EW Barker Centre for Law & Business


Dynamics of Shareholder Power in Korea

Kon Sik KIM

This paper explores the dynamics of shareholder power in Korea. It will first survey ownership structure and shareholder profile, and then explain various shareholder powers on the books and in reality. It will also explore how shareholder interest is reflected in the performance of firms in Korea.

The ownership structure of large business conglomerates in Korea, commonly called chaebol, is often characterized as the controlling minority shareholder (CMS) structure. This paper emphasizes three features of Korea's ownership structure: (1) large holdings by affiliated firms, (2) potential influence of foreign investors and (3) rise of the National Pension Fund.

The scope of shareholder power is relatively broad under the statutes. In reality, however, shareholders do not take full advantage of these rights. As for voting at the GSM, the presence of the CMS renders shareholders' voting right less relevant, if not entirely meaningless. As for shareholders' other rights, shareholders often hesitate to exercise them, either because they cannot meet a relevant shareholding threshold or because they do not find it financially worthwhile to exercise such rights.

As long as the CMS remains in power, shareholders' voting rights will be less relevant in Korea. On the other hand, shareholders' other rights, especially their right to file a lawsuit against the firm or managers, will continue to occupy the center stage. Corporate governance discourse will likely change, if the CMS somehow loses control and, as a consequence, becomes indistinguishable from a professional manager.

No attempt has yet been made to replace the CMS at a chaebol, even when the CMS falls into a crisis of confidence, such as being convicted for a serious crime. Thus, as long as the current political climate continues, one may safely predict that the CMS structure will remain unchanged, and that shareholder power will remain largely an issue for academics.

Shareholder Rights in China: From Book to Action

Li GUO & Gilbert HENG

The concept of shareholder protection in China is only recently becoming an issue for serious consideration. China's rapid transition towards a market-based economy, coupled in part with increasing internationalization of capital markets and global convergences of business corporations and practices, have accelerated China's learning curve and expedited the movement of her corporate laws towards those in developed Western countries. This article analyzes the company laws protecting Chinese shareholders, evaluates the effectiveness of China's corporate governance framework, and concludes with a discussion on the importance of protecting the rights of minority shareholder particularly in the context of China's economy.

Shareholder Power in India

George S. GEIS

A casual observer of the Indian economy might be excused for believing that shareholder power is on the rise in the subcontinent. As the story goes, Indian firms are starting to feel the effect of forces that have buffeted corporate managers in the West: the rising influence of institutional investors, proxy advisors, hedge funds, and activist shareholders. Moreover, recent corporate governance reforms in India are closely patterned on regulatory initiatives from countries where shareholders have loud voices. The push for reforms like greater information disclosure and director accountability implicitly relies on a meaningful body of outside shareholders to monitor the news and guard against managerial agency costs.

But a careful look at the underlying composition of equity ownership in India suggests that the exact opposite is true: India can best be understood as a stable counter-example to the alleged global trend towards shareholder activism. Indeed, most of the evidence suggests that outside shareholder power remains, for all practical purposes, largely irrelevant for major Indian firms. The ownership structure of India's largest public corporations continues to be skewed toward controlling inside shareholders-a legacy of family owned business ventures and state nationalization. Put simply, outside shareholders own too little stock to influence corporate decision-making in a meaningful manner, and this historical fact is not changing. If anything, the trend seems to be moving away from outside share ownership. Inside controllers at many large firms have boosted their stakes, and the proportion of large outside shareholders (holding at least one percent of the stock) is static or declining. For these reasons, shareholder power cannot yet be viewed as a significant lever for corporate governance in India.

This chapter describes and analyzes these trends in more detail. Part I offers some brief context on India's approach to corporate governance, with a focus on recent reforms and the expectation that powerful outside shareholders might play a greater monitoring role. Part II then turns to the central question: is the theoretical possibility of outside shareholder power a practical reality? More specifically, it studies share ownership patterns for fifty large Indian companies to demonstrate that most public firms continue to be dominated by inside controllers. To be sure, there are a few exceptions, where outside shareholders do hold most of the equity. But this is not the prevailing state of affairs. The chapter concludes by offering some brief predictions about the likelihood of change in the coming years as both the Indian economy and regulatory reform efforts continue to march forward.

