Ch9 - Ownership and Corporate Control Flashcards
Types of investors
- Individuals: company founders, families, executives, directors, other private investors
- Institutions: pension funds, mutual funds, exchange traded funds (ETF), banks, insurances, sovereign & hedge funds
Pro & Con of ETFs
Exchange Traded Funds
+One single investment necessary for private investor to hold a diversified portfolio
+ Low management fees
- Beneficial Ownership: Investors in ETFs don’t directly own shares, limiting their voting rights.
- Passive Management: Focus on tracking indices reduces incentives for shareholder activism.
Def. of Shareholder Activism
Defined as actions taken by shareholders to influence corporate policies and practices.
Channels fo Shareholder Activism
○ Direct negotiation with management/board
○ Proxy contests
○ Public campaigns
○ Shareholder proposals
○ Litigation
Reasons for historically low overall levels of shareholder activism
○ High costs and free-rider problems for small shareholders
○ Passive investment approach favored by many institutional investors
The “Heuschrecken (Locust) Debate”
● German term criticising activist investors (particularly hedge funds) for perceived short-termism and potential job losses.
● Sparked by Grohe acquisition, despite eventual positive outcomes.
Costs of Activism
○ Engaging without management involvement: 0.5 basis points per year (assets)
○ Active management involvement: 50-100 basis points per year
1 basis point = 0.01%
Obstacles for pension and mutual funds (shareholder activism)
○ Diversification requirements
○ Weak personal incentives for fund managers
○ Insider trading regulations restricting board nominations
Hedge Funds in Activism
- hedge fund activism can lead to positive returns for target companies in the short term
- long-term effects of their activism and their potential impact on stakeholders beyond shareholders remain subjects of debate
What are Hedge Funds
○ Pooled, private, not widely available
○ Operate outside typical US securities regulations
○ Performance-based compensation, significant manager investment
○ Advantages over traditional funds:
○ Not required to diversify portfolios
○ Allowed to use leverage, lock-up periods, and charge higher performance fees
○ Can engage in derivatives trading, enhancing flexibility
Evolution of Activism
○ Institutional investors becoming key activists:
○ Driven by regulation, long-term focus, and ESG concerns
● Globalization of activism:
○ Expansion of investor service companies (ISS, Glass Lewis)
● Emergence of ESG:
○ Investors push for climate action, diversity, and social responsibility
○ Prominent stances by BlackRock, Vanguard, etc.
What voting rights are there as shareholder?
○ Board elections
○ Capital changes
○ Bylaw amendments
○ Say-on-pay votes
○ Tender offers
○ Auditor appointments
○ CEO and board discharge
(might depend on the charta)
Cash-flow rights vs. voting rights
may not be proportional due to:
○ Departures from one-share one-vote
○ Complex ownership structures
○ Investor heterogeneity
Ownership Structures to limit other voting rights
● Pyramids: Control via a chain of ownership stakes.
● Dual-class shares: Different classes with varying voting and cash-flow rights.
● Cross-shareholdings: Companies holding stakes in each other.
Weakest Link Approach (simple pyramid)
Voting-Power Indices
