Corporate Governance Through Voice and Exit “Corporate Governance Through Voice and Exit” Marco Becht Solvay Brussels School , Université Libre de Bruxelles, CEPR and ECGI Julian Franks London Business School, CEPR and ECGI Hannes Wagner Bocconi and ECGI 5 October 2019 The research was supported by a grant from the Norwegian Finance Initiative (NFI). - 1 -
Corporate Governance Through Voice and Exit What do we know about shareholder stewardship? Passive Manager Active Manager Activist Hedge Fund Stakes held Hundreds to thousands Hundreds Typically <20 companies Fund can Yes Yes Yes vote/complain/ engage (“Voice”) Fund can SELL No Yes Yes (“Exit”) Workload per ~250 companies per ~20 companies per ~1 company per Governance team person, per year person, per year person, per year member Note: Activist hedge funds are a highly specialized market. Represented less than 1 percent of global equity assets in 2015 (despite large and persistent inflows) - 2 -
Corporate Governance Through Voice and Exit Clinical Study • Proprietary data from a large UK asset manager: Standard Life Investments (SLI; today Aberdeen Standard Investments) • Data on contacts with portfolio companies (engagements), voting and daily holdings (trading) for all funds with a UK equity position • Study focuses on UK equities team • Caveats » Proprietary data, difficult to replicate » Single asset manager with specific stewardship & investment process » Voluntary disclosure bias § Unravelling theorem: “best in class” - 3 -
Corporate Governance Through Voice and Exit Research questions • We attempt to provide evidence on: 1. How is the SLI UK equities team organized? 2. Does SLI monitor? Does SLI engage? Does SLI vote? 3. What role does monitoring, engagement and voting play in trading decisions ? 4. Does monitoring and engagement provide information advantages? Does stewardship contribute to alpha? - 4 -
Corporate Governance Through Voice and Exit Outline • Institutional Setting • Illustrative Case Studies • Event Study : Abnormal trading and abnormal returns - 5 -
Corporate Governance Through Voice and Exit Institutional Setting • SLI Funds Managed by the UK Equities Team • UK Equities Team » Governance and Stewardship Group » Internal Sector Analysts » Fund Managers » Vote Manager • Activities » Monitoring and engagement (meetings, other contacts) » Voting » Trading - 6 -
Corporate Governance Through Voice and Exit UK Equities fund managed by SLI equities team: Number, size, and turnover - 7 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Team SLI UK Equities Team “Black Box” Voting Exit Decision Decision - 8 -
Corporate Governance Through Voice and Exit Portfolio Company 1 Contacts Contacts Contacts Sector Analysts Fund Managers G&S Group Voting Trading Decision Decision - 9 -
Corporate Governance Through Voice and Exit 1 - 10 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts 2 Sector Analysts Fund Managers G&S Group Voting Trading Decision Decision - 11 -
Corporate Governance Through Voice and Exit 2 - 12 -
Corporate Governance Through Voice and Exit G&S Team’s motives for contacts and engagements 2 Contact Initiated by Target 12% Research 4% Compensation 35% Environmental and Social 18% Underperforma nce Governance 6% Engagement 25% Note: Compensation is a frequent topic; financial underperformance is rarely a topic - 13 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Group 3 Voting Trading Decision Decision - 14 -
Corporate Governance Through Voice and Exit 3 - 15 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Group 4 Voting Trading Decision Decision - 16 -
Corporate Governance Through Voice and Exit 4 Summary Statistics for Internal Analysts - 17 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Group Voting Trading Decision Decision 5 - 18 -
Corporate Governance Through Voice and Exit 5 - 19 -
