Hedge funds first began engaging in the assertive form of shareholder activism for which they are renowned in the United States, and the United States is where hedge fund activism has become most firmly entrenched as part of the corporate governance landscape. Nevertheless, hedge fund activism is a global phenomenon, with companies in numerous countries being targeted. The United Kingdom, Japan and Canada are the three countries other than the U.S. where hedge fund activism has been most prevalent. The efforts of hedge fund activists in Britain and Japan have begun to capture the attention of academics (e.g. Iris Chiu, The Foundations and Anatomy of Shareholder Activism (2010) and John Buchanan, Dominic Chai and Simon Deakin, Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (2012)). In the case of Canada, however, little has been said about hedge fund activism in the academic literature. Correspondingly in “Hedge Fund Activism Canadian Style,” recently published on SSRN, I describe the emergence of hedge fund activism in Canada, identify the legal and economic variables that account for its rise to prominence and offer predictions on whether the trend will be sustained.
Posts Tagged ‘Brian Cheffins’
Since the late 1990s, a “law and finance” literature emphasizing quantitative comparative research on the relationship between national legal institutions on the one hand and corporate governance and financial systems on the other has achieved academic prominence. An important tenet of the law and finance literature is that corporate law “matters” in the sense it does much to explain how durable and robust equities markets develop. While “law and finance” has an important forward-looking normative message, namely that countries must enact suitable laws to reach their full economic potential, the thesis that corporate law influences stock market development seems to be well-suited to offer insights into if, when and how a country develops a corporate economy widely held companies dominate. Law and finance thinking implies that this should not occur in the absence of corporate law providing significant stockholder protection. In Questioning “Law and Finance”: U.S. Stock Market Development, 1930-70, recently published on SSRN, we draw upon events occurring in the United States to cast doubt on this logic.
The role that regulation should play in the development of securities markets is much debated and a persistent lull in initial public offerings helped to prompt some deregulation through the enactment of the 2012 Jumpstart Our Business Startups (JOBS) Act. While the appropriate scope of public regulation of securities markets is a contentious issue and while the market for newly listed firms can be a bellwether for the development of public equity markets, the empirical literature on regulation of IPOs is small and generally inconclusive. In our paper, Regulating IPOs: Evidence from going public in London and Berlin published on SSRN, we use history to offer insights concerning regulation of IPOs and the development of public equity markets. In particular, we draw upon hand-collected Initial Public Offering (IPO) datasets to undertake a comparative study of the London and Berlin stock markets between 1900 and 1913, a period that coincides with the apogee of an era of global financial development unmatched until the end of the 20th century.
In contrast to most other countries, in both Britain and the United States, a hallmark of corporate governance is a separation of ownership and control in major business enterprises. Various theories that have been advanced to account for why patterns of ownership and control differ across borders, with the most influential being that the “law matters” in the sense that ownership dispersion is unlikely to become commonplace in public companies unless company law provides substantial protection to outside investors. As one of us has argued elsewhere, these theories do not explain effectively why a separation of ownership and control became the norm in the UK. In our paper “Ownership Dispersion and the London Stock Exchange’s ‘Two-Thirds Rule’: An Empirical Test”, recently published on SSRN we analyze a different law-related hypothesis concerning the evolution of ownership patterns and show that it similarly lacks substantial explanatory power.
In the paper Delaware’s Balancing Act, which was recently made publicly available on SSRN, we examine the decline in Delaware’s popularity as a venue for corporate litigation. The Delaware court system has functioned to a significant degree as a de facto “national” court for U.S. corporate law. Corporate disputes arising in Delaware courts frequently generate extensive press coverage. Delaware law is a central part of the business law curriculum in U.S. law schools and law students learning corporate law are exposed to a steady diet of Delaware case law. Official comments accompanying the Model Business Corporations Act (M.B.C.A.), a model set of laws prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association followed by 24 states, frequently refer to Delaware cases to provide examples or as a source of further explanation. Courts in M.B.C.A. states often rely on Delaware case law to clarify gaps in the M.B.C.A. and sometimes even cite Delaware jurisprudence in preference to M.B.C.A. court decisions.
