Assaf Hamdani

Institutional Investors as Minority Shareholders

We examine the role of institutional investors in corporate governance in an environment where ownership is concentrated. The presence of dominant shareholders alters the role of institutional investors by limiting their voting influence; by shifting the focus from shareholder-manager conflicts (when ownership is dispersed) to conflicts between controlling and minority shareholders (when ownership is concentrated); and by creating new potential conflicts of interest when business groups are present. Using hand-collected data on voting by institutional investors in Israel, which adopted far-reaching measures to empower minority shareholders, we find that: (1) Institutional investors rarely vote against insider-sponsored proposals even when the law grants them special voting power; (2) Institutional investors are more likely to vote against compensation-related proposals than against other related party transactions even when minority shareholders lack the power to influence outcomes; and (3) Institutional investors with potential ownership and businessrelated conflicts of interest are less likely to vote against insider-sponsored proposals than standalone institutional investors, both when minority shareholders have power and when they do not. One interpretation of these findings is that the power granted to the minority plays a role only in the selection of proposals brought to a vote but not in voting on existing proposals; another is that, in order for institutions to play a valuable role in corporate governance, granting voting power to minority shareholders is unlikely to be effective unless conflicts of interest are addressed.

Corporate Control and Idiosyncratic Vision

This Article offers a novel theory of corporate control. It does so by shedding new light on corporate-ownership structures and challenging the prevailing model of controlling shareholders as essentially opportunistic actors who seek to reap private benefits at the expense of minority shareholders. Our core claim is that entrepreneurs value corporate control because it allows them to pursue their vision (i.e., any business strategy that the entrepreneur genuinely believes will produce an above-market rate of return) in the manner they see fit. We call the subjective value an entrepreneur attaches to her vision the entrepreneur’s idiosyncratic vision. Our framework identifies a fundamental tradeoff, stemming from asymmetric information and differences of opinion, between the entrepreneur’s pursuit of her idiosyncratic vision and investors’ need for protection against agency costs. Entrepreneurs and investors address this inevitable conflict through different ownership structures, each with different allocations of control and cash-flow rights.Concentrated ownership, therefore, should not be viewed as an unalloyed evil. To the contrary, it creates value for controlling and minority shareholders alike. Our analysis shows that controlling shareholders hold a control block to increase the pie’s size (pursue idiosyncratic vision) rather than to dictate the pie’s distribution (consume private benefits). Importantly, when the entrepreneur’s idiosyncratic vision is ultimately realized, the benefits will be distributed pro rata to all investors. Our framework provides important insights for investor protection and corporate law doctrine and policy. We argue that corporate law for publicly traded firms with controlling shareholders should balance the controller’s need to secure her idiosyncratic vision against the minority’s need for protection. While the existing corporate-law scholarship has focused solely on the protection of minority shareholders, we show that it is equally important to pay heed to the rights of the controlling shareholders.

The Class Defense

Lawmakers, courts, and legal scholars have long recognized that consolidating the claims of dispersed plaintiffs with similar grievances may promote justice and efficiency. In this Article, we argue that justice and efficiency also mandate that similarly positioned defendants be provided with an adequate procedure for consolidating their claims. We explore the circumstances under which costly litigation and collective action problems will prevent dispersed defendants with plausibly valid defense claims from confronting plaintiffs in court and analyze the troubling fairness and deterrence implications of such failure. We then demonstrate that aggregated claims will rectify the imbalance between the common plaintiff and defendants. To achieve defendant consolidation, we propose to implement what we label as the class defense device. We outline the novel features that will make the class defense both effective and fair - i.e., that will provide class attorneys with proper incentives, adequately protect the due process rights of absentee defendants, and keep to a minimum the omnipresent risk of collusion. Finally, we show that the class defense procedure affords would-be defendants greater protection than its alternatives. Specifically, we demonstrate that the class defense is a superior framework for resolving many disputes - such as lawsuits against credit card and cable companies - that currently take the form of class actions.

Independent Directors and Controlling Shareholders

Independent directors are an important feature of modern corporate law. Courts and lawmakers around the world increasingly rely on these directors to protect investors from controlling shareholder opportunism. In this Article, we argue that the existing director-election regime significantly undermines the ability of independent directors to effectively perform their oversight role. Both the election and retention of independent directors normally depend on the controlling shareholders. As a result, these directors have incentives to go along with controllers’ wishes, or, at least, inadequate incentives to protect public investors. To induce independent directors to perform their oversight role, we argue, some independent directors should be accountable to public investors. This can be achieved by empowering investors to determine or at least substantially influence the election or retention of these directors. These “enhanced-independence” directors should play a key role in vetting “conflicted decisions,” where the interests of the controller and public investors substantially diverge, but not have a special role with respect to other corporate issues. Enhancing the independence of some directors would substantially improve the protection of public investors without undermining the ability of the controller to set the firm’s strategy. We explain how the Delaware courts, as well as other lawmakers in the United States and around the world, can introduce or encourage enhanced-independence arrangements. Our analysis offers a framework of director election rules that allows policymakers to produce the precise balance of power between controlling shareholders and public investors that they find appropriate. We also analyze the proper role of enhanced-independence directors as well as respond to objections to their use. Overall, we show that relying on enhanced-independence directors, rather than independent directors whose election fully depend on the controller, can provide a better foundation for investor protection in controlled companies.

Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment in Israel

Concerned with excessive risk taking, regulators worldwide generally prohibit private pension funds from charging performance-based fees. Instead, the premise underlying the regulation of private pension schemes (and other retail-oriented funds) is that competition among fund managers should provide them with the incentives to make investment decisions that would serve their clients’ interests. We use a regulatory experiment from Israel to examine the effects of incentive fees and competition on the performance of retirement savings schemes. Taking advantage of a unique institutional setup, we compare three exogenously-given types of long-term savings schemes operated by the same management companies: (i) funds with performance-based fees, facing no competition; (ii) funds with AUM-based fees, facing minimal competitive pressure; and (iii) funds with AUM-based fees, operating in a highly competitive environment. We find that funds with performance-based fees exhibit high returns, possibly somewhat higher risk (depending on the measure used) and, in particular, high risk-adjusted returns. By contrast, we find no evidence that competitive pressure leads to improved performance. We conclude that incentives and competition are not perfect substitutes in the retirement savings industry. Our analysis also suggests that the pervasive regulatory restrictions on the use of performance-based fees in pension fund management may be costly and should be reconsidered.

Hidden Government Influence Over Privatized Banks

Abstract In this Article we examine Israel’s ongoing process of bank privatization to explore the link between privatization programs and the ownership structure of public companies. Our thesis is that concentrated ownership provides regulators with a platform for exerting informal influence over corporate decision-making. This platform serves regulators as a safety valve when all else fails, especially when they would like firms to terminate senior executives or board members. Communicating with controlling shareholders increases the likelihood that both the regulatory intervention and the reasons underlying it will remain confidential. Moreover, controlling shareholders can make swift decisions and implement them quickly, with no need for formal group deliberation. When informal influence is important — as in the case of banks — the government may prefer firms with controlling shareholders to widely held firms. It may therefore prefer to sell a control block in the firm undergoing privatization rather than distribute its shares through the stock market.