Corporate Governance Through Voice and Exit

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“Corporate Governance Through Voice and Exit”

Marco BechtSolvay Brussels School, Université Libre de Bruxelles, CEPR and ECGI

Julian FranksLondon Business School, CEPR and ECGI

Hannes WagnerBocconi and ECGI5 October 2019

The research was supported by a grant from the Norwegian Finance Initiative (NFI).

Corporate Governance Through Voice and Exit

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What do we know about shareholder stewardship?

Passive Manager Active Manager Activist Hedge Fund

Stakes held Hundreds to thousands Hundreds Typically <20 companies

Fund can vote/complain/engage (“Voice”)

Yes Yes Yes

Fund can SELL (“Exit”)

No Yes Yes

Workload per Governance team member

~250 companies per person, per year

~20 companies per person, per year

~1 company per person, per year

Note: Activist hedge funds are a highly specialized market. Represented less than 1 percent of global equity assets in 2015 (despite large and persistent inflows)

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Clinical Study

• Proprietary data from a large UK asset manager: Standard Life Investments (SLI; today Aberdeen Standard Investments)• Data on contacts with portfolio companies (engagements), voting and

daily holdings (trading) for all funds with a UK equity position• Study focuses on UK equities team• Caveats

» Proprietary data, difficult to replicate» Single asset manager with specific stewardship & investment process» Voluntary disclosure bias

§ Unravelling theorem: “best in class”

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Research questions

• We attempt to provide evidence on:1. How is the SLI UK equities team organized?2. Does SLI monitor? Does SLI engage? Does SLI vote?3. What role does monitoring, engagement and voting play in trading

decisions ?4. Does monitoring and engagement provide information advantages? Does

stewardship contribute to alpha?

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Outline

• Institutional Setting• Illustrative Case Studies• Event Study : Abnormal trading and abnormal returns

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Institutional Setting

• SLI Funds Managed by the UK Equities Team• UK Equities Team

» Governance and Stewardship Group» Internal Sector Analysts» Fund Managers» Vote Manager

• Activities» Monitoring and engagement (meetings, other contacts)» Voting» Trading

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UK Equities fund managed by SLI equities team: Number, size, and