Shareholder Empowerment in Controlled Companies : The Case of Singapore

Luh Luh LAN & Umakanth VAROTTIL

Prevailing corporate governance literature has incontrovertibly identified the agency problems in controlled companies as those between the controlling shareholders (agent) and the minority shareholders (principal) or the "controller-minority" or "horizontal" agency problem While several corporate governance strategies have been proffered to address these agency problems in the broader milieu, here we raise and discuss two specific strategies that may be potentially deployed to address the agency problems in controlled companies. These are: (i) the participative strategy, wherein shareholders (particularly the minority) are enabled and encouraged to exercise greater participation in companies in which they have invested so as to strengthen shareholder democracy; and (ii) controlling strategy, wherein the focus is on controlling or regulating the actions of the controlling shareholders rather than empowering the minority shareholders.

The core argument in this chapter is that given the predominant ownership and control exercised by the controlling shareholders in controlled companies, the participative strategy is sure to be met with impediments. Any amount of additions to the powers of the minority shareholders in corporate democracy would not be meaningful if they are required to exercise it in the shadow of a controlling shareholder's dominance. Given the ineffectiveness of the participative strategy, the corporate governance efforts in controlled companies may instead be better spent on the controlling strategy. A system of greater monitoring of controlling shareholders, especially on matters where such shareholders may be interested, such as self-dealing transactions, would augur to the benefit of the minority shareholders.

We explore these strategies by concentrating on one jurisdiction, i.e. Singapore. The study of Singapore is interesting because it ranks highly among Asian economies against indicators for corporate governance and investor protection. At the same time, the corporate sphere is replete with controlled companies, where dominant control is exercised either by business families or the state. Singapore thus provides an eminently suitable case study for when the participative strategy might work (if at all) and how that might be bolstered through the operation of the controlling strategy so as to protect the minority shareholders and address the agency problem relevant to controlled companies.

The Future of Japanese Corporate Governance: Japan's Internal Governance and Development of Japanese-Style External Governance through Engagement

Takaaki EGUCHI

A business organization is said to have effective internal governance if there is an incentive mechanism whereby even a self-serving top manager is led to take public-spirited actions that build value for the company. Acharya et al. (2011) show that an organization has capacity for such implicit control if its constituents build their career within the organization and expect to be rewarded for the long run. These conditions generally apply well for the organization of post-war Japanese companies that exhibit community-like features. Indeed, the mechanism of internal governance seems to have worked well during the catch-up phase of the Japanese economy until the 1980's, by creating propulsion necessary for growth. But once this process was over, the growth bias inherent in the mechanism caused wasteful investment because the practice of cross-shareholding reduced the intensity of external governance, which would have otherwise had a constraining effect on such bias.

External governance is control that the company's physical capital providers, such as outside equity and debt holders, assert on the act of the top manager. It complements the discipline imposed by internal governance, but it also impairs internal governance if asserted excessively. What is important, then, is to maintain a proper balance between internal and external governance.

Since the mid-1990's, the practice of cross-shareholding has been waning. Pacing with the decline, institutional investors have stepped up their corporate governance activities. It is quite likely that institutional activism will play a pivotal role in the new governance regime. Nonetheless, Japanese-style activism will be different from American-style activism that often employs theatrical techniques or from British-style collective engagement. Given Japanese organizations' greater capacity for internal governance, in order for engagement to be effective in bringing about changes, Japanese institutional investors will need to induce management's initiative from within as a catalyst. An ability to act more like a solution-provider for management, which is required for the catalyst role, is the key feature that will distinguish engagement in Japan from those in Britain or the United State.

Multiple Faces of Shareholder Power in Asia: Complexity Revealed


This Chapter uses three distinct lenses (i.e., American, Asian, and jurisdiction-specific lenses) to reveal the multiple faces of shareholder power in Asia. It demonstrates that viewing shareholder power in Asia solely through the monolithic American-cum-global lens not only results in myopia, but terribly misleads. It explains why jurisdiction-specific (and not American or Asian) lenses are required to reveal the "external private benefits of control" which appear to be critical for understanding the behaviour of the most important shareholders in Asia's miracle economies-a fact that has been almost entirely overlooked. The Chapter concludes by suggesting that future research should use "jurisdiction-specific lenses" to gather and analyse local knowledge to understand the unique external private benefits of control that make shareholder power in Asia's leading economies incredibly diverse and complex-something that will require a book not another regression analysis.

