”Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape.
”Do institutional investors demand corporate disclosure? A central question in finance and accounting is whether corporate transparency benefits or hurts investors. This issue is complicated by the fact that information provision could affect groups of investors differentially. Public information may crowd out the private information advantage of some institutional investors; alternatively, investors, particularly those following more passive trading strategies, may not be information sensitive. However, even passive institutional investors may benefit from an increase in monitoring by other stakeholders following improved disclosure. Further, regardless of the preferences of institutional investors, whether or not they are able to affect corporate policy on this margin is unclear. This tradeoff is reflected in mixed empirical evidence on the relationship between institutional ownership and corporate disclosure.
To address this tradeoff faced by institutional investors, we analyze the revealed preference for corporate disclosure by institutional investors and the associated impact on the information content of corporate disclosure. Empirically, identifying a causal effect of institutional ownership on corporate disclosure policy is difficult because experimental settings and direct measures of corporate disclosure quantity and characteristics are scarce. We propose a two-part solution to these problems. First, we utilize exogenous changes in institutional ownership around Russell 2000 index reconstitutions in a regression discontinuity design to identify the effect of institutional ownership on corporate disclosure policy. Second, we directly measure the characteristics of corporate disclosure using a novel data set composed of all 8-K filings between 1996 and 2006.
Abstract: Corporate boards play a central role in corporate governance and therefore are regulated in the corporate law and corporate governance codes of all industrialized countries. Yet while there is a common core of rules on the boards, considerable differences remain, not only in detail, but sometimes also as to main issues. These differences depend partly on shareholder structure (dispersed or blockholding), partly on path dependent historical, political and social developments, especially employee representation on the board. More recently, in particular with the rise of the international corporate governance code movement there is a clear tendency towards convergence, at least in terms of the formal provisions of the codes. This article analyses the corporate boards, their regulation in law and codes and their actual functioning in nine European countries (Belgium, France, Germany, Italy, the Netherlands, Poland, Sweden, Switzerland and the United Kingdom) in a functional and comparative method. Issues dealt with are inter alia board structure, composition and functioning (one tier v. two tier, independent directors, expertise and diversity, separating the chair and the CEO functions, information streams, committees, voting and employee representation) and enforcement by liability rules (in particular conflicts of interest), incentive structures (remuneration) and shareholder activism. The article finds convergence in these European countries due to the pressures of competition, a pro-shareholder change supported by government and institutional investors and, to a certain degree, the impact of the EU. This convergence shows more in the codes and the ensuing practice than in the statutes. On the other side considerable differences remain, in particular as a result of the failure to adopt a mandatory „no frustration“ rule for takeovers at EU level and diverging systems of labor codetermination. The result is an unstable balance between convergence and divergence, shareholder and stakeholder influence and European v. national rulemaking.
Read full working paper here.
An in-depth interview with Mr. Tsuyoshi Maruki, who established Strategic Capital, Inc. in September 2012, was one of the Founding Partners of M&A Consulting (Japan’s first activist fund), and once worked “on loan” at METI (when it was known as “MITI”).
”Abstract. After the banking crisis of 1997, corporate ownership in Japan shifted from an insider-dominated to an outsider-dominated structure. This paper analyzes the impact of dramatic changes in the ownership structure on corporate governance and firm value, focusing on the role of foreign institutional investors. There are two competing views on the role of increased foreign ownership. The positive view is that foreign investors have had high monitoring capability, and encourage improvements in the governance arrangement of firms, resulting in higher performance.
In this paper, HBS Professors Suraj, Srinivasan, and Vijayaraghavan analyze the period 2003-2013 and conclude that US managers often seek to avoid listing legitimate shareholder proposals in the proxy materials. This is a stark contrast to the situation here in Japan, where executives must include virtually any shareholder proposal in the proxy, even if strange or rude.
Seth Fischer, chief investment officer and portfolio manager at Oasis Management, discusses Japan’s corporate governance, the effectiveness of Abenomics and where he sees opportunities. He speaks to Bloomberg’s Rishaad Salamat on “Trending Business.” (Source: Bloomberg)
”Historically, shareholder activism has rarely been successful at Japanese companies. However, as Japan moves closer to a Western model of corporate governance, shareholders may be playing a larger role in the strategy and leadership of some Japanese companies. This has recently been exemplified by the apparent influence of Daniel Loeb, from the hedge fund Third Point, on the leadership of Seven & i Holdings (“the Company”), which holds its annual general meeting on Thursday, May 26.
”The Japanese equity market has been under pressure recently from a strengthening currency, a weakening global economy and the uncertainty caused by the Bank of Japan’s introduction in late January of a negative interest rate policy. We recognise these concerns, but think that the fears of many market participants are overdone.
As value investors we still see Japan as a fertile hunting ground.
A far greater percentage of listed companies have net cash on their balance sheets in Japan than in any other major market and net cash represents a greater percentage of market capitalisation, as shown below. Furthermore, many of those companies have significant unrealised gains on real estate holdings; and many have large holdings of listed equities, some for strategic business purposes, but some for no reason other than historic relationships.
The question that has occupied the minds of value investors like us has been how that value can be unlocked, used more efficiently and returned to investors when not needed for operational purposes. In that regard, we think that 2015 was a pivotal year for listed Japanese companies.
”Abstract: The increasing share of foreign institutional investors has been a global phenomenon for the past few decades. Corporate ownership in Japan shifted from an insider‐dominated to outsider‐dominated structure after the banking crisis of 1997. On the role of increasing foreign ownership and its consequences, there are two competing views. The first view, or convergence view, is that foreign investors have high monitoring capability, and encourage improvements in the governance arrangements of firms, resulting in higher performance. Conversely, the skeptical view insists that they have a strong bias in their investment strategies and are less committed to a firm. Even though a correlation between foreign ownership and corporate polices and high performance could be observed, it could be superficial. Higher stock returns can be induced by their order demand, while performance can simply reflect foreign investors’ preference for high quality firms. To answer which view is more persuasive, this paper analyzes the impact of dramatic changes in the ownership structure on corporate governance, corporate policies, and firm value, with a focus on the role of foreign investors, particularly in Japan…………..”