The US is the crucible for global shareholder activism and US investors will continue to influence global markets for a couple of important reasons. They continue to control by far the largest portion of global institutional investment and corporations worldwide will rely increasingly on global equity financing for future expansion. As a result, they will come face-to-face with dominant and demanding US investors.
There are, however, certain factors that may mitigate some of the more acrimonious aspects of shareholder activism. US investors have begun to focus on the kinds of ‘relationship investing’ common in other cultures. And with global volatility a greater issue of late, the kinds of long-term investing approaches advocated by some of these activists may actually bring companies and investors closer together.
Financial assets of institutional investors in France, Germany, the UK, the US and Japan were worth $21.6 trillion at the end of 1996 (see Table 1). US institutions accounted for 61.9 percent of the total. Their financial assets were approximately six times those in the UK, ten times those in France and Germany and nearly four times those in Japan.
A global equity market
Investing will become more dependent on global equity markets, shifting economic clout to investors with equity stakes, especially those willing to become activists. At the turn of the century, the US economic model resembled current models in Germany, France and Japan. Capital expansion was accomplished with retained earnings, bank loans from a closely-knit banking community, and/or substantial long-term equity raised through extensive and virtually permanent corporate cross-shareholdings. Gradually, the US has developed a broad and deeply liquid equity market with dispersed ownership. This model is now being emulated around the world, as countries rely more on equity market expansion in place of traditional ownership patterns.
Table 2 shows how much room there is for investors in France, Germany and Japan to provide equity for corporate expansion. The largest allocation to equities – 67.2 percent of assets – was made by UK institutional investors, followed by US institutions at 40.3 percent. The weighted average of equity allocation across the five countries is 37.5 percent. In 1996 bonds dominated the investment portfolios of French institutional investors, accounting for nearly two-thirds of financial assets. By contrast, UK institutions allocated only 15.7 percent to bonds. German institutions were heavy investors in loans and bonds, and had the lowest proportion of their financial assets invested in equities.
Table 3 shows just how much of the equity of the largest 25 corporations in countries like Germany and Japan is closely held. Blocks held by non-financial institutions amount to as much as 33.5 percent of the equity of the top 25 companies in France, 24.2 percent in Germany, and 21.2 percent in Japan. These ownership amounts will be ‘unwound’ in the next few years, as companies enter global equity markets and deal with global shareholders who want them to achieve competitive returns on equity and comparable dividend pay-out.
Finally, globalizing equity markets and dispersing ownership is further reinforced by worldwide privatization programs. Ironically, this dispersion can actually increase the influence of shareholder activists; as more passive global investors (banks and corporate pension funds) decline involvement in activism, assertive US-style shareholders gain a larger than proportionate share of governance clout.
Relational investing allies
Concerns about global volatility and the flight of capital may actually bring long-term investors and their companies closer together. No issue continues to polarize corporations and institutional investors more than ‘short-termism’. Governance guidelines of major US institutions, however, reveal a surprisingly consistent recognition that investments should be undertaken for long-term return, not for short-term trading gain.
For example, TIAA-Cref is the largest retirement system in the world with nearly $250 bn under management. As far back as the early 1970s, Cref rejected the so-called Wall Street Walk, believing that the most responsible, and in the long run the most successful, investment approach is to present shareholder concerns directly to management to encourage them to make needed changes. Moreover, the fund’s policy statement says: ‘The primary responsibility of the board of directors is to foster the long-term success of the corporation consistent with its fiduciary responsibility to the shareholders.’
While many US investors did tender their stock to raiders during the 1980s takeover wars, things have changed now. Investors have voted for limited poison pills to enable a company to fend off a raider. There have also been cases where institutions have refused a takeover premium because management presented a better alternative strategic plan.
The Conference Board has done considerable work on institutions’ widely different trading and investment patterns. Turnover characteristics vary not only by type of institution, but by segment of the portfolio. While a large number of ‘momentum’ traders operate in US securities markets, most major public pension funds – the most activist in the corporate governance arena – actually trade the least.
Corporations can seek out long-term ‘investors’ as opposed to ‘traders.’ Moreover, many of these large investors are looking more in-depth into companies in their portfolios that show up on their governance screens. When they intervene on governance issues, they often want to discuss the strategic direction of the company and how it intends to achieve its goals.
This is a bit like the ‘relational investing’ style of communications between companies and a small group of banks and other investors so common in cultures like Germany and Japan. Thus, although the US has clearly carved a path for investor intervention, the future of activism may be shaped by a blending of – hopefully – the best of the current US and non-US governance practices.
Dr Carolyn Kay Brancato is head of the Conference Board’s Global Corporate Governance Center