Shareholder Power in America, 1800-2000: A Short History

Harwell WELLS

This Chapter takes a long view of shareholder power in the United States. Most accounts of shareholder power begin either in the 1930s, when Berle and Means's The Modern Corporation and Private Property identified the "separation of ownership and control" and consequent shareholder powerlessness as the hallmark of American corporate capitalism, or the 1980s, when economic disruptions and the growth of institutional Investors produced a new wave of shareholder activism that broke decisively with older traditions of shareholder passivity. This chapter reaches back, though, to the early nineteenth century, when Americans first saw the development of for-profit corporations and resulting struggles among shareholders over the corporation's policies and directions. It then follows the course of shareholder power up to the twenty-first century, documenting the ebb and flow of shareholder power over two centuries.

The Theory and Practice of Corporate Voting at U.S. Public Companies

Randall S. THOMAS

This paper develops a comprehensive theory of corporate voting and its role in corporate governance for U.S. public corporations. We begin by addressing why shareholders should vote, and then ask why no other stakeholders vote. We finish the first part of the paper by examining what shareholders should vote on. In Section II we discuss the implications of empty voting for our theory. Section III examines the current system of corporate voting in the U.S. to see how it conforms to our theory. We finish with some brief conclusions.

This article will be published in: The Research Handbook of Shareholder Power, edited by Jennifer Hill and Randall Thomas, Edgar Elgar (forthcoming 2014).

Keyword: Corporate VotingJEL Classifications-- G30; K22

Beyond Efficiency in Securities Regulation


This Article argues that the rise of algorithmic trading problematizes the foundational basis on which much of today's securities regulation framework rests: the understanding that securities prices objectively reflect available information in the market. The Efficient Capital Markets Hypothesis (ECMH) has long provided the theoretical touchstone undergirding central pillars of securities regulation. Mandatory disclosure, evidentiary presumptions in antifraud litigation and regulation driving the design of modern exchanges all look to the ECMH for theoretical validation. It is easy to understand why. Laws that make markets better at interpreting information can also improve their ability to allocate capital across the real economy.

Theory and regulation, however, have failed to keep pace with markets where traders rely on pre-programmed algorithms to execute trades, exemplified by the explosive growth of high-frequency trading (HFT). Though innovation may be helping markets to become more efficient in processing information, it is not obvious that markets are becoming better at communicating what this information signifies for capital allocation. This Article makes two claims. First, complex algorithms foster a separation between the trader and her ability to control the algorithm. Algorithms can execute many thousands of trades in milliseconds, crunching vast quantities of data and dynamically interacting with other traders in the process. This intelligence makes it difficult for a trader to fully predict how an algorithm might behave ex ante and near-impossible to track and control its activities in real-time. Secondly, whereas markets traditionally rely on informed fundamental traders to decode complexity, these actors possess reduced incentives to perform this function in algorithmic markets. Fundamental traders routinely see their gains diminished by faster, automated traders able to front-run trades and to derive maximal benefit from information. With deeper uncertainties involved in deciphering the meaning of prices in algorithmic markets, this Article shows that conventional assumptions governing the application of regulatory doctrine also break down. With these insights, this Article, offers a new framework to progress a thoroughgoing reevaluation of the centrality of efficiency economics in regulatory design.

The Power of Shareholders


Shareholders play a crucial, but decidedly subordinate governance role in corporations. Despite recurring references to shareholder primacy and to shareholders as owners of the corporation, their power is not the plenary power of a primate or an owner but rather limited to doing only three things-voting, selling, and suing-- and each in very limited doses. The shareholder role can best be understood by thinking of shareholders as one of the four principle actors in a shared governance system. Three are the only parties named in most corporations statutes-shareholders, directors, and officers-none of whom have primacy, with each sharing in a balance of power as to the decisions of the polity not unlike frequent description used for our political system. The fourth recurring player is the judiciary, determining the roles for each of the other three under the applicable statute or common law. Theory helps explain what each actor can do and the roles they have been assigned, and can underlie judicial decisions. But the purity of any theory is regularly subsumed within a dynamic in which the most dominant explanatory principle is the four groups must share power as to the entity's governance.

