boards have become significantly more likely to implement non-binding, majority-vote (MV) shareholder proposals. Using a sample of 620 MV proposals between 1997 and 2004, we find that shareholder pressure (e.g., the voting outcome and the influence of the proponent) and the type of proposals are the main determinants of the implementation decision, while traditional governance indicators do not seem to affect the decision. We then examine the labor market consequences of the implementation decision for outside directors and find that directors implementing MV shareholder proposals experience a one-fifth reduction in the likelihood of losing their board seat as well as other directorships.

US “say‐on‐pay” legislation

PurposeThe purpose of this paper is to discuss the issues surrounding “say‐on‐pay” legislation in the USA; evaluate the corporate governance alternatives to “say‐on‐pay” legislation; recommend a policy encouraging enhanced executive accountability; and suggest research questions pertaining to “say‐on‐pay” proposals and executive compensation for scholars to pursue.Design/methodology/approachThe paper takes an exploratory approach to discussing and analyzing the issues surrounding “say‐on‐pay” legislation in the USA and offering an alternative corporate governance approach to enhancing executive performance.FindingsThe paper finds that whether an annual non‐binding “say‐on‐pay” policy is instituted or not within a company is not the crux of the executive compensation issue. What is important is whether concerned shareholders have the ability to have proxy access and successfully pass such a resolution, thereby exercising shareholder pressure on the board of directors to implement a corporate policy of equating appropriate executive compensation with managerial performance. Moreover, this improvement in board‐shareowner engagement, along with expanded disclosure of executive compensation packages, will assist in obviating the need for the exercise of a draconian shareholder resolution to remove directors.Originality/valueThis paper offers an in‐depth review of the “say‐on‐pay” legislative and corporate governance controversy; places the issue in the context of effective corporate governance; recommends a reasoned approach to executive compensation accountability; and offers a list of research questions for corporate governance and human resource management scholars to pursue.

The Influence of Stock Market Listing on Human Resource Management: Evidence for France and Britain

AbstractWe use data from the Relations Professionnelles et Négociations d'Entreprise survey of 2004 and the Workplace Employment Relations Survey of 2004 to analyse how far approaches to human resource management differ according to whether an establishment is part of a company with a stock exchange listing. In both countries we find that listing is positively associated with teamworking and performance‐related pay, while in France, but not in Britain, it is also linked to worker autonomy and training. Our findings are inconsistent with the claim that shareholder pressure operates as a constraint on the adoption of high‐performance workplace practices. The pattern is similar in the two countries, but with a slightly stronger tendency for listing to be associated with high‐performance workplace practices in France.

Investing in the Competition

We expect competitors to act as each other's foes. Yet some companies own equity stakes in their competitors. The Article explores this phenomenon of companies owning about 5-15% of the competition and conjectures a few explanations for this investment strategy. The focus of the Article is on the 'barrier to team formation' motivation; investment in the competition that amounts to an anti-takeover mechanism. The Article suggests that companies invest in the competition to deter a third competitor from joining forces with the competition. This anti-takeover mechanism is unique, it is initiated and controlled by a person who is not a fiduciary of the company and who owes no duties to the company's shareholders, but rather is controlled by a competitor (who owns fiduciary duties to its own shareholders). While the managers enjoy the entrenchment provided by the anti-takeover mechanism, they do not control it. And unlike the customary anti-takeover mechanisms, the shareholders cannot bring a derivative suit to restrict it, there is no judicial review of the mechanism, and shareholder pressure cannot relieve it. Thus, the shareholders are vulnerable and are exposed to agency costs, while management is entrenched by this anti-takeover mechanism installed by the competitor. In order to prevent the anti-takeover effect of investing in the competition, the article proposes to amend the bidding rules and allow a special split bid that will level the playing field for potential bidders.

The Influence of Stock Market Listing on Human Resource Management: Evidence for France and Britain

We use data from the Relations Professionnelles et Negociations d'Entreprise survey of 2004 and the Workplace Employment Relations Survey of 2004 to analyse how far approaches to human resource management differ according to whether an establishment is part of a company with a stock exchange listing. In both countries we find that listing is positively associated with teamworking and performance-related pay, while in France, but not in Britain, it is also linked to worker autonomy and training. Our findings are inconsistent with the claim that shareholder pressure operates as a constraint on the adoption of high-performance workplace practices. The pattern is similar in the two countries, but with a slightly stronger tendency for listing to be associated with high-performance workplace practices in France.

