BWL (Fach) / Corporate Governance (Lektion)
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Corporate Governance SS2019
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- Difference UK vs US approach UK: Self regulatory, opt out possible US: Prescriptive
- Germany and CG - bank-based insider system with civil law- solid shareholder protection, not so strong regulatory agencies- small capital markets- concentrated corporate ownership, families and banks- tow-tier boards ...
- GCGC/DCGK 1. legal stipulations2. shall recommendations -> comply or explain3. should recommendations -> devitation w/o disclosure
- Sections of GCGC 1. Legal setting 2. Shareholders and general meeting- right to vote in AGM- AGM decides on appropriation of NI, discharge of acts of mgmt and supervisory board- AGM elects shareholder representatives ...
- Ownership and control Ownership = ownership of CF rightsControl = ownership of voting rights
- Coporate control (Jensen Ruback) - rights to determine the mgmt of corporate resources, i.e. the rights to hire, fire and set compensation of top-level mgmt
- Types of controlling shareholders - majority (50%) - supermajority (75%) - blocking minority (25%)
- IPOs: types of shares, avoidance of dilution - primary shares: new shares issued by company, proceeds from sale of shares go to company- secondary shares: existing shares held by incumbent shareholders, proceeds go to shareholders - dilution avoidable ...
- What are violations of the one share-one vote principle ... - shareholders control proportion of votes larger than rights to firms CF- aggravation of COI between minority and controlling shareholders: more private benefits of control tend to be extracted (controlling ...
- Combinations of ownership and control Dispersed/Weak:- most UK/US companies- managers vs. shareholder agency problem- monitoring via market, institutional shareholders- extreme combinations via voting caps Dispersed/Strong:- outside UK/US- ...
- Dual class stock in Germany and US, evidence for dual ... Germany- preference shares without voting rights but with preferred dividend/liq. rights- maximum 50% of shares US- only 6%- argument: management protection from ordinary shareholders vs. agency problems- ...
- Mechanisms that create a wedge betwenn ownership and ... Dual class stock- Stocks with voting rights and stocks without voting rights (or more than 2 classes) Loyalty shares- multiple voting rights for long term shareholders Pyramid ownership structures- ultimate ...
- Benefits of control Security benefits of control- increase in firm value due to monitoring of mgmt by large shareholder- shared by all shareholders Private benefits of control- large shareholders extract beneftis at the ...
- Blockholders = shareholders that hold significant stakes - generall accepted: 5% or more- typically sometimes controlling (mostly families, holdco) and some never hold control (institutional investors)- sometimes ...
- Family firms: Advantages, disadvantages PRO- large, undiversified family stake- incentives to ensure survival, long-term profits and long-term relations with stakeholders- associated with lower cost of debt- less pressure from stock market ...
- Family firms: characteristics - controlling family, often using CEM- participating in MGMT (often CEO/chairman)- mostly for generations (sometimes bought)- usually no other large shareholders- family business groups: groups of companies ...
- Family firms: Empirical results - higher firm value, higher profitability- ONLY IF founder is still active on EB or SB
- Effects of multiple blockholders 1. controlling coalitions: blockholder collude to extract PBoC2. cross-monitoring: monitor each other, reducing expropriation -> opposing effects Empirical evidence confirms cross-monitoring
- Market rule vs. mandatory bid rule incl. defintion ... Market rule- sale of share to any acquirer offering an acceptable price- most private sale-of-control transactions in the US Mandatory bid rule- acquirer of controlling stake has to offer remaining shareholders ...
- Market for corporate control - lower stock price relative to what it could be with more efficient management, the more attractive a takeover gets for parties that think they can manage more efficiently - Market for corporate control ...
- Types of bids on market of corporate control - block trades vs. takeovers- friendly (target is open to receiving an offer) vs. hostile (management rejects offer)
- LBO Leveraged buyout -> takeover financed with large amounts of debt
- Tender offer takeover bid - offer to all shareholders to purchase shares for price b- successful if > 50% of shares are tendered
- Disciplinary takeovers - poorly performing firm -> target for disciplinary/hostile takovers- takeovers -> management and board turnover => takeover threats/offers discipline managers as they want to keep their jobs => takeover ...