Befitting an approach that eschews the purity of any one theory in favor of a messy interactive structural dynamic, this chapter begins with brief description of why the frequently identified touchstones of ownership and principal/agency are insufficient to adequately describe the shareholder role. American corporations statutes are likewise misdirectional, setting out a role for directors that flatly contradicts shareholder primacy even to the point of appearing to establish director primacy. But that template turns out to be no more consistent with the reality of modern corporate governance. What we ask and permit shareholders, directors and managers to do builds off of the standard principal/agent monitoring story in economics of who is best positioned to monitor conflicted or lax decision-making. The result is a system in which directors, managers, and shareholders are given power to check the powers of the others and the courts act as continuing facilitators of this mandatory power-sharing. The shareholder powers to vote, sell or sue reflect this functional relationship, not an all-encompassing theory of primacy. A subsequent part identifies how the characteristic of the shareholder base, particularly the institutional nature of today's shareholders, with most of them as intermediaries, affects how shareholder power works in this shared power world. The last part returns to theories of shareholder primacy with a revised template of the role they end up playing in this non-primacy world.

Hedge Fund Activism in Europe: Does Privacy Matter?


We have obtained data on 131 European interventions from five activist funds which have provided the authors with proprietary information; of these 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 private friendly).

Institutional Investor Activism in a Context of Concentrated Ownership and High Private Benefits of Control: The Case of Italy


This is a draft chapter for a forthcoming volume, The Research Handbook on Shareholder Power, edited by Randall Thomas and Jennifer Hill (Cheltenham:Edgar Elgar). This chapter describes the experience with activist institutional investors in an apparently unfavorable corporate environment (Italy), commonly depicted as one of concentrated ownership, notoriously inadequate legal protection for minority shareholders and an apparent disregard for their interests by controlling shareholders. We document a non-negligible volume of "core" active institutional investment, together with some idiosyncratic forms of activism (the appointment of "minority" directors on the boards of Italian listed companies). We attempt to evaluate whether what we see is genuine shareholder-value oriented activism or a strategy to engage in a privileged relationship with controlling shareholders, in order to share in private benefits of control extraction. We find no sufficient evidence to support a "dark side" view of shareholder activism, at least as a general explanation. Instead, we provide recent anecdotal evidence of initiatives effectively aimed to curb the extraction of private benefits by dominant shareholders.

Changing Law and Ownership Patterns in Germany: Corporate Governance and the Erosion of Deutschland AG

Wolf-Georg RINGE

Corporate Control & Governance after a Decade from "Novo Mercado": Changes in Ownership Structures and Shareholder Power in Brazil


The chapter discusses the latest reforms promoted by BM&FBovespa on the rules of the special corporate governance listing segments in response to the international financial crisis and to the national changes in corporate ownership.

In order to assess the evolution of shareholder power, it builds on the classic Berle and Means taxonomy in order to classify corporate control of Brazilian corporations and discuss how shareholder power is evolving. The data shows that Brazilian corporations are changing from a purely controlling shareholder model to more dispersed patterns of shareholding ownership. It also explores how these developments have affected corporate decision-making and control traditionally exerted by a controlling shareholder. It also presents data on Brazilian corporations that have achieved the largest degree of ownership dispersion. It shows that, contrary to media and current market perception,no companies have achieved a degree of shareholding dispersion that characterizes the typical Berle and Means corporation with managerial control. Increased dispersion of shareholding ownership has been counter balanced by the concomitant phenomenon of formation of shareholder coalitions. These coalitions often discipline the exercise of voting and joint control and establish barriers for the free transferability of shares. Furthermore, these shareholders agreements generally interfere in the voting decisions of the board of directors, as they establish that shareholders shall meet before board meetings to decide how board members will vote in corporate matters. The paper further discusses the negative impact that the increased use of shareholder agreements has produced for the role of the board of directors and the lack of directorial independence in Brazilian corporate governance.

Shareholders in Family Controlled Business Groups


This study revisits the question of the ownership structure and control of family business groups in 45 countries around the world. We focus on the use of holding companies, pyramid structures, cross holdings and dual class shares. We explore the association of financial development, legal origins, shareholder rights and rule of law on the proportion of listed firms that are represented by family controlled business groups and their use of control enhancing devices across countries. We also explore the importance of access to capital by individual group members and the internal capital supplied by group members and their assistance in gaining access to external capital and its relationships to the above country level characteristics.

