Topics, Issues, and Controversies in Corporate Governance and Leadership
STANFORD CLOSER LOOK SERIES
stanford closer look series 1
Risk Management Breakdown atAXA Rosenberg: The Curious Case of aQuant Manager Trusted Too Much
Te need or corporate governance systems is driv-en by problems that can occur when there is a sepa-ration between the owners o a company and themanagers o the company. Because managers areagents (and not sole owners themselves), they donot always have incentive to act in the best inter-est o shareholders. Instead, they can take actionsto improve their own situation, even when there isa cost to those actions that is borne by sharehold-ers. o rectiy this problem (known as the “agency problem”), organizations adopt incentive and con-trol systems that better align the interests o man-agers and owners and improve the ability o share-holders to monitor executive behavior.Each company aces challenges in designing a governance system that works best or its particularsituation and structure. In the case o public com-panies, shareholders must overcome the challengeso diuse ownership (which makes monitoring di-cult) and the need to work through a board o directors. In the case o companies with dual classshares, shareholders must overcome the challengeo having inerior voting rights relative to insid-ers. Even in the case o privately held companies,owners sometimes struggle with issues o separa-tion and control. Te challenges can be particularly acute when a company ounder has considerableinuence over the organization and its culture, andthird-party investors have been brought in to shareownership. In order to be successul, the governancesystem must balance
to the expertise andknowledge o the ounder with objective
that allows the board o directors to intervene withthe ounder’s decisions when necessary. Lacking this balance, a company’s governance system can
By dv f. l B tyMy 30, 2013
invite problems that signicantly increase the pos-sibility o organizational ailure.
governance at aXa rosenberg
Rosenberg Institutional Equity Management was a private investment management rm ounded by Barr Rosenberg in 1985. Barr, a ormer nance pro-essor at the University o Caliornia at Berkeley, is widely renowned or his pioneering work on risk actors that inuence stock value that is still in usetoday in portolio risk assessment and perormanceattribution. Trough his rm, Barr employed a quantitative strategy based on undamental analysisto identiy and rank companies that were underval-ued relative to peers. He set an ambitious target o achieving 2 to 4 percent alpha (or outperormance)relative to benchmarks, and or the most part wassuccessul in meeting this goal over a 15 year pe-riod. With his track record, Rosenberg attractedinvestors in the U.S., Europe, and Asia and by thelate 1990s managed $10 billion in assets.In 1999, French insurance company AXA, look-ing to diversiy and expand its investment manage-ment business, acquired a stake in Barr’s investmentrm. Under the agreement, AXA purchased a 50percent ownership position and received an optionto buy an additional 25 percent. Barr remaineda signicant investor and chairman o the rm, which was renamed AXA Rosenberg. Under theiragreement, AXA had the right to appoint 50 per-cent o the board o directors, with Barr appointing the remaining 50 percent.
O note, this structure was to remain in place
, meaning that AXA’s board representation would not change even when AXA exercised its option to increase its own-ership position to 75 percent.