Читать книгу Understanding and Managing Strategic Governance - Wei Shi - Страница 19

The 1980s was known for hostile takeovers and the use of junk bonds to facilitate large takeovers by corporate raiders. This period inspired a book and movie titled Barbarians at the Gate, which chronicles the takeover by Kolberg, Kravis, and Roberts (KKR) of RJR Nabisco in a stunning $24 billion deal. However, in the early 1990s, the market for corporate control became dampened after the collapse of the junk bond market and the jailing of Michael Milken and the failure of his firm, Drexel Burnham Lambert.

In the late 1990s, institutional investors, such as pension funds and mutual funds, became more active. Although institutional investor activism rose in this period, the market for corporate control declined because of defensive actions by boards that largely insulated firms from pressure. But activist hedge funds stepped in with more offensive actions. In the 2000s, activist hedge funds began to nominate unaffiliated board members and influence their election to boards. One legal observer called this approach quasi-control because it uses board power rather than just ownership voice, as pension fund holders had used in the 1990s, although it falls short of actual corporate control. When activist fund representatives fill one or more board seats, their influence often leads to the replacement of significant corporate managers, such as the CEO or CFO, and the replacements often favor the strategic decisions preferred by the activists.

In wolf-pack activism, funds ready for aggressive campaigns team together with other activist investors. This tactic may include securing minority board representation (especially by way of negotiated settlement), which represents a much cheaper alternative to engaging in a proxy contest or pursuing a hostile takeover. In this manner, activist hedge funds can pursue a number of different companies compared to focusing their efforts entirely on one or two targets. As such, the amount of capital that they need to invest in specific target companies has gone down over time.

What regulatory and other changes occurred to allow for an atmosphere of wolf-pack activism? Changes in Securities and Exchange Commission regulations and the entrance of shareholder proxy advisory intermediaries facilitated the changes. The SEC enacted a proxy access rule in 2010, though it was later vacated by the US Court of Appeals for the District of Columbia Circuit in 2011. However, in recent years, many S&P 500 companies have adopted proxy access bylaws, which usually allow shareholders who hold 3 percent of the shares of a company for at least three years the ability to nominate directors without going through a proxy contest. Rather than risk a proxy contest, firms have allowed more access to the nomination process. In fact, 88 percent of the board seats won in 2016 were achieved through settlement agreements rather than proxy contests, compared to 70 percent in 2013 and 66 percent in 2014.

Proxy advisory intermediaries, such as Institutional Shareholder Services (ISS) and Glass Lewis, have enabled the power of other institutional investors, often in support of the activist shareholders. Because institutional investors are significant shareholders, often having shares over the SEC 3 percent rule, they hold power to nominate directors directly during the proxy voting process. And because institutional investors frequently follow large proxy advisor voting recommendations, activist investors team with these intermediaries to get their board members elected. Under SEC rule changes and proxy advisor power, firm leaders are more likely to settle with activist shareholders and support a campaign for minority board representation rather than risk a negative vote in a proxy contest.

Sources: Benoit, D., & Grant, K. (2015). Activists' secret ally: Big mutual funds – large investors quietly back campaigns to force changes at US companies. Wall Street Journal, www.wsj.com, August 10 www.wsj.com/articles/activist-investors-secret-ally-big-mutual-funds-1439173910; Coffee J. C., & Palia, D. (2016). The wolf at the door: The impact of hedge fund activism on corporate governance. Journal of Corporation Law 41(3): 545–607; Baigorri, M., & Kumar, N. (2017). Black swans, wolves at the door: The rise of activist investors. Bloomberg, www.bloomberg.com, July 12; Christie, A. L. (2019). The new hedge fund activism: Activist directors and the market for corporate quasi-control. Journal of Corporate Law Studies 19(1): 1–41; Wong, Y.T.F. (2020). Wolves at the door: A closer look at hedge fund activism. Management Science 66(6): 2347–2371.

