Governance and Activist Investors Outside of the United States

Ch apte r 10. Mini -Case

Governance and Activist Investors Outside of the United States

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Gove rnanc e in Japan , German y, an d China ha s bee n chang ing as “wes tern” gove rnanc e

sys tems hav e inc reas ing ly bee n adop ted . Trad itiona lly, boa rds of direc tors in thes e na tion s hav e

large ly bee n co mpose d of ins ide r manage r direc tors. In 2015 , Japa n adop ted a ne w gove rnanc e

cod e tha t strong ly emphas ize d the impo rtanc e of firms to elec t man y more independen t ou tside

direc tors. Ac tivist sha reho lde rs an d a stron g marke t for co rpo rate con trol hav e trad itiona lly bee n

absen t in Japan . More recen tly, sha reho lde rs hav e bee n more ac tive an d the mos t success ful

one s hav e bee n labe lled “engage men t” funds . Th e chang e is signa led , for exa mple, by the

Japanes e Gove rnmen t Pens ion Inves tmen t Fun d choos ing an ac tivist inves tor, the Taiyo Pac ific

Pa rtne rs LP — a U.S. base d engage men t fun d — to manag e so me of its $1 trilli on in asse ts.

Fu rthe rmore, the Japanes e Financ ial Se rvice s Agenc y ha s introduce d a “stewardsh ip code ” tha t

ca lls on inves tors to “pres s for grea ter returns .” As such , the Japanes e env iron men t is beco ming

more orien ted toward “sha reho lde r righ ts,” althoug h the app roac h co mpa rative ly is no t as

“ac tivist” as foun d else whe re in the world.

Bes ide s a ne w bran d of ac tivism in Japan , ac tivism is sp read ing aroun d the glob e inc lud ing

German y. Aga in, a rev ise d gove rnanc e cod e pushe d for more sha reho lde r-friend ly gove rnanc e

arrange men ts, inc lud ing an emphas is on ou tside direc tors an d stronge r emphas is on execu tive

long -term incen tive co mpensa tion . W ith stronge r emphas is on sha reho lde rs’ righ ts, ac tivist

fund s pu rsue d more ac tivity. Cev ian Cap ital, an ac tivist fund , is invo lve d in owne rsh ip with

ThyssenK rup p an d Bilfi nge r. Like wise , Elliott Manage men t, ano the r ac tivist fund , is invo lve d with

Celes io an d Kabe l Deu tsch land . Althoug h manage men t tea ms are qu ite susp iciou s of ac tivists in

German y an d othe r con tinen tal Eu ropea n coun tries , “German y is an area whe re ac tivists may

loo k becaus e of its protec tion s for mino rity inves tors in takeove r dea ls.” Howeve r, resea rch

sho ws tha t ac tivist inves tors hav e les s influenc e on top manage men t tea ms becaus e of

res trictive gove rnanc e regu lation . Fo r exa mple, on e stud y foun d tha t ac tivist inves tors’

invo lve men t did no t lea d to inc rease d CEO turnove r.

Althoug h som e ac tivism ha s take n plac e in mainlan d China , firms in Hon g Kon g hav e bee n

targe ted more by ac tivist funds . Hon g Kong -listed co mpan ies hav e bee n loosen ing rules for

foreign owne rsh ip and , the refore, co mpan ies hav e bee n pay ing more atten tion to wha t inves tors

think in rega rd to gove rnanc e an d transpa renc y. In mainlan d China , ho weve r, often sha res are

mos tly owne d by pa ren t bus ines s grou p firms as well as the gove rnmen t or, becaus e the y are

often younge r, the y are still owne d by the firm’s founde rs. As such , the re is les s po ten tial influenc e for foreign inves tors on co mpan y dec isions . Howeve r, the Shangha i-Hon g Kon g Stoc k

Connec t prog ram ha s acce lerated oppo rtun ities for ac tivists on the mainland . Th roug h the

Connec t prog ram, foreign financ ial ins titution s ca n hav e direc t acces s to mainlan d China ’s

cap ital marke ts. Th is mean s tha t foreign owne rsh ip will hav e more ac tivist influenc e becaus e of

sha reho lde r vo ting righ ts in loca l mainlan d China -listed firms. Also , man y ho me-grown Chines e

ac tivist fund s thrive d du e to the ir recen t inves tmen ts in the techno log y sec tor with the succes s of

Alibaba , Tencen t, an d man y othe r high techno log y firms.

Bu t ho w do owne rs from emerging marke t coun tries an d coun tries with sign ifican t gove rnmen t

owne rsh ip influenc e the firms the y inves t in ove rseas ? Interes ting ly, sove reign wea lth funds ,

man y from emerging econo mies , are play ing a do minan t role by inves ting in deve lope d

econo mies as well as othe r emerging econo mies . In the ir own way, the y are play ing an ac tivist

role. Fo r exa mple, sinc e the globa l financ ial crisis, man y German firms hav e sough t inves tmen t

from sove reign wea lth firms from Gulf States in the Mideas t. In pa rticu lar, man y German major

au tomob ile firms hav e rec ruited Gulf Coope ration Counc il (GCC ) sove reign wea lth fun d

inves tmen ts du ring the stresse s of financ ial res truc turing spu rred by the financ ial crisis. Thes e

sove reign wea lth fund s are long -term inves tors an d reduc e the poss ibilit y of a hos tile takeove r,

which ha s beco me a more prominen t fea ture in the German co rpo rate gove rnanc e landscape .

Sove reign wea lth fund s are also tak ing ac tive roles in climate change . Fo r ins tance , the

Norweg ian sove reign wea lth fun d is dives ting its asse ts in coa l an d othe r foss il fue ls. Its strateg y

is to focu s its wea lth to hav e an influenc e on sa lien t sus tainab ilit y issues , suc h as climate

change .