- Takeover defenses - Monitoring of shareholder base and dialogue- stabilization of shareholder base (e.g. anchor investors)- legal mechanisms (change-of-control clauses, poison pills, severance pay)- post-bid defenses (press ...
- Takeover defenses and impact on NAC - defense -> increase Net Acquisition Costs -> reduce takeover NPV
- Institutional investors - investors that manage capital on behalf of other people e.g.- banks- hedge funds- insurance compoanies- investment advisors, mutual funds- pension funds- others
- Shareholder acitivism forms Exit- sell shares Voice- threating Exit- asking questions- introducing shareholder proposals- voting rights, proxy votes- communication and negotiation with mgmt/board- letter writing, press campaigns- ...
- Shareholder proposals - proposals in AGM, to be voted on by AGM- typically related to CG and social policy- most dont get majority votes- mgmt not obliged to comply in the US
- Examples for Activist investors - hedge funds- pensions funds- wealthy individuals - private equity firms- sovereign wealth funds (i.e. goverment owned)
- Methods of activist investors - communication and negotiation with mgmt/board- public letters to management/board- proxy fights (or threat)- lawsuits for breach of duty (or threat)
- Proxy fights - activist investor attempts to persuade shareholder to implement changes to board or accept/reject takeover bids-> often to acquire board seats - In hostile takteovers: replace dissident directors - ...
- Hedge fund activism - non-confrontal vs. hostile- hedge funds are active and aggressive due to stronger financial incentives
- Hedge fund characteristics 1. pooled, privately organized investment vehicles2. administered by professional investment managers with performance-based compensation and significant investments in the fund3. not widely available ...
- Hedge fund investments - small stakes, short horizon- hostile cases -> greater capital commitments- horizon varies significantly
- Success of shareholder acitivism - activists are most successful at creating value when they effect a change in control (even though they dont take controlling stakes in firms themselves) - measurably increases likelihood that undervalued ...
- Tasks and duties of the board - monitor and advise management (similar)- hire/fire CEO + succession- mangement compensation- approve transactions that fundamentally change assets, financial or earnings situtation- oversee legal, regulatory ...
- Duties of board directors Fiduciary duty: Act in interest of corporation (shareholders in the US)Duty of candor: inform shareholders of all informations relevant for company and management evaluationDuty of care: Sorgfaltspflicht ...
- Organizational structure of the board - one-tier vs. two-tier- labor representation- chairman- board committees
- Chairman of the board - presides over board + meetings- schedules meetings, sets agenda- distributes material in advance of meetings- coordinates actions of comittees -> determines content and timing of matters brought before ...
- Board committees - meet specific functional roles- specialized with necessary expertise- most important: audit, compensation and nomination/governance (majority independent)
- 3 Characteristics of good board composition Diversity- heterogenity in terms of attributes: age, ethnicity, gender, education, tenure, work experience Expertise Independence
- Benefits and costs of board diversity Benefits- more resources and infos- helps address broader stakeholder base- more cognitive and intra-group conflicts, less groupthink Costs- higher costs of communication/coordination- slower decision ...
- Board independence indicators according to GCGC - part of management in two years before appointment- business relationships with dependent entities in prior year- close family member to mgmt- in supervisory board >12 yrs
- Mechanisms affecting board independence outside of ... - board interlocks (CEO of firm A on board of firm B and vice versa)- co-option (appointed after CEO assumes office)- demographic and value similarity- social ties between CEO and director -> weaker monitoring ...
- Board independence and asymmetric information - cost of acquiring information about firm low -> higher independence ratio is better- cost of information is high -> higher independence ratio is worse "outside directors never know enough about the ...
- Outside directors receive incentives from - compensation and equity ownership (increasing!)- director replacement- opportunity to receive additional board seats
- Endogenity in board research - equilibrium outcome is sensitive to exogenous parameters -> heterogenity in parameters -> heterogenity in solutions => one size may not fit all
- Executive compensation as a governance device ... S. 290-294
- Elements of exec compensation - Perquisites, contractual agreements (airplanes, life insurance, power ; change-in-control payments, severance pay)- Restricted stock (grant of shares with restricted transferability and vesting)- Stock ...