For board members to affect strategic governance, the same standard applies. Corporations often replace one or more directors each year. Each replacement represents a chance to shape the board to meet the corporation's strategic needs. An unexpected death of one director can shape corporate acquisitions strategy, which indirectly shows the impact on strategy that even one director can have.³⁶ Not surprisingly, nominating committees increasingly seek board members with specific functional expertise, such as in labor, environmental, compensation, or public policy. For example, when a firm is experiencing operational problems, appointing a chief operating officer (COO) or CEO with operational experience from another firm helps the appointing firm to improve its performance.³⁷

FIGURE 1.2 Board diversity of S&P 1500 firms.

Nomination committees may also seek directors to match diversity characteristics of customers or to extend operations into global markets. Diversity may improve board effectiveness. Growing evidence suggests that board gender diversity is associated with a number of desirable organizational outcomes, such as avoidance of securities fraud,³⁸ more vigilant monitoring of the top management teams,³⁹ more ethical firm behavior,⁴⁰ and higher accounting-based performance and stock market returns.⁴¹ As Figure 1.2 shows, boards have become more diverse over time in regard to appointing more females and ethnic minority members. But these positives are stymied if, for example, solely one woman is placed on a board as a token to create institutional legitimacy.⁴² Recognizing the positive effects of diverse membership on boards, institutional investors are using their power to push companies to appoint more women and minorities. For instance, BlackRock, a large mutual fund manager, suggested that diverse boards “make better decisions” and that it planned to focus on the issue in discussions with company leaders ahead of annual meetings.⁴³ Yet we note that diverse demographic characteristics do not always mean that the new “diverse” members will have diverse opinions as current board members. For example, directors are inclined to select a demographically different new director who can be recategorized as an in-group member based on his or her similarities to them on other shared demographic characteristics, and such recategorization also increases demographically different directors' tenures and likelihood of becoming board committee members.⁴⁴ We also note that board demographic diversity can be detrimental to unity among members, making firms become attractive targets for hostile stakeholders; interestingly, as a result, firms with a more demographically diverse board are more likely to be targeted by activist investors, presumably because boards are unable to form an effective coalition against activist investors.⁴⁵

The nominating and governance committees—sometimes held as a single, combined committee—carry out important functions. The governance committee can conduct a management audit, assessing the capabilities and potential of the company's board and management team, and suggest training to sensitize the directors to environmental, regulatory, or diversity issues that affect strategy. Such an audit focuses board attention on human assets and helps plan changes in leadership. In fact, succession planning forms another crucial issue under the purview of the governance committee. When a CEO is dismissed or moves to another firm, a board of directors without a strong succession plan may scramble for a replacement, which may lead to serious strategic consequences. Many boards have authorized their nominating committees to seek out potential executive talent to avoid shocks upon surprise departures. Some boards hold an annual joint session of the compensation committee, the nominating and governance committees, and the executive committee to discuss succession planning and executive resource development. Another important issue lies in appointing qualified board committee chairs. When highly qualified chairs are passed over and less qualified members receive chair appointments, the selections can lead to a negative board climate,⁴⁶ which also may affect strategic governance. To avoid pitfalls from inadequate chair appointments or succession shocks, directors should formalize succession processes that can improve their information collecting and processing abilities and give rise to a greater quantity and quality of qualified chairs and CEO candidates.⁴⁷ The following example demonstrates the hazard in not having a succession plan in place.

In mid-2020, leaders of Cerberus Capital Management, a private equity firm holding more than 5 percent ownership of Commerzbank, the second largest German bank, sent a letter to the board chair that the bank “has not presented a coherent strategy and has failed to implement even its own progressively less-ambitious plans.” Cerberus heads wanted to name two new supervisory board members to encourage significant changes to Commerzbank's supervisory board, management board, and the strategic plan. One month later, over disagreements with Cerberus (the bank's second largest shareholder), Commerzbank CEO Martin Zielke announced unexpectedly that he would step down from his position. The abrupt announcement came as a surprise and reduced the value of the firm, while the departure left a governance void at the bank.⁴⁸ Compared to German competitor Deutsche Bank's 1 percent loss, Coomerzbank shares fell 26 percent, when a new CEO was appointed in September 2020.⁴⁹

