ACF 8: Shareholder Activism

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  • Created by: charlie
  • Created on: 05-05-18 16:26
E.g. Facebook SH Activism issue (US dual class structure)
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Shareholder issue: agency problems
1) Information asymmetry (managers inside low % shares/ SH outside high % shares) 2) Conflicts of interest (Managers want to increase firm size/ SH want to increase SH value)
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Part-solution to agency problems: Shareholder Activism
Shareholders exercise their voting rights as partial owners to influence a corporations behaviour
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Topics SH have been active on...
1) Gender pay gap 2) Governance 3) Climate change 4) CEO employee pay gap 5) Pollution
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Shareholder activism issues: 1) Monitoring management is costly
Smaller SH 'free ride' (marginal benefit from monitoring is -ve) Large SH incentive to monitor (monitor through 1) Direct intervention/ making voice heard 2) Selling share threat/ wall street walk)
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Shareholder activism issues: 2) Blockholders may exacerbate agency problems
1) ex ante presence of threat reduces firm value 2) extract private benefits at expense of smaller SH (induce firm to buy products from other held firms at inflated prices) 3) Large activists ('attacktivists') push for ST value (share buybacks)
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Activist investor (Cevian Capital/ Starboard Value/ Icahn)
1) Identifies under performing companies not achieving their targets (Yahoo) 2) Buys large stake = becoming Blockholder 3) Gains seat on company board 4) Influences management (votes or direct management actions/ may launch 'proxy fights')
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Shareholder activism issues: 3) European complicated laws + customs on SH activism
E.g. Germany has 'dual board' (management board + supervisory board) + public family-owned companies have concentrated SH ownership
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Shareholder activism issues: 4) Activist investors have to gain more than just improved returns
win-over 1) traditionally-minded local investors 2) politicians + unions sensitive to change
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Negative SH activists: US (Attacktivists) Vs EU (Targets)
Aggressively push for change which increases media attention + causes greater issues (E.g. Elliott Advisors (US) admit shares after battle lost with Alliance (UK))
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Positive SH activists: Construtivists
Persuasively engage with CEO's (usually female)/ management to implement LT changes to company
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Hedge Fund differences to institutional activists: 1) Stronger performance incentives
1) Earn significant performance fees (20% of excess return on top of AMC) 2) Invest large amounts of personal wealth (high stakes)
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Hedge Fund differences to institutional activists: 2) Lightly regulated + small client base
1) Cater for institutional clients + HNW individuals 2) Less need for diversified portfolios (easier to become blockholders in invested companies)
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Hedge Fund differences to institutional activists: 3) Use complex products
Able to use complex financial products (derivatives) / leverage stakes
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Hedge Fund differences to institutional activists: 4) Face fewer conflicts of interest
1) Are smaller/ not owned by parent company/ have subsidiaries with different investment philosophies 2) Don't need to satisfy as many non-financial stakeholders at expense of SH wealth
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Hedge Fund differences to institutional activists: 5) 'lock up' provisions
Restrict investors from withdrawing their capital to held intermediate + LT investment objectives materialise
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UK 2018 Corporate governance statement: disclose how they contribute to wider society alongside business success + SH value
FOR: SH value isnt sole reason for company existence/ AGAINST: Companies act illustrates SH should have primacy + not be on same level as 'contributions to society'
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Other cards in this set

Card 2

Front

Shareholder issue: agency problems

Back

1) Information asymmetry (managers inside low % shares/ SH outside high % shares) 2) Conflicts of interest (Managers want to increase firm size/ SH want to increase SH value)

Card 3

Front

Part-solution to agency problems: Shareholder Activism

Back

Preview of the front of card 3

Card 4

Front

Topics SH have been active on...

Back

Preview of the front of card 4

Card 5

Front

Shareholder activism issues: 1) Monitoring management is costly

Back

Preview of the front of card 5
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