The Leximetric Research on Shareholder Protection

Mathias M. SIEMS

The 'leximetric' research, discussed in this chapter, uses datasets on shareholder protection in order to address important questions of comparative company law and corporate governance. For example, this research may be able to show whether or not there is a trend to increase shareholder power across countries. It can also provide us with tools to challenge statements that there are deep differences between civil and common law countries in company law.

The main parts of this chapter are based on datasets collected in a project on Law, Finance and Development at the University of Cambridge. This chapter discusses the research of this project as well as related research not affiliated with this group. In addition, it will present new data that bring up-to-date some of the findings of the original project.

The structure of the chapter is as follows. By way of background information, Section II discusses the research that claims that company laws that are favourable towards shareholders foster financial development. Section III addresses how leximetrics can be a useful tool in comparative company law as it enables us to measure both the strength of shareholder protection and differences between countries. Section IV presents possible limitations of such research. Section V concludes.

Reframing the Role of Boards of Directors under a Team Production Model

Margaret M. BLAIR

The standard framework in legal scholarship and finance for research on the role of boards of directors in publicly-traded corporations has been the principal-agent model, which emphasizes that directors are supposed to be agents of shareholders who monitor management. Using this framework, researchers have found little or no evidence of any consistent relationship between the structure or actions of boards, and the performance of the corporation, leading many scholars to claim that boards are ineffective. In this paper, I argue that the problem may not be that boards of directors are ineffective, but that scholars may be ignoring a more important role that directors play -- that of final arbiter or decision-maker in a hierarchical team. In contrast with the principal-agent model, the team production model of corporate law suggests that one of the most important functions of the board of directors is to decide on actions and strategies of corporations in the face of uncertainty and competing, or even diametrically opposed interests of the various participants or "team members."

Images of the Shareholder - Shareholder Power and Shareholder Powerlessness

Jennifer G. HILL

A range of conceptions of the shareholder's role in the corporate enterprise have underpinned corporate law over the last century. These images of the shareholder have varied across time and jurisdictions.

The role of shareholders became increasingly ambiguous in the global financial crisis era. Although many considered shareholders to be victims of the crisis, a growing chorus of corporate law commentators, particularly in the United States, depicted shareholders as collaborators or predators, who are themselves threats to the corporate enterprise. This paper examines how different images of the shareholder, in terms of shareholder power and sophistication, can affect judicial decision-making and regulation.

Independent Directors and Controlling Shareholders


In this paper we analyze the function and relevance of independent directors in companies with controlling shareholders. Our main thesis is that the role of independent directors in controlled corporations is to a large extent different from that played by the same in diffuse ownership companies. Firstly, their number in the board is lower, almost never reaching the board majority that is required in those countries, like the US and the UK, where large listed companies have diffuse shareholders. Secondly, important functions like hiring and firing the top managers, and setting their remuneration, are mainly exercised by controlling shareholders either directly or through their representatives in the board. Thirdly, the controllers generally also set the main corporate strategies and are active in the monitoring of managers, which they do of course mainly from their perspective as block-holders, not necessarily targeting shareholder wealth maximization. Fourthly, independent directors are mainly relevant for the protection of minority shareholders with respect to the agency costs of majority shareholders. Therefore, they should be (and often are) particularly active in audit committees and in the monitoring of related party transactions.

In this paper, we explore such differences and show how they are reflected in the legal regimes applicable to independent directors in jurisdictions where controlled corporations are the dominant paradigm in corporate governance. We consider, in particular, the corporate governance provisions and standards applicable to independent directors in Europe, Latin America, Japan, India and China, comparing the same with those applicable in diffuse ownership jurisdictions like the US and the UK.

The outcomes of our analysis, on one side, confirm our thesis that independent directors have a different and narrower role in controlled corporations; on the other, reveal that several jurisdictions only pay lip service to the concept of independent directors as a central governance mechanism in listed companies. Indeed, what often drives acceptance of modern corporate governance standards, including the appointment of independent directors to corporate boards, is the issuers' goal to attract new capital and appease institutional investors, particularly foreign ones, rather than their willingness to really change traditional corporate governance practices which may substantially diverge from those international standards.

National legislations and corporate governance codes often follow this pattern, offering weak definitions of independence, attributing weak powers to independent directors or leaving their role substantially indeterminate, and undervaluing their role in board committees. In the last section of this paper, we suggest possible ways for overcoming this problem in countries that really want to focus on independent directors also in the governance of controlled corporations.