Jeremy Grant

Hedge Fund Activism in Europe

The paper analyzes 362 European activist interventions by hedge funds, focus funds and other activist investors from 2000 to 2008. The sample includes both public and private interventions. The private interventions are based upon proprietary data collected from five activist funds. For public interventions the disclosure of acquired stakes is associated with large positive abnormal returns across a number of jurisdictions. Private activism is extensive and profitable but less so than public activism, in large part because the incidence of takeovers is higher in public activism. The returns from hostile activist interventions are more profitable than co-operative ones, and returns for specialist activist funds are substantially larger than for other investors. After controlling for these factors legal jurisdiction does not explain differences in returns across countries.

Financial Tunnelling and the Mandatory Bid Rule

In this paper, we use case studies to document how dominant shareholders have circumvented mandatory bid rules to appropriate wealth from minority shareholders. Dominant shareholders are numerous in Continental Europe. Creative compliance with mandatory bid rules reveals the failure of boards and regulators to protect minority shareholders and the difficulties of legislating in this area. We propose enhanced means for protecting their interests.

Kevin J. Murphy on Executive Compensation: Is Europe Catching Up with the US, and Should it Do So?

Executive compensation has risen sharply over the last few years in both Europe and the US, although the level of compensation in the US is still considerably higher than in Europe. The steep rise in compensation is driven in part by the ratchet effect induced by more stringent disclosure rules, and in part by inefficiencies in, and governance failure of, the CEO hiring process.

Hedge fund activism in Europe: Does privacy matter?

Shareholder activism in Europe is sometimes difficult to observe. There are few shareholder proposals put forward at annual meetings on the Continent and even fewer in the United Kingdom. Activism by hedge funds is relatively more frequent but data is only available on the most public cases. This does not imply that shareholder activism in Europe is non-existent; on the contrary. The lack of shareholder proposals could be the result of real shareholder power that only needs to surface occasionally. We analyze this proposition in a non-random sample of 131 European interventions from five activist funds which have provided the authors with proprietary information. Of these 131 interventions, 57 were not made public either during or subsequent to the intervention. Investigating private activism is important because, when it is combined with public activism, it provides a better measure of the overall level of activity. It also allows us to examine the issue of whether private engagements are more profitable than public and hostile engagements, rather like the comparison with hostile versus agreed takeovers (although not all public engagements are hostile and not all private ones are friendly). Our findings indicate that shareholder activists in Europe are more influential than the public numbers might suggest. Also, private engagement outcomes are more profitable when there is chairman turnover and non-takeover restructuring (spin-offs, equity carve-outs). Private activism appears to be particularly significant when engaging with blockholder controlled companies.

Sean O’Hare on UK Compensation Trends

While the UK is in general following the compensation trends set in the US, its shareholder approval process of top management compensation is less formal and mechanical. In turn, this allows more firm-specific flexibility. Changes to the UK tax law that considerably lower the ceiling on tax-favoured pension arrangements from April 2006 will have an important impact on the compensation structure of UK executives in the near future.

Paul Davies on Boards of Directors: the European Perspective

UK company legislation has traditionally had a paradox at its heart. While it has been highly prescriptive in terms of laying out the residual rights of shareholders, it is silent on the role of the board of directors. This gap has been filled in recent years by the introduction of the combined code on corporate governance. The implications of the code, with its emphasis on the monitoring role of non-executive directors, are to push the UK towards a de facto two-tier board system. Similarly, many European countries are introducing choice, between one- and two-tier boards, as to the optimal board structure.

Andrei Shleifer asks Is There a Major Problem with Corporate Governance in the United States

The distinction between civil law and common law countries comes down to the question of who has the ultimate trust of society, lawmakers (legislators) or law enforcers (judges). It is argued that common law, which puts much more trust in law enforcers and gives much greater discretion to the courts, is better placed to protect shareholders, and so fosters the development of efficient capital markets. The current tendency under Sarbanes-Oxley for more prescriptive capital market rules might be counterproductive.

Steven N. Kaplan on the State of US Corporate Boards and Governance: What is Right and Wrong?

Since 1980, the structure and overall performance of US corporate boards appear to have improved in terms of setting executive compensation, monitoring CEOs and independence of top management. The large increase in the equity component of executive compensation has been an important part of this shift as it has significantly increased senior managers’ focus on the creation of shareholder value. US boards, however, have performed less well in a number of key areas, particularly monitoring accounting manipulation and effectively valuing the options granted to senior executives. Recent reforms have had a positive effect on these issues (although they have imposed a substantial increase in compliance costs, particularly in the short term). Boards can still go further in improving executive compensation by restricting the liquidity of options grants and expensing all stock options.

Roberta Romano on Institutional Shareholders and Corporate Governance in the US

Public sector funds like CalPERS and NYCERS are the most activist investors in the US. They mainly employ voting initiatives to make their voice heard. However, empirical studies demonstrate that such initiatives have no impact on corporate performance; in cases where funds are entitled to subsidies for their voting initiatives they actually destroy – on average — shareholder value.

Michael Jensen on Agency Costs of Overvalued Equity

Michael Jensen addressed the agency costs of overvalued equity, a subject that is both in contrast and a complement to his earlier work on the agency costs of just the contrary, undervalued equity. Historically, he has been a strong proponent of the proposition that the maximisation of shareholder value is the objective of the firm, and he still is.