Corporate Governance Through Voice and Exit 5 What management proposals does SLA vote against? Year Board Compensati Capital M&A SRI Articles Audit Routine Other Total on 2004 18.4% 50.0% 2.6% 0.0% 5.3% 2.6% 13.2% 0.0% 7.9% 100.0% 2005 9.0% 71.8% 0.0% 0.0% 6.4% 1.3% 3.8% 3.8% 3.8% 100.0% 2006 9.7% 64.5% 1.6% 0.0% 8.1% 1.6% 4.8% 3.2% 6.5% 100.0% 2007 13.6% 65.2% 0.0% 1.5% 1.5% 1.5% 7.6% 3.0% 6.1% 100.0% 2008 18.1% 65.3% 0.0% 0.0% 0.0% 1.4% 8.3% 2.8% 4.2% 100.0% 2009 14.7% 62.1% 5.3% 3.2% 0.0% 0.0% 7.4% 4.2% 3.2% 100.0% 2010 13.9% 58.3% 9.7% 4.2% 0.0% 1.4% 2.8% 1.4% 8.3% 100.0% 2011 15.7% 66.3% 6.7% 1.1% 2.2% 1.1% 1.1% 0.0% 5.6% 100.0% 2012 5.0% 74.2% 10.0% 1.7% 2.5% 0.0% 3.3% 0.0% 3.3% 100.0% 2013 30.7% 57.4% 4.0% 3.0% 0.0% 1.0% 2.0% 0.0% 2.0% 100.0% 2014 16.5% 74.8% 5.8% 0.0% 0.0% 0.0% 0.0% 0.0% 2.9% 100.0% 2015 17.3% 58.2% 12.2% 2.0% 1.0% 1.0% 3.1% 2.0% 3.1% 100.0% Total 15.2% 65.0% 5.4% 1.5% 1.9% 0.9% 4.1% 1.6% 4.3% 100.0% Note: Among all management proposals, the ones that SLA votes against are overwhelmingly related to board issues and compensation issues (together 80.2% of all votes against) - 20 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Group Voting Trading Decision Decision 6 - 21 -
Corporate Governance Through Voice and Exit Active share and trading (turnover) 6 • Funds managed by UK equities team • Cremers and Petajisto would classify equity funds with active share below 60 percent as “quasi indexers” - 22 -
Corporate Governance Through Voice and Exit Portfolio Company Contacts Contacts Contacts Sector Analysts Fund Managers G&S Team Voting Exit Decision Decision - 23 -
Corporate Governance Through Voice and Exit 1 Analyst Meeting 2 G&S Meeting 3 G&S Contact 4 G&S GHW Raised/Removed 5 Analyst Report AGM AGM EGM AGM 6 AGM/EGM Vote 7 Analyst Buy/Sell/Hold 8 Fund Manager Trades - 24 -
Corporate Governance Through Voice and Exit Case Studies • Large widely held FTSE100 company (Vodafone) • Company transitioning from founder control to independence (easyJet) • Company de facto controlled by controversial founder (Sports Direct) - 25 -
Corporate Governance Through Voice and Exit Example 1: SLI Monitoring and Engagement of a FTSE100 Company (Vodafone) SLI Monitoring and Engagement Activity 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 Date Analyst Meeting CEO FD Chair NA G&S Meeting G&S Other Rem GHW Active AGM EGM Against Director Against Rem Buy Hold Sell - 26 -
Corporate Governance Through Voice and Exit Example 2: SLI Monitoring and Engagement of a founder influenced company (easyJet) SLI Monitoring and Engagement Activity 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 Date Analyst Meeting CEO FD Chair NA G&S Meeting G&S Other Rem GHW Active AGM EGM Against Director Buy Hold Sell - 27 -
Corporate Governance Through Voice and Exit Example 3: SLI Monitoring and Engagement of a de facto founder controlled company (Sports Direct) SLI Monitoring and Engagement Activity 01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 Date Analyst Meeting Meet CEO Meet FD Meet Chair NA G&S Meeting G&S Other Rem GHW Active AGM EGM Against Abstain Buy Hold Sell - 28 -
Corporate Governance Through Voice and Exit - 29 -
Corporate Governance Through Voice and Exit Event Study Event study of trading and abnormal returns around four events: I. Company meetings II. Raising of internal governance warning* III. Internal analyst recommendations* IV. Voting** Note: * information likely to be known to fund managers before date marker ** outcome often predictable; residual uncertainty on outcome - 30 -
Corporate Governance Through Voice and Exit Event Study I. Company meetings II. Raising of internal governance warning III. Internal analyst recommendations IV. Voting - 31 -
Corporate Governance Through Voice and Exit Event Study I. Company meetings II. Raising of internal governance warning III. Internal analyst recommendations IV. Voting - 32 -
Corporate Governance Through Voice and Exit Event Study I. Company meetings II. Raising of internal governance warning III. Internal analyst recommendations IV. Voting - 33 -
Corporate Governance Through Voice and Exit Event Study I. Company meetings II. Raising of internal governance warning III. Internal analyst recommendations IV. Voting - 34 -
Corporate Governance Through Voice and Exit Engagement Activity & “Tone” around shareholder votes - 35 -
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