mertens seminar 28 maart 2007[1]
TRANSCRIPT
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Corporate Governance:
How useful is shareholder invention?
Gerard M.H. Mertens
RSM Erasmus University
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Substance or symbolism?Corporate governance practices of
institutional investors
April 2007Report to Eumedion/ Nederlandse Corporate
Governance Stichting
Abe de Jong, Gerard Mertens,
Hans van Oosterhout, Helene Vletter-van Dort
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"What is the overallimportance to your firm
of the corporategovernance of portfolio
companies?"
How do you expect yourfirms views of the
importance of corporate
governance to change
over the next threeyears?
78%
63%
0% 20% 40% 60% 80% 100%
Continental
Europe (n=59)
Average(n=322)
Significantly orSomewhat More
61 %
71%
0% 20% 40% 60% 80% 100%
Continental
Europe
(n=59)
Average
(n=322)
Extremely orVery Important
Survey based on 322 institutional investors in 2006(ISS Global Institutional Investor Study)
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Royal Dutch Shell - Reserve scandal, accountability and unification
VNU - Buying IMS Health and selling to private equity
CSM - Fat balance sheet, new strategy and new CEO
Euronext - Strategic options and the European identity
Stork - Public to private and focus on Aerospace
ABN AMRO - Buying 1% and writing a letter
Examples of shareholder Activism
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Theory on corporate governance tells us:
Shareholder activism is a means of corporate governance in the
pursuit ofshareholder wealth maximization
The utility of shareholder activism as an instrument of corporategovernance is largely conditioned by:
the degree to which shareholdings are dispersed,
informational and legal barriers that stand in the way of exercisingshareholder voice,
the level of inside ownership in the target firm, ownership concentration,
the degree of institutional ownership,
the absolute size of the equity holding in the target firm
Is shareholder activism therefore an ultimum remedium that shouldbe put to use only after making a thorough cost-benefit analysis?
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Focus of Empirical Research
The relation between shareholder activism and performance
Mostly about shareholder activism in the United States.
Results are mixed:
some studies find positive effects of shareholder activismon targeted firms,
for instance Becht et al. (2006) show that engagement
yields abnormal positive return,
others conclude that shareholder activism has a negligibleimpact on target firm performance
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Other theories ?
Theory building not directly related to shareholderactivism may also be interesting
So-called institutional explanations of organizationalstructures and policies appear to be empirically powerfulin corporate governance research
The ceremonial dimension of shareholder activism
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Empirical results of our survey
1. There may be an important ceremonial dimension toshareholder activism
Share lending practices:
62% lend shares, yet no one retains shares, while onlyfew give voting instructions
2. The real importance to investors of shareholderactivities: how many resources are spent?
Consistent with other research, these are found to be
smallaround 100.000and spent predominantly ondomestic investments
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Empirical Results of our survey
3. Corporate governance issues are reported to be the most
important trigger for shareholder activities
4. For these shareholdings, proxy voting is about the onlyactivity institutional shareholders engage in
5. Dominant role of ISS leads to uniform company reports and
voting recommendations. This increases the risk of developing
largely ceremonial shareholder policies and activities
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Empirical results of our survey
6. Home bias: Investors are generally more active in their home
countries than in the foreign countries in which they invest
7. Virtually no investor spends resources on measuring the
costs and benefits of their shareholder activities
8. Dutch pension funds reported to be driven mostly bysymbolic and ceremonial dimension of shareholder activities,
while the international pension funds reported to bemotivated predominantly by the considerations that underlie
a rational cost-benefit analysis
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