Shareholder Value Reconsidered Simon Deakin and Ajit Singh Centre for Business Research University of Cambridge CBR Summit: 29-30 March 2006 Innovation and Governance
Shareholder value reconsidered • Defining ‘shareholder value’ and its relationship to company law • The pivotal role of the market for corporate control: evidence on UK takeovers • The perverse effects of stock market volatility in the US • Developing countries: the ‘crony capitalism’ hypothesis • Is the shareholder value norm a source of efficiency, or just a fad? CBR Summit: 29-30 March 2006 Innovation and Governance
The end of history for corporate governance? • ‘A principal reason for convergence [in corporate law] is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders… Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the “end of history” for corporate law’ (Henry Hansmann and Reinier Kraakman, January 2000) [emphases added] CBR Summit: 29-30 March 2006 Innovation and Governance
‘Enlightened shareholder value’ • ‘[a]n obligation on directors to achieve the success of the company for the benefit of the shareholders by taking proper account of all the relevant considerations for that purpose’ including ‘a proper balanced view of the short and long term, the need to sustain effective ongoing relationships with employees, customers, suppliers and others; and the need to maintain the company’s reputation and to consider the impact of its operations on the community and the environment’ (UK Company Law Review Steering Group, 2000) CBR Summit: 29-30 March 2006 Innovation and Governance
The company’s interest ‘in itself’ • ‘In Anglo-Saxon countries the emphasis is for the most part on placed on the objective of maximising share value, whilst on the European continent and France in particular the emphasis is placed more on the human assets and resources of the company… Human resources can be defined as the overriding interest of the corporate body itself, in other words the company considered as an autonomous economic agent, pursuing its own aims as distinct from those of its shareholders, its employees, it creditors including the tax authorities, and of its suppliers and customers; rather, it corresponds to their general, common interest, which is that of ensuring the survival and prosperity of the company’ (Viénot report, 1995) CBR Summit: 29-30 March 2006 Innovation and Governance
Origins of shareholder value • The takeover revolution • The City Code on Takeovers and Mergers: constraining the target board • Shareholder value metrics • Share option schemes • New managerial class • Rise of the institutional shareholder CBR Summit: 29-30 March 2006 Innovation and Governance
‘Creative destruction’ • ‘[i]t was impatient, value-focused shareholders who did America a great favour by forcing capital out of its traditional companies, and thereby making it available to fund the venture capitalists and the Ciscos and Microsofts that are now in a position to propel our economy very rapidly forward’ (Larry Summers, 2001) CBR Summit: 29-30 March 2006 Innovation and Governance
‘The unproductive shareholder’ • ‘stock-market investors have become, collectively, an extraordinarily unproductive force in business. Indeed, for the last two decades, their contribution to corporations has been literally negative… it’s wrong to shovel money out to shareholders in ever larger scoops and force other stakeholders to pay the price’ (Marjorie Kelly, Harvard Business Review , 2001) CBR Summit: 29-30 March 2006 Innovation and Governance
Net Sources of Finance for Germany, Japan, the UK and US 1970-89 (percentages) 100 80 60 40 20 0 -20 Internal Bank Bonds New equity Trade Capital Other finance credit transfers Germany Japan UK US Source: Singh, 2003:49 CBR Summit: 29-30 March 2006 Innovation and Governance
The regulatory framework for takeover bids • Company law: directors owe duty to act in good faith in the interests of the company • Takeover Code: soft law which imposes a bid timetable and principle of ‘equal treatment’ of target shareholders; major reason for dispersed share ownership in UK • Specific duties are owed by directors to target shareholders • In the UK, restrictions on poison pills make all listed companies open to the possibility of a hostile bid • In the US, poison pills are generally permitted, but may have to be redeemed by the board in the event of an ‘auction’ between competing bidders CBR Summit: 29-30 March 2006 Innovation and Governance
