Intro

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There has been a shift in share ownership in the UK Individuals own less shares now, as pension funds and insurance funds increase This essay will discuss the influence shareholders have on companies. And whether or not the change in share ownership has also changed this influence

1) Companies Behaviour Companies are stereotyped do be greedy - looking out for their best interest (high remuneration and high KPI) Agency theory Shareholders - how regulations and the importance of corporate governance has closed the gap of this problem. 2) Shareholder power y Yes (thoretically) they have power - extraordinary general meetings, voting rights etc y And No they don't have a power - often rolled over by directors in the company. Link with agency theory y Exit or voice? Which is better for the company? y Voice - through vote y Should be heard y How they have the power y Regulations that call to shareholders for active involvement 3) Institutional Investors and how they act as shareholders 3.1) Increase in shareholders powers and implication of it y As mentioned above, a large part of share ownership in the world is now owned by institutional investors. y There have been many attempts to increase the activism of shareholders - recommendations from the ISC. y This shows power and influence of the shareholders will increase the more active the shareholders are y Why should they be more active? More pressure on insitutional invstors as shareholders - they have a fiduciary responsibility - they have to act in the best interest of a third party. Besides that, being majority shareholders (insert definition) they are also looking out in the interest of individual shareholders who might be minority owners. y Regulations - myner report y Implication of shareholders engagement : y increase in companies performance by monitoring and intervening when necessary (page 110 textbook) y How can they exercise their power? Using tools : One on one meetings, voting, shareholder proposals, focus lists for companies that underperform. y More returns for shareholders in terms of hedge funds as investors (cite Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors" by APRIL KLEIN and EMANUEL ZUR) : o Two major differences are that hedge funds target more profitable firms than other activists, and hedge funds address cash flow agency costs whereas other private investors change the target s investment strategies. o Hedgefund activism creates shareholder value o Under this theory, firms can reduce agency conflicts between managers and

shareholders by reducing excess cash on hand, and by obligating managers to make continuous payouts in the form of increased dividends and interest payments to creditors. Consistent with this view, hedge fund targets initially have higher levels of cash on hand than do other entrepreneurial activist targets There should be a balance between hedge funds and corporate governance. Sometimes hedgefunds are not concerened with corporate governance

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3.2)Behaviour of shareholders in exercising power and implication of it Because most of these shareholders are majority funds - there is the danger of having absentee shareholders. Portfolio managers "A continuing obstacle to the success of most corporate governance initiatives is the unwillingness of the majority of institutional portfolio managers to co-operate with governance activists even to the extent of merely voting in cases where clear bene ts would ow to all shareholders from a positive result" - it impacts majority shareholder but gives negative impact on minority. Corp gov ensures ALL shareholders benefit. International investors might not be actively involved in voting - "box ticking", and difficulty to vote due to cross borders problems (Not enough time given, language barriers, free riding ie if someone else is going to vote why should I vote?) - an implication of shareholders not being active, is a minority shareholder losing power " Institutional shareholders do not like to vote shares against incumbent managements. Often, they prefer not to vote at all." Implication of shareholders passivism: Directors who misuse companies funds Shirking from shareholders Leehman brothers and enron Royal Ahold (Page 3 textbook) - supressed the involvement of investors "Directors have overgenerous remuneration packages" Sometimes activism isnt a good thing

4) Conclusion Real world situation - what is happening now? Fidicuary duties