Volumetric Production Payments - Analytical Implications and Adjustments for E&P Companies

For several decades, volumetric production payment (VPP) transactions have been an option for smaller exploration and production (E&P) companies to monetize a portion of specific oil and gas properties to fund growth. In the current high commodity price environment, VPP's also have been used to facilitate the acquisition of properties that have steep production decline curves. This structure appears to allow an E&P company to acquire the longer lived production and undeveloped potential of the target properties while having a financial investor fund the high price for current flush production that is in steep natural decline. VPP's have also been strongly advocated by activist shareholders, including hedge funds, as a means for an E&P company to return capital to shareholders. E&P companies with weak capital reinvestment results have been particularly vulnerable to this sort of shareholder pressure. The future use of VPP's will likely be driven by its perceived benefits for acquisition structuring or by the degree to which the capital markets believe VPP's increase shareholder value.

Management of change: Lessons learned from staff reductions in the chemical process industry

Increasing global competition and shareholder pressure are causing major changes in the chemical industry. Over the last decade companies have been continuously improving staff efficiency. As a result, most modern chemical plants can be regarded as lean. Plans to further reduce the number of staff have come under increasing criticism by personnel for safety reasons, and there is strong resistance to further staff reductions. It is clear that management and workers often have conflicting viewpoints for more than just safety reasons; technologists and safety engineers also have different points of view. This results in complex decision-making processes and makes it difficult to realize changes. What can the chemical industries learn from their experiences of decision-making and management with regard to staff reductions? In our exploratory research that used four case studies, we were able to identify and analyse three distinct patterns, with some variations: • Fragmented and incomplete decision-making. • Unintended and undesirable side effects generated by the decision-making and management of change. • Development of difficult dilemmas and ambiguous issues. In this paper, we present a conceptual model that includes factors important for optimizing shifts. This model can serve as a common frame of reference for all agents involved in the decision-making and management process with regard to staffing. The present study was based on four cases, which means our findings serve to form rather than test hypotheses. At this early stage it is not yet possible to generalize from or validate the results, but we plan to go beyond these preliminary results in future research.

Why Do Managers Dismantle Staggered Boards?

Staggered boards offer incumbent management considerable protection from hostile takeovers and proxy fights. However, in the last few years, managers of an increasing number of firms have voluntarily destaggered their boards, exposing themselves to the risk of being removed from office. This paper investigates why managers decide to destagger their boards. I find statistically significant evidence that the likelihood of destaggering increases with shareholder pressure (in the form of precatory shareholder resolutions seeking destaggered boards) and with the amount of the CEO's unvested (including out-of-the-money) options. I do not find evidence of a strong connection between the decision to destagger and firm performance, or other CEO characteristics, including other forms of compensation such as unrestricted equity. The study provides insight into the informal power and influence of shareholders over the board, and the role of equity and monetary compensation in aligning management's interests with those of the shareholders.

Board of Directors' Responsiveness to Shareholders: Evidence from Shareholder Proposals

Using a sample of 620 non-binding, majority-vote (MV) shareholder proposals between 1997 and 2004, we analyze the frequency, determinants and consequences of boards' implementation decisions. The frequency of implementation has almost doubled after 2002, reaching more than 40%. Shareholder pressure (e.g. the voting outcome and the influence of the proponent) and the type of proposals are the main determinants of the implementation decision, while traditional governance indicators do not seem to matter. Outside directors implementing MV shareholder proposals experience a one-fifth reduction in the likelihood of losing their board seat and in the likelihood of losing other directorships.

Governance and CEO Turnover: Do Something or Do the Right Thing?

We study how corporate governance affects firm value through the decision of whether to fire or retain the chief executive officer (CEO). We present a model in which weak governance—which prevents shareholders from controlling the board—protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994–2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making. This paper was accepted by Brad Barber, finance.