corporate governance: an...
TRANSCRIPT
CorporateGovernance:AnOverview
ProfessorJohnC.Coates
December2016
IOSCO/PIFS-HLS
GlobalCerGficateProgramforRegulatorsofSecuriGesMarkets
Whatiscorporategovernance?
VerydifferentdefiniGons
• ThewayssuppliersoffinancetocorporaGonsassurethemselvesofgeUngareturnoninvestment.
– Shleifer&VishnyJF1997
• ThereconciliaGonofconflictsofinterestamongcorporateclaimholders.
– ClaessensandYurtogluIFCForum2012
• Theconstraintsthatshapeexpostbargainingoverprofitsgeneratedbyfirms.
– ZingalesNewPalgraveDicGonaryofEconomics1998
• Thesystembywhichcompaniesaredirectedandcontrolled.– CadburyCommi`ee1992
Financial/shareholderPOVdominant(inUS,spreading),butconsider...
• “Thevastmajorityofcapitalexpenditures[atlargeUSfirms]areinternallyfunded.”
– JonathanBerkandPeterDeMarzo,CorporateFinance(ThirdEdiGon2014),at525
• “Morethan75%ofcapitalexpendituresarefundedfromretainedearnings.”– Id.at570
CurrentRangeofMeanings
Control DisclosureClear ReliableFlexible Consistent
Enforceable Relevant
Accountability LegiGmacyFinancial Rent-seekingCompliance Self-aggrandizement
Resilience (Sustainable) Socialvalue
CurrentRangeofMeaningMakers
BoardsMostlyCEOsAudit/financial
VarietyofotherSMEsLobbyists+LawyersTradeorganizaGons
UnionsInsGtuGonalowneragentsEntrepreneurs
RegulatorsandjudgesStockexchangesStandardse`ers(egFASB)
AcademicsLaw,finance,ethics,Economics,accounGng
AcGvistsShareholder+social
PoliGcians
HowisCGchanging?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK
US
Linear (UK)
Linear (US)
Data sources: Federal Reserve Board (US); Office for National Statistics (UK)
“Owners” are concentrating in “owner-agents”: conventional institutions in US and UK
1 in 5 have > 30%!Held by 1 owner!
Conventional vs. New Institutions in US
0%
5%
10%
15%
20%
25%
30%
1980 1990 2000 2010 2013
As % of US Corporate Equity
Pension funds
Insurance Cos.
RICs
Conventional vs. New Institutions in US
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
As % of US Corporate Equity
Hedge Funds
Purely passive
0%
5%
10%
15%
20%
25%
30%
1980 1990 2000 2010 2013
As % of US Corporate Equity
Pension funds
Insurance Cos.
RICs
OldShareholder“Levers”
• WallStreetwalk• Pushingfor“bestpracGce”changes
– Currentfocus:board“renewal”(evaluaGons,limits)
• Directcontacts• Embarrassment• Lobbying(SOX,Dodd-Frank)• Sayonpayvotes• Shareholderproposals
– Currentfocus:proxyaccess(1-3shhrepsonboard)• Proxyprocess(hosGletakeovers)
NewShareholder“Levers”
• WallStreetwalk• Pushingfor“bestpracGce”changes
– Currentfocus:board“renewal”(evaluaGons,limits)
• Directcontacts(“engagement”)• Embarrassment–
– “Withhold”votes– Sayonpayvotes
• Shareholderproposals(e.g.,majorityvotebylaws)– Currentfocus:proxyaccess(1-3shhrepsonboard)
• Lobbying(SOX,Dodd-Frank,JOBSAct)• Proxyprocess(hosGletakeovers)
Casestudy:Allergan
• Overseveralyears• ISS+convenGonalinsGtuGonspushed
• Grudgingacquiescence– Declassifiedboard– SpecialmeeGngs
• Valeant&PershingSquareTeamup
• HosGlebid+acGvistHF
• Valeant– “Inverted”forlowtaxrate– Raisedprices,cutR&D– EPSgrowth->moreM&A
• ForcedAto:– Buybackshares– CutR&D– SelltoWhiteKnight
• Inalower-taxjurisdicGon
• Thencollapsedinscandal
Yetmoreshareholder“levers”
• WallStreetwalk• Pushingfor“bestpracGce”changes