In our paper, The Corporate Pyramid Fable, which was recently published on SSRN, we investigate the impact intercorporate taxation of dividends had on corporate pyramids. Intercorporate taxation of dividends became a permanent feature of the U.S. tax landscape in 1935. Correspondingly, to assess the impact of this change, we rely on a pioneering hand-collected dataset based on filings made between 1936 and 1938 with the Securities and Exchange Commission by investors owning 10% or more of shares of corporations registered with the Commission. To the extent that the received wisdom concerning tax and corporate pyramids is correct, the introduction of taxation on intercorporate dividends in 1935 should have prompted the rapid unwinding of corporate-held ownership blocks in public companies, thus causing the simplification of complex group structures, including pyramidal arrangements.
Our results indicate matters worked out much differently. Although politicians may have supported the intercorporate dividends tax because they believed that it would induce corporations to unwind stakes held in other publicly traded corporations, tax reform apparently did not have that effect. Corporations that owned large stakes in publicly traded firms rarely sought to exit in the years immediately following the introduction of intercorporate taxation of dividends, and many corporations even increased their ownership stakes in other corporations. A key reason the introduction of intercorporate taxation of dividends did not have the anticipated impact was that the tax burden was so modest. Although dividends by one corporation to another corporation were no longer completely tax-free, they remained largely exempt.
In my paper Did Corporate Governance “Fail” During the 2008 Stock Market Meltdown? The Case of the S&P 500, a draft of which is currently available here, I provide the first detailed empirical analysis of the operation of U.S. corporate governance during the stock market turmoil of 2008. The study focuses on a sample of companies at “ground zero” of the stock market meltdown, namely the 37 firms removed from the iconic S&P 500 index. The results indicate that, despite U.S. stock markets experiencing their worst year since the 1930s, corporate governance performed tolerably well. This in turn implies it would be premature for policymakers to overhaul existing arrangements.
As the paper describes, over the past few decades U.S. corporate governance has been re-oriented towards the promotion of shareholder value. The sharp decline in share prices that occurred in 2008 implies this shareholder-focused corporate governance model “failed” and that reform is correspondingly justified. However, corporate governance is not the primary determinant of share prices, as reflected by the fact academic testing of the hypothesis that good corporate governance improves corporate financial performance has yielded inconclusive results. It therefore is possible that in 2008 corporate governance in public companies generally functioned satisfactorily amidst general market trends that inexorably drove share prices downwards. The paper examines whether this in fact might have been the case by examining corporate governance in companies removed from the S&P 500 index.
Over the next while there likely will be numerous studies of how corporate governance functioned during the recent financial crisis. However, the 37 companies removed from the S&P 500 in 2008 provide an apt starting point. One reason is that big public companies are markedly more important from an economic and investment perspective than their smaller counterparts — the S&P 500 index covers approximately 75% of the total value of the U.S. equities market. Another is that among any sample of publicly traded firms “troubled” companies will likely be the center of the action with respect to corporate governance controversies (e.g. Enron), and companies dropped from the S&P 500 index are apt to fall into this category. Among the 37 companies removed in 2008 20 can be categorized as “at risk”, with 13 of the companies having been dropped due to a dramatic fall in their market value, six due to “rescue mergers” (i.e. mergers where the company would have likely otherwise ended up bankrupt) and one due to Chapter 11 bankruptcy. Of the 10 industrial sectors represented in the S&P 500, firms from the “financials” sector dominated both the overall sample (15 out of 37 firms) and the “at risk” cohort (12 out of 20).
The primary search strategy I used to assess the operation of corporate governance in the 37 companies removed from the S&P 500 during 2008 was a thorough analysis of press and newswire coverage. A wide-ranging set of searches was conducted for each of the sample companies using Factiva, which offers extensive coverage of newspapers, business magazines and trade journals. The searches were structured to find out what corporate governance mechanisms were activated in the six months before and six months after a company’s removal from the S&P index, with the objective being to assess how responsive and effective corporate governance was during the stock market turmoil.
Due to the prominence of companies that are part of the S&P 500, the Factiva searches should have brought to light most material corporate governance developments concerning the sample companies. Nevertheless, the Factiva searches were supplemented by analysis of Georgeson’s 2008 Annual Corporate Governance Review, the Stanford Law School Securities Class Action Clearinghouse database and an AFL-CIO website offering data on CEO pay for 2007.
