Corporate Governance

L6 – Shareholders, Investors

Dr. Dr. Petra Inwinkl

Steuerberaterin und Wirtschaftstreuhänderin

Department of Accounting, Innovation and Strategy,  

Oskar-Morgenstern-Platz 1, 1090 Wien,
Room 04.338
Mobile: +43-664-60277-38125

DR. DR. PETRA INWINKL STB 1

Compulsory reading
 Shleifer, A. and Vishny R.(1997), A Survey of Corporate Governance, Journal of Finance, Vol. LII, No.2, V.
Large Investors

 Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related

shareholder activism and say-on-pay votes: A literature review and research agenda. Journal of
Accounting Literature, 40, 116-151.

 EUROPEAN ECONOMIC, EMPLOYMENT AND SOCIAL POLICY, The revised Shareholder Rights
Directive 2017: policy implications for workers
https://www.etui.org/Publications2/Policy-Briefs/European-Economic-Employment-and-Social-Policy/The-r
evised-Shareholder-Rights-Directive-2017-policy-implications-for-workers

 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending
Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (Text with EEA
relevance) http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017L0828&from=EN

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Shareholders = stockholders = investors
The legal system is a
key influence on the
type of ownership
and control structure.

Controlling shareholder Where ownership is more concentrated and there is a difference between the cash-
– example:
flow rights and voting rights of shares, owning a relatively small proportion of the
share capital with voting rights can be enough to control the firm.

Blockholder: The owner of a large amount of a company's shares. In terms of shares, these
owners are often able to influence the company with the voting rights awarded with
their holding.

Shareholders: Individuals, institutions, firms, or other entities who own at least one share in a
company.

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In the European Union?

Ownership structure

Differences British & Irish listed companies have dispersed ownership structure
between national
corporate Italy, Austria, Germany, Portugal and the Baltic members have a very concentrated ownership
governance
In Ireland, Finland, Hungary, the Netherlands and Slovakia stock ownership is mainly concentrated in
codes may the hand of foreign investors
originate in the
In Bulgaria, Cyprus, Denmark, Germany, Italy, Slovenia and Spain stock rely on a significant domestic
ownership ownership
structures of
France, U.K and Sweden remain about 40% foreign ownership
companies

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 The influence of a shareholder depends on?

Shareholders
Minority shareholders Majority shareholders
A majority shareholders has outright
A substantial minority
control of the firm and its
shareholder – a shareholder who has
management with 51 or more percent
between 10 and 20 percent – stake has the incentive
to collect ownership.
information and monitor the management.

The person has enough voting control to put This group can in essence strongly
pressure on the management in some cases.
influence the corporate governance of
companies

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 Institutional investors

In the UK and US there is a predominance of

Shareholder
Common Stock
institutional shareholders:
Preferred Stock for example,
• pension funds,
• insurance companies,
• mutual funds. Known as the "Oracle of
A-plc Omaha," Warren Buffett is an
investment guru and one of
Institutional investor(s) are large shareholders including the richest and most
sovereign wealth funds (fund owned by a government respected businessmen in
and these funds are often very large and influential) the world.

The literature usually separates institutional investors and other activists, such as labor unions, environmental
groups or religious groups
Activities of shareholders?
Monitoring and enforcement bodies
Who monitors?
A wide variety of bodies may be engaged in monitoring and/or enforcing the
application of corporate governance codes in terms of comply-or-explain.
These can be grouped into:

Shareholders can pursue both financial value and

other stakeholder-related objectives, e.g. CSR
performance.

shareholder activism
and say-on-pay votes

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When exercise shareholders their
rights?
Annual General Meeting (AGM) The most important legal right of
shareholders
The most important legal right shareholders have is the
right to vote on important corporate matters.

Examples:
Elections of boards of directors and their period
Approval of the compensation for executive managers
Mergers, acquisitions, liquidations,
To table shareholder proposals

Proxy advisors are companies specialised in analysing

company disclosures and providing advice for investors
on how they should vote at the general meeting of
shareholders.

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Voting characteristics - institutional
investors
Institutional investors have a fiduciary duty towards the beneficiary owners of the shares and
therefore must generally vote in line with shareholder financial value
The overall number of shares owned by institutional investors constantly rises.