– Currentfocus:board“renewal”(evaluaGons,limits)• Directcontacts(“engagement”)• Embarrassment–
– “Withhold”votes– Sayonpayvotes
• Shareholderproposals– Currentfocus:proxyaccess(1-3shhrepsonboard)
• Lobbying(SOX,Dodd-Frank,JOBSAct)• Proxyprocess(hosGletakeovers)
Anotherway“owners”havego`enmorepower
• Fewer(iflarger)publiccompanies
• Morefirmsownedbyprivateequity
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
3/1/80
3/1/81
3/1/82
3/1/83
3/1/84
3/1/85
3/1/86
3/1/87
3/1/88
3/1/89
3/1/90
3/1/91
3/1/92
3/1/93
3/1/94
3/1/95
3/1/96
3/1/97
3/1/98
3/1/99
3/1/00
3/1/01
3/1/02
3/1/03
3/1/04
3/1/05
3/1/06
3/1/07
3/1/08
3/1/09
3/1/10
3/1/11
3/1/12
3/1/13
3/1/14
3/1/15
Num
berofCom
panies
Date
NumberofUS-listedForeignandDomes9cCompanies
n_foreign
n_domesGc
Note:OperaGngcompaniesonly(i.e.,nolimitedpartnerships,closed-endfunds,REITs,ETFs)listedonNasdaq,NYSE,andAmex(nowNYSEMKT)
Source:ProfessorJayRi`er’sIPOwebsite
But that doesn’t mean US equity markets have been shrinking – they’ve been growing, in fact
60%
65%
70%
75%
80%
85%
90%
0
5000
10000
15000
20000
25000
30000
35000
40000
1980 1990 2000 2010 2013
Market cap of US public companies
MC as % of CE
But all corporate equity has been growing faster
60%
65%
70%
75%
80%
85%
90%
0
5000
10000
15000
20000
25000
30000
35000
40000
1980 1990 2000 2010 2013
Corporate equity
Market cap of US public companies
MC as % of CE
Public equity has thus been declining in relative importance
60%
65%
70%
75%
80%
85%
90%
0
5000
10000
15000
20000
25000
30000
35000
40000
1980 1990 2000 2010 2013
Corporate equity
Market cap of US public companies
MC as % of CE
But“private”equityisamisnomer
Whoowns“private”equityfunds?
• Pensionfunds• Banks• Insurancecompanies
• Endowments
• Sovereignwealthfunds• ETFs• Inotherwords,thesameinsGtuGonsthatownpubliccompanies
LessonsforRegulatorsfromTrend1
• Knowtheinvestors SECCorpFin+IM
• Goals,constraints,trends• Recognizemostdecisionmakersarealsoagents
• AnalyzegovernancereformsatmulGplelevels
• What’stheeffectoncompanies?
• Managers?Boards?Employees?
• What’stheeffectonulGmateinvestors?
• Bytypes? Beneficiaries?• Moneymanagers?Governanceprofessionals?
Alsonew:agovernanceindustry
• Aninterestgroup– Publicpensionfunds– Unionpensionfunds– Proxyadvisors(ISS)– Academics– Assetmanagers
• BlackRock• SSgA• Vanguard• Allianz
• WithininsGtuGons:– Goalsmayconflictwithporxoliomanagers
• AcrossinsGtuGons:– Goalsmayconflictwitheachother,e.g.,
• SSgApolicy2016:– Maywithholdvotes
– Ifdirectorsse`le– WithhedgefundsatexpenseofLTinvestors
Shareholder“Levers”
• WallStreetwalk• Pushingfor“bestprac9ce”changes
– Currentfocus:board“renewal”(evalua9ons,limits)• Directcontacts(“engagement”)• Embarrassment–
– “Withhold”votes– Sayonpayvotes
• Shareholderproposals– Currentfocus:proxyaccess(1-3shhrepsonboard)
• Lobbying(SOX,Dodd-Frank,JOBSAct)• Proxyprocess(hosGletakeovers)
Foreignownershipisgrowing,too
GlobalizaGon’srisks
• “BestpracGces”ingovernancespreadthroughmulGlateralorganizaGons
• Oyenwithoutenoughregardtorelevantownershiporothercountry-specificdifferences
• WhatisroleofNEDsatacompanywithacontrolshareholder?– UScorporatelawdefersonlylightlytosuchNEDs
• Increasingshareholderpoweroverall(vsboard)canworsenintra-shareholderconflict
LoomingChoices
• IPOsvs.othertriggersforCGlawsornorms?
