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Shareholder Activism

Benefits and Drawbacks

Series:

Marion Hartmann

This book analyses and compares the benefits and drawbacks of shareholder activism in corporations under US American and German law, applying means of new institutional economics. The analysis concentrates on three fields of action of active shareholders in targeted corporations: nominations and elections, transaction decisions and financial decisions. The author evaluates and compares the effectiveness of the means which active shareholders use and of the limitations they face. She concludes that shareholder activism has benefits and drawbacks. Both require legal actions under the two jurisdictions, such as stronger nomination and election rights under US American law and more effective disclosure obligations under German law.
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E) Part III: Financial activism

Extract



I) Introduction

The third relevant area for shareholder activism relates to the financial structure of targeted corporations. Active shareholders, especially hedge funds,1942 pursue rather generalized strategies, like the payout of excess cash via dividends and share repurchases and/ or the increase of corporate leverage to mitigate agency costs.1943 The impact of active shareholders on the financial structure has the advantage that it often involves a direct return flow from the corporation to the shareholders.1944 These cash-focused one-time effects allow them to realize short-term maximization of personal shareholder value.1945 Especially in regard to the latter effect, active shareholders pursuing financial activism are frequently confronted with substantial critique. Active shareholders often apply impact on the corporate financial structure as part of a more comprehensive strategy. Particularly in relation to the successful pursuit of the sixth of the analyzed transaction activism constellations (facilitating divestitures), they tend to subsequently impact the financial structure.

1) Underlying interests of actors involved in financial activism

According to Berle and Mean’s understanding of the separation of ownership and control, directors deciding how to invest corporate funds tend to act opportunistically. They tend to make investment decisions not necessarily to maximize corporate value by choosing the projects with the highest net present value according to shareholders’ interest, but to further their own goals. Active shareholders may intervene against this kind of opportunism and aim to reduce the resulting agency costs by exercising impact on the financial structure of the targeted...

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