Institutional investors with a good reputation or superior capability to file potential wealth-
increasing proposals receive higher voting support from other shareholders.

Institutional investors’ efforts to monitor the firm and engage in activism are predominantly
moderated by their investment strategy.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB 9

Voting characteristics – other activists
 Other activists are more concerned with stakeholder demands.

 Labor unions are more likely to object in firms with a higher representation of their
workforce rather than on specific company-related issues. Therefore, union-
sponsored proposals receive less voting support from their fellow shareholders.

 Similarly, religious or environmental groups, as well as individuals, receive less

support for proxy polls than do institutional investors or coordinated groups.

 Even beneficial representatives of private investors are perceived as more (financial)

shareholder value-oriented than individuals or religious groups.

 Consequently, certain groups are perceived as less concerned with firms’ financial value
and pursue other (stakeholder) interests and investors may fear the loss of financial firm
value.

 However there is no uniform rule for submitting or supporting shareholder proxies.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB 10

 Exercising Shareholders’ Rights
Shleifer, A. and Vishny R.(1997)
‘In countries with weaker legal systems, shareholder
voting rights are violated more flagrantly.
Russian managers sometimes:
1. threaten employee-shareholders with layoffs
unless these employees vote with the
management,
2. fail to notify shareholders about annual meetings,
3. try to prevent hostile shareholders from voting
based on technicalities, and so on.
Shleifer, A. and Vishny R.(1997): the legal extent and
the court protection of shareholder voting rights differ
greatly across countries
In the EU
Proposal
2013
Directive on the Exercise of Shareholders’
Rights (Directive 2007/36/EC)
Directive (EU) 2017/828 of the European Parliament
and of the Council of 17 May 2017 amending
Directive 2007/36/EC as regards the encouragement
of long-term shareholder engagement (Text with EEA
relevance)
Shareholder identification
 Companies are often unable to identify their shareholders.
 Shares are often held through complex chains of intermediaries.

The identification of shareholders is a prerequisite to direct communication between the

shareholders and the company and therefore essential to facilitating the exercise of shareholder
rights and shareholder engagement.

This is particularly relevant in cross-border situations and when using electronic means.

Listed companies should therefore have the right to identify their shareholders in order to be able
to communicate with them directly.

Intermediaries should be required, upon the request of the company, to communicate to the
company the information regarding shareholder identity.

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 Cross-border exercise of shareholder rights

In order to promote equity investment throughout the Union and to facilitate the exercise of
rights related to shares, this Directive should establish a high degree of transparency
with regard to charges,
including prices and fees,
for the services provided by intermediaries.

Discrimination between the charges levied for the exercise of shareholder rights
domestically and on a cross-border basis should be prohibited.

Any differences between the charges levied for the domestic and the cross-border exercise
of shareholder rights should be allowed only if they are duly justified and reflect the variation
in actual costs incurred for delivering the services by intermediaries.
Remuneration

Shareholders SHOULD have an effective

say on remuneration policy
They should be granted the right to hold a
binding or advisory vote on the
remuneration policy
Executive remuneration
shareholders’ vote

vote on the ex post

remuneration policy remuneration reports

result result
binding vote = approval needed by advisory vote
shareholders
A say on pay is the ability of shareholders to vote on the remuneration awarded to company directors.
Shareholders will be able to express their view twice. First they will vote ex ante on the remuneration policy
which lays down the framework within which remuneration can be awarded to directors.
Second they will vote ex post on the remuneration report describing the remuneration granted in the past
financial year.
Warren Buffett - Absurd CEO Salaries

https://www.youtube.com/watch?v=ZMZPLTaoiR4

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 How will the Directive (EU) 2017/828 work in practice? What
is the difference between the binding and advisory vote?
Shareholder activism related to executive compensation has become an increasingly important subject during the annual
general meetings of listed companies.
Say-on-pay (SOP) is a law that enables shareholders to vote on the appropriateness of executive compensation.
In 2017, the European Parliament updated the 2007/36/ EC directive to incorporate minimum requirements for annual
general meetings, including the implementation of a mandatory SOP on the board remuneration policy at least every four
years and an annual vote on board remuneration reports.
The vote on the remuneration policy will in principle be binding, which means that companies are only able to pay
remuneration on the basis of the policy approved by shareholders.
Member States will however have the possibility to opt for an advisory vote.
This means that companies are allowed to apply a remuneration policy which has been rejected by shareholders, but are
required to submit a revised policy at the next general meeting.
The vote on the remuneration report will be advisory. Member States will also have the possibility to allow companies to
replace this vote by a discussion at the general meeting.
EU member states had two years to implement the directive.
Regulatory changes on national levels were the consequence.
National Transposition