The Thirteenth Directive • ‘actual and potential takeover bids are an important means to discipline the management of listed companies with dispersed ownership, who after all are the agents of shareholders. If management is performing poorly or unable to take advantage of wider opportunities the share price will generally under-perform in relation to the company’s potential and a rival company and its management will be able to propose an offer based on their assertion of their greater competence. Such discipline of management and reallocation of resources is in the long term in the best interests of all stakeholders and society at large. These views also form the basis for the Directive’ (EU High Level Group). CBR Summit: 29-30 March 2006 Innovation and Governance
Examining takeover bids • Inconclusiveness of econometric studies suggests role for more focused research (reported in Deakin and Slinger, 1997; Deakin, Hobbs, Nash and Slinger, 2003) • Non-random sample of 15 bids mounted in period 1993- 96 chosen to reflect main bid types (hostile; agreed; UK only; international; cash only; shares only; shares and cash) • Interviews with directors, bankers, lawyers,institutional investors, union representatives, aimed at understanding perceptions of bid process • Sample re-examined 5 years on to see how the merged firm was perceived to have performed CBR Summit: 29-30 March 2006 Innovation and Governance
How market actors view takeover regulation • Takeover Code and directors’ fiduciary duties ranked highest among factors affecting bid outcomes • Regulatory factors more likely to affect outcome in hostile as opposed to agreed bids • Employees’ interests less likely to be given priority in hostile bids than in agreed bids • Target employees were expected to suffer losses from bids; target shareholders were the most likely to gain; other consistent gainers were advisers CBR Summit: 29-30 March 2006 Innovation and Governance
The Importance of Regulatory Factors in Determining Takeover Outcomes Figure 1 100 90 80 % of respondents citing factors as important 70 60 50 40 30 20 10 0 Takeover Code and Fiduciary duties of Companies Acts Tax Possibility of Takeover law s of EC merger law SAS Rules directors obligations reference to MMC another country CBR Summit: 29-30 March 2006 Innovation and Governance
Figure 2 The Mean Perceived Effect of Mergers on Different Groups 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 Shareholders Employees Managers Directors Suppliers Customers Banks Bondholders Competitors Advisors Bidders Targets CBR Summit: 29-30 March 2006 Innovation and Governance
Takeover Premiums in Selected Takeover Bids 1993-96 140 120 100 Prem ium (% ) 80 60 40 20 0 L B B e y e s E n L b S t m E b n b t S r k e r r E e a c e o e T o o W r V i w S w t s a w F D r c s r - V t S i P - c l n F r a o s - - e o e a N C - E n d a - W - N r l M e E o y e E n R d - - h s o a c - r - G - n P y n e b l s a s L n o r g i r h o R f p e o e a e x r g t s s u w D i e r h a t n n G o o i n t l o a l i r G - i r t E K o S e P H r U N e A s h g d a h - s e e x s e i t f t e t h i i s n t o T s i u r c U i B o S n H r a H r a g l a f a r T Takeover CBR Summit: 29-30 March 2006 Innovation and Governance
Directors’ duties • ‘The effect of General Principle 9 is that you are given permission to temper your pursuit of your shareholders’ interests with your employees’ interests. It is used as an argument but never really has an influence on the outcome.’ • ‘I have yet to come across a bid in which the creditors’ and employees’ interests have been thought about in front of shareholders: it’s on the list, but of no practical importance: first is share price, and second are service contracts for directors’ CBR Summit: 29-30 March 2006 Innovation and Governance
Stakeholders • ‘Employees? They never came into it. I spoke to one [target] director once, on a picket line outside an EGM. He shook my hand and thanked me for all I was doing for the shareholders. I told him I was doing it for the employees. In general, as long as the new owner tells us that they intend to carry on as before, the directors feel that they’ve done their job. In reality, employees’ interests (and differences in company practices) are not considered. [Target] directors never came to see us at all.’ (trade union official) CBR Summit: 29-30 March 2006 Innovation and Governance
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