The key findings of the study are as follows:
• Only a minority of the sample companies experienced overt criticism of the board or publicized boardroom turnover, with the firms involved almost exclusively being in the “at risk” category
• A sizeable minority of “at risk” companies experienced publicized turnover of senior management
• The executive pay policies of a sizeable minority of the sample companies were criticized, with the controversies being restricted to at risk companies and companies that paid their CEOs more than the S&P 500 average
• Private equity went AWOL in a difficult climate for public-to-private buyouts
• Institutional investors (i.e. mutual funds and pension funds) were largely silent
• Hedge fund activism affected only a small minority of the sample companies, though the interventions produced results when they occurred
To the extent that corporate governance did “fail” among the companies removed the S&P 500, the difficulties were restricted largely to the financials sector. Boards of a number of banks and thrifts were subjected to intense criticism and bonus-driven executive pay may well have provided senior managers of major financial companies with incentives to take risks that were ill-advised due to the hit their firms would take if things went wrong. The corporate governance challenges financial companies pose, however, are likely to diminish over the next while, with the entire sector retrenching due to a combination of market trends and regulatory factors.
Once the financials are removed from the equation, the case in favor of a regulatory overhaul of corporate governance is weakened considerably. Based on what happened with the companies removed from the S&P 500 during 2008, corporate governance performed tolerably well. Moreover, while the U.K. already has in place a number of the features of corporate governance popular among those who advocate reform in the U.S., the stock market meltdown was worse in Britain than in America. Future studies perhaps will uncover damning evidence of corporate governance breakdowns during the stock market meltdown of 2008. However, at this point the case for radical reform has not been made out.
The paper is available here.
U.K. corporate governance is characterized by a separation of ownership and control, in the sense that a majority of British publicly traded companies lacks a shareholder owning a sufficiently sizeable voting block to dictate corporate policy. This pattern has not only influenced the tenor of corporate governance debate in Britain but serves to distinguish the U.K. from most other countries. Existing theories fail to account adequately for ownership and control arrangements in Britain. My book, Corporate Ownership and Control: British Business Transformed, just published in the U.K. and soon to be available in the U.S., accordingly explains when and why ownership became divorced from control in major British companies.
The approach I adopt in the book is strongly historical in orientation, as I examine how matters evolved from the 17th century through to today. While a modern-style divorce of ownership and control can be traced back at least as far as mid-19th century railways, the “outsider/arm’s-length” system of ownership and control that currently characterizes British corporate governance did not crystallize until the second half of the 20th century. Corporate Ownership and Control: British Business Transformed brings the story right up to date by showing current arrangements are likely to be durable. The insights it offers correspondingly should remain salient for some time to come.
Corporate Ownership and Control: British Business Transformed is divided into eleven chapters:
One: Setting the Scene
Two: The Determinants of Ownership and Control: Current Theories
Three: The ‘Sell Side’
Four: The ‘Buy Side’
Five: Up to 1880
Seven: The Separation of Ownership and Control by 1914
Nine: 1940–1990: The Sell Side
Ten: 1940–1990: The Buy Side
Eleven: Epilogue: Current Challenges to the UK System of Ownership and Control
Key arguments I make in Corporate Ownership and Control: British Business Transformed include:
The current credit crisis has many reaching for their history books, seeking to find out what lessons might be drawn from previous financial disasters. There is a rich history of bank failures. What can history tell us about the $2,000bn world of hedge funds?
Some say the turmoil in financial markets could be a boon for shrewd hedge fund managers, allowing them to pick up assets on the cheap from distressed sellers. Others argue hedge funds are in a potential death spiral, with redemption demands from investors prompting asset sales which lock in losses, in turn prompting further redemptions and so on.
While hedge funds seem to capture perfectly the zeitgeist of contemporary capitalism, they actually have parallels in investment companies that flourished on Wall Street in the late 1920s. By 1929 a new investment company was being launched every day amidst frenzied demand from investors. These investment companies had a number of similarities to modern hedge funds.