DR. DR. PETRA INWINKL STB

18
Agency Theory
 
 As ownership is dispersed in modern corporations, the shareholders (principals) delegate the task of
managing the firm to executives (agents)
 The agent receives a certain level of discretion to handle the task and hence gains an information
advantage. This advantage often results in moral hazards and self-serving actions because the
interests of both parties are not fully aligned
 The principal uses a variety of monitoring and incentive alignment mechanisms in order to reduce the
losses caused by the self-serving agent (agency costs)
 Executive compensation is one of the most important incentive- alignment mechanisms as it can fill the
gap between firm performance and managerial effort.
 The alignment effect in neoclassical principal agent theory is generated either through performance-
based payments or equity compensation.
 Still, the expected positive outcome is rarely observed empirically because firm performance accounts for
only a fraction of total CEO payments and incentive alignment through managerial equity ownership is
weak at best.
Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and research agenda. Journal of Accounting Literature, 40, 116-
151.

DR. DR. PETRA INWINKL STB 19

Agency Theory and Non-Financial Aspects
 
 Agent theory is the basis of current empirical research on executive compensation and shareholder
activism.
 Shareholders may use the legal power offered by their shares to follow other non-financial goals and
long-term incentives. Among these non-financial goals, corporate social responsibility (CSR) is of key
importance.
 There is ample evidence that shareholder activism is closely linked to CSR.

 The degree to which a shareholder seeks shareholder value is moderated by the level of
stakeholder interests.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB

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Corporate governance characteristics
Firm executives are more likely to grant a voluntary SOP proposal when ownership is dispersed.

If the ownership structure

 is concentrated
 consists of insiders
 Is represented by long-term investors

SOP dissent tends to decrease due to higher monitoring capabilities, behind-the-scenes

negotiations and long-lasting alliances between block holders.

Similarly, higher equity holdings by board members or managers tend to decrease negative votes
although found increasing dissent in firms with higher CEO ownership.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB 21

Shareholders’ Voting Decisions
 Shareholders’ voting decisions are further influenced by stakeholder.
Firm insiders (such as the management),
outsiders (such as the proxy advisor), and
the public.

Managers influence shareholders directly by issuing voting recommendations or

indirectly by classifying the proxy proposal.

Proxy advisor recommendations are especially negative when high executive compensation is
paired with low firm performance.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB 22

SOP proposal effects - Shareholder pressure
 SOP voting dissent is a ‘simple, highly visible metric’ that is easily observable and can result in public
outrage once it is high enough to attract significant attention.
 The reviewed literature confirms that a certain threshold must be met before managers consider substantial
changes. The higher the SOP voting dissent, the more pressure is exercised.
 Empirically, a significant limit is measured above up to 30% voting disagreement.
 The latter cut-off point is also used by proxy advisors, which assesses dissent above 30% as significant
and expects that a compensation policy change by the firm or otherwise will announce a negative
recommendation.

Source: Obermann, & Velte. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and
research agenda. Journal of Accounting Literature, 40, 116-151.

DR. DR. PETRA INWINKL STB 23

Your next step after this session
 Repeat your assigned class reading for this session
 Watch and reflect on Additinal Video Seminar V7 – Managerial Hegemony Theory
 Solve Mini-Quiz 4
 Start to prepare for Group Assignment – Part B
Thank you for your
participation and
good work!

Have a good rest

of the day and all
the very best for
you!

Petra Inwinkl
Bildquelle: https://pixabay.com/service/terms/ (Stand 20.05.2020 )
DR. DR. PETRA INWINKL STB 25