Corporate Governance And Investor Activism

Tenacious headlines and publications of institutional investor discontent and activism continue to emerge within the world's financial news. Since the concentration and span of ownership by institutional investors is increasing worldwide their influence has grown considerable as well as their willingness to use it. Large potential benefits of their input into the monitoring process of management boards is also recognised and activism is encouraged by various committee reports, such as illustrated by the Combined Code (1998) and the NAPF report of 1995. However despite this, attitudes within large investment institutions can differ greatly with regards to activism and this only mirrors the intense academic debate and controversial evidence probing the merits of activism. Although activism possesses many valuable qualities and has in cases been beneficial to the company and shareholders, it also faces many problems that prevent its wider acceptance into practice. Whether activism adds value or is damaging to a company, for example to its reputation or by driving away talented managers, is yet another controversial area of focus. Before going into detail over such issues, I will first describe some case examples from the media industry that contained institutional investor discontent and their responses.

In the first example, investors were led by Tweedy Browne, the New York investment firm, into forcing Conrad Black to relinquish control of Hollinger International. As chairman and chief executive Lord Black controlled 73% of the votes with only a 30% equity stake. With such large influential power he was able to pay for his private expenses with the firm's funds, awarding himself uncommon "non-compete?fees that are normally given to a board as a whole. Hollinger's board consisted of many of Lord Black's friends and included his wife whom charged her extravagant birthday party expenses to the company accounts. Lord Black used company funds to purchase a new luxury property and took extravagant holidays via the firm's private jet. Once such unethical actions were found out, naturally investors were angered. At first Tweedy Browne was a lone voice, but the campaign gradually gathered strength after Treedy Browne's enquiry bore results and demonstrates a success story for shareholder activism, which offered an alternative to divesting the shares and exiting.

Another example involves the appointment of BSkyB's chief executive James Murdoch. This was a highly controversial issue for shareholders as they felt the young 30 year old was appointed simply because of his father's great influence over the group board on which he sat as chairman. Rupert Murdoch, father of son James Murdoch, chaired News Corp, who held approximately 35.4% of the BSkyB's shares. Peter Montagnon, head of investment affairs at the ABI, stated investors concerns over the objectivity of the selection process and they also feel this possesses strong implications over the independence of the board and the effectiveness of its non-executive directors. PIRC further solidify this concern in saying they don't believe the firm is run in the best interests of shareholders, especially when knowing only one name was put forward for the position of chief executive. The shareholders however possessed little power due to Rupert Murdoch's control in News Corp.

The case regarding the merger of Carlton and Granada to form an enlarged ITV is another example of institutional shareholders pursuing their own interests and exercising their power. Shareholders were highly in favour of the merger but not of keeping both men as chairman and chief executive. Michael Green, chairman of Carlton, and Charles Allen, his opposite at Granada felt that if their job positions were not secure in the merged company, they were willing to call off the merger and keep their jobs. This represented a very clear conflict of interests between the management of the two firms and shareholders. Shareholders felt that the two men who use to be bitter rivals would be incapable of working on the same board and they were both equally at fault in the OnDigital disaster which cost their companies ?.2 billion. Shareholders wanted Mr Allen to stay on and Mr Green off the new board completely. Tactfully the shareholders spearheaded by Fidelity, a US fund management group declared their support for the merger including key board position for both men in the merged firm, but after the deal was cleared moved swiftly into revolt. Shareholders in this faction represented a potent force with 40% of shares collectively, such power enabling them to call an emergency general meeting and vote Michael Green out. In the interests of better corporate governance, shareholders campaigned for Mr Green to step aside for an independent chairman. The non-executive directors of Carlton showed much aggressiveness towards investors over their actions towards Mr Green feeling he was a key figure that shouldn't lose his job. At the heart of this tension was whether the non-executive directors were performing their role with such a fierce response to a large number of large holders. The revolting shareholders applied pressure by setting a deadline for the boards response towards the proposals for Mr Green's removal. The board reply "can't comply?but Mr Allen of Granada concludes that shareholder interests will be served and Carlton's board later accepts the proposals. This merger very much resembled a takeover in the end due to the shareholder activism, it is a strong case illustrating the immense power they can have over a company's direction.

"One of the most important elements to understanding the current state of corporate governance is an understanding of this group.?(Monks and Minow, 2004) Monks and Minow were referring to institutional investors. Before analysing how the shareholder activism of institutions has made an impact upon controlling managers, I believe it is important to describe the growth in their importance within the world's financial markets and corporate governance developments.

Berle and Means (1932) once characterised the UK ownership structure as dispersed, a situation whereby many shareholders hold small holdings. In such a situation shareholders are disorganised and typically do not communicate with one another. However in recent times ownership has become much more concentrated, with a relatively small number of institutional investors holding larger stakes in a wider range of firms. The growing number of individuals placing their savings in the hands of skilled investment institutions is the source of the transfer of ownership from individuals to institutions.

Institutional investors now represent the UK's dominant shareholder class, the Hampel report (1998) stated

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