• AnGtrustvs.CG?
• Dualclassornot?
Triggers• TradiGonalUStrigger:IPO,lisGng,or#ofRHs
– IncreasingdeviaGonsfromsingle-model
– JOBSAct• PermanentexempGonforsmallcapsfromSOX
• Emerginggrowthcompanies
• Upto2000accreditedinvestors– Firm-specificCGdeviaGonspre-IPO(dualclass)
• Otherpossibletriggers– Industry(SIFIs,largeextracGveundertakings)– Size(largeundertakings)– Employment(Germanco-determinaGon)– Numberofeconomic(notlegal)owners(PE)
Triggers• TradiGonalUStrigger:IPO,lisGng,or#ofRHs
– IncreasingdeviaGonsfromsingle-model
– JOBSAct• PermanentexempGonforsmallcapsfromSOX
• Emerginggrowthcompanies
• Upto2000accreditedinvestors– Firm-specificCGdeviaGonspre-IPO(dualclass)
• Otherpossibletriggers– Industry(SIFIs,largeextracGveundertakings)– Size(largeundertakings)– Employment(Germanco-determinaGon)– Numberofeconomic(notlegal)owners(PE)
AnGtrust
• TradiGonalanGtrustsharplydisGnguishedfirmsfromowners,absent“control”
• Concentrated(non-controlling)ownership– PossiblygoodforCG– BadforanGtrust:reducedincenGvestocompete
Source:Azaretal.2015,forthcomingJournalofFinance
AnGtrust
• TradiGonalanGtrustsharplydisGnguishedfirmsfromowners,absent“control”
• Mayalsoworseninequality(Elhauge2016)
• SoluGons?
– Watchthisspace!
Short-Termvs.Long-Term
• OneresultofincreasedshareholderpoweratUSfirmshasbeenreducedmanagerpower– Manyentrepreneursarepost-IPOmanagers
– Asaresult,theuseofnon-contestablecontrolstructureshasbeenincreasing
Source:ProfessorJayRi`er’sIPOwebsite
Difficultpolicyissues• PermitdualclasslisGngatall?
– AlibabacametoUSbecauseHongKongwouldnot• “Morethantwo-thirdsofthemarketcapitalisaGonofChinesecompanieslistedinNewYorkusedual-classshares,includingBaiduandJD.com.”
• Permit“breakthrough”?– Topermitcross-borderM&A?
• EU’sTakeoverDirecGvewouldhavedonethis– Notclearlygoodpolicy,except...
• OverGme,suchstructureserodevalue
– Ayersetperiodofyearsunlessre-authorized?– Ayerfounderdies?
Difficultpolicyissues• PermitdualclasslisGngatall?
– AlibabacametoUSbecauseHongKongwouldnot• “Morethantwo-thirdsofthemarketcapitalisaGonofChinesecompanieslistedinNewYorkusedual-classshares,includingBaiduandJD.com.”
• Permit“breakthrough”?– Topermitcross-borderM&A?
• EU’sTakeoverDirecGvewouldhavedonethis– Notclearlygoodpolicy,except...
• OverGme,suchstructureserodevalue
– Ayersetperiodofyearsunlessre-authorized?– Ayerfounderdies?
Conclusion• Corporategovernance’smeaningiscontested• Threetrends
– “Owner-agent”powerisgrowing– A“governanceindustry”isgrowing– Governanceisglobalizing
• Threehard,near-termchoices– TriggersforregulaGon,norms– AnGtrust– Dualclass
Thankyou!