Ano the r exa mple is the acqu isition ac tivity of Braz ilian multina tiona ls, which hav e bee n

suppo rted by its sove reign wea lth fund , the Braz ilian Deve lop men t Ban k (BND ES ). BND ES ha s

bee n “invo lve d in seve ral large -sca le ope ration s an d he lpe d orches trate merge rs an d

acqu isition s to bu ild large ‘na tiona l cha mpions ’ in seve ral indus tries .” Fo r exa mple, “BND ES

he lpe d rescu e Braz ilian mea tpacke r JBS -Fribo i, which agg ress ive ly expande d interna tiona lly by

acqu iring large U.S. produce rs Swift an d Pilgrim’ s Pride , amon g othe rs. In su mm ary, wes tern

gove rnanc e dev ice s an d sha reho lde r ac tivism hav e bee n sp read ing globa lly, an d owne rs in

emerging econo mies are pa rticipa ting in the marke t for co rpo rate con trol an d in res truc turing

inves tmen ts, espec ially sove reign wea lth fund s tha t also exe rcise influenc e in deve lope d as well

as deve lop ing coun tries . Thes e fund s often focu s to suppo rt gove rnmen t strateg ies , suc h as in

China ’s ene rgy sec tor, whe re the Chines e gove rnmen t is seek ing to acqu ire more ene rgy asse ts

an d na tural resou rce s to suppo rt its econo my. So metimes thes e sove reign fund s also suppo rt

gove rnmen t pos itions , suc h as Norway, which is us ing asse ts to emphas ize sus tainab ilit y, an

impo rtan t soc ial an d po liti ca l move men t. Sou rces : M. Almad i & P. Laz ic, 2016 , CEO incen tive co mpensa tion an d ea rning s manage men t,

Manage men t Dec ision , 54 (10 ): 2447 –2461 ; J. Brauns tein, 2017 , Th e do mes tic drive rs of state

financ e ins titutions : Ev idenc e from sove reign wea lth funds , Rev iew of Interna tiona l Po liti ca l

Econo my, 24 (6): 980 –1003 ; L. Fletche r & E. Johann ings meier, 2017 , Hedg e fund s prospe r on

China tec h bu t bubb le fea rs emerge , W all Stree t Jou rna l, ww w.wsj.co m, Sep tembe r 12 ; N.

Hasega wa, H. Kim, & Y. Yasuda , 2017 , Th e adop tion of stoc k op tion plan s an d the ir effec ts on

firm pe rformanc e du ring Japan ’s pe riod of co rpo rate gove rnanc e reform, Jou rna l of the

Japanes e an d Interna tiona l Econo mies, 44 : 13 –25 ; T. Kaspe reit, K. Lopa tta, & D. Onnen , 2017 ,

Sha reho lde r Value Implica tion s of Complianc e with the German Corpo rate Gove rnanc e Code ,

Manage rial an d Dec ision Econo mics, 38 : 166 –177 ; K. Naga ta & P. Nguyen , 2017 , Ow ne rsh ip

struc ture an d disc losu re qua lity: Ev iden ce from manage men t forecas ts rev ision s in Japan ,

Jou rna l of Accoun ting an d Pub lic Po licy , 36 (6): 451 –467 ; O. Noreng , 2017 , Norway ’s

dive rsifica tion , W orld Oil, 238 (12 ): 23 ; M. Stanca ti & M. Fa rrell, 2017 , Saud i Sove reign W ea lth

Fun d se ts growth targe ts, W all Stree t Jou rna l, ww w.wsj.co m, Octobe r 26 ; X. Geng , T. Yosh ika wa,

& A. M. Colpan , 2016 , Leve rag ing foreign ins titutiona l log ic in the adop tion of stoc k op tion pa y

amon g Japanes e firms, Strateg ic Manage men t Jou rna l, 37 (7): 1472 –1492 ; B. Alhashe l, 2015 ,

Sove reign wea lth funds : A literature rev iew, Jou rna l of Econo mics an d Bus ines s, 78 : 1–13 ; K.

Narioka , 2015 , Ac tivist inves tors in Japa n find so me doo rs crack ing open , W all Stree t Jou rna l,

ww w.wsj.co m, Janua ry 29 ; S. G. Lazza rini, A. Musacch io, R. Bande ira-de -Mello, & R. Marcon , R.

2015 , W ha t do state-owne d deve lop men t bank s do ? Ev idenc e from BND ES , 2002 –09 W orld

Deve lop men t, 66 : 237 –253 ; A. Musacch io & S. G. Lazza rini, 2014 , Reinven ting State Cap italism:

Lev iatha n in Bus iness , Braz il an d Beyon d, Cambridge : Harva rd Unive rsity Press ; X. Sun , J. Li, Y.

W ang , & W . Clark, 2014 , China ’s sove reign wea lth fun d inves tmen ts in ove rsea s ene rgy : Th e

ene rgy secu rity pe rspec tive , Ene rgy Po licy , 65 : 654 –661 .

Cas e Discuss ion Ques tion s

1. W hy are man y coun tries adop ting “wes tern” gove rnanc e sys tems similar to thos e foun d in the

United States an d the United Kingdo m tha t are more sha reho lde r friend ly?

2. W ha t pa rticu lar gove rnanc e dev ice s are he lping or hinde ring goo d gove rnanc e in thes e

coun tries tha t are chang ing the ir gove rnanc e sys tems?

3. How do sove reign wea lth fund s affec t gove rnanc e of firms in ho me an d foreign coun tries ?

4. W ha t wou ld yo u reco mm en d to improv e the gove rnanc e sys tems in Japan , German y, an d

China , respec tive ly, give n the gove rnanc e dev ice s desc ribe d in Chap ter 10 ?

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