Although board committees supervise managerial incentives and behavior, the relationship between committee chairs and top managers does not have to be adversarial. In fact, the compensation committee sets appropriate incentives so that the top managers, especially the CEO, will work on behalf of shareholders and stakeholders to create a strategy and make strategic decisions that will build both firm growth and stakeholder wealth. Pay structure for the top management team by the compensation committee creates a definite strategic governance issue.⁵⁰ A large pay differential among top management team members can give rise to problematic social comparison, since a smaller number of officers may get large pay packages, whereas others receive less.⁵¹ Large pay dispersions can generate less cooperative teamwork and less effective overall strategy implementation, ultimately leading to lower firm performance. For instance, a large pay gap between CEOs and non-CEO top executives provides strong incentives for the latter to resort to misconduct as a means of outperforming others.⁵² Relatedly, high pay dispersion among employees in R&D groups leads to less innovation,⁵³ which is especially detrimental to firms in the pharmaceutical industry or other industries that depend on innovation for continued profitability. Collective incentives focused on the top management team can also influence how much the whole firm will focus on corporate social responsibility issues.⁵⁴ Also, by setting the pay culture for the firm, not only for top managers but for employees overall, the compensation committee influences strategic implementation throughout the organization.

Audit committees may likewise influence strategy, albeit at times indirectly. As noted earlier, boards with a majority of outside directors depend on financial outcomes to judge firm performance, or what is labeled financial control.⁵⁵ Comparatively, a strategic control emphasis allows for the evaluation of strategic situations subjectively, based on the quality of board member strategic comprehension during decision-making. If no one on the audit committee can help inform outside board members to understand the strategic contingencies involved, their sole dependence on their accounting and financial orientation will likely affect the firm's strategy, since managers will take actions that involve less risk, such as more unrelated diversification.⁵⁶ That is, if managers feel that they are judged on financial outcomes alone rather than on the upfront agreement of the board (or committee) on the quality of their decisions using strategic controls, they are likely to seek to diversify the firm to reduce their employment risk (see Chapter 3).⁵⁷

Business-level strategy (strategic positioning within the same industry) is also affected by these control systems. In a classic strategy book titled Organizational Strategy, Structure, and Process,⁵⁸ two polar business-level strategies are defined: defenders and prospectors. Defender strategies target stable and defensible market domains, seeking to solve the engineering problem by focusing efforts on producing and distributing goods and services in the most efficient and cost-effective manner possible. Alternatively, prospectors pursue strategies that tend to compete by continually finding and exploiting new product and market opportunities, seeking to establish strong product reputation and market dominance through product innovation and market development. Prospectors take risks, which enable them to quickly respond to new opportunities and changing competitive landscapes. When a firm pursues a less aggressive, more predictable, and stable strategy (such as those generally pursued by defenders), the audit committee can rely more on financial control, judging executives based on their achievement of financial objectives⁵⁹ and an appropriate tax strategy.⁶⁰ However, a prospector firm audit committee may need to allow executives to take on more risk. Directors should therefore make sure that the audit committee is structured with the right members to fit the business-level strategic approach that the firm pursues to enable proper strategy execution (see Chapter 4).

The most beneficial background for audit committee members and the optimal committee practices may differ between industries and even with the board as a whole; firms in high-technology industries with rapid change will need to have more emphasis on strategic control than more stable industries.⁶¹ In addition to industry, the stage of the firm in its lifecycle or its strategic focus may also affect optimum governance characteristics and processes.⁶² A small, young, rapidly growing firm with high institutional ownership, for example, may benefit more from directors with industry expertise and from a greater focus on serving, as in an advisory source to management. Conversely, a large, established firm in a declining industry, with a widely dispersed shareholder base, may benefit more from directors with financial expertise and a board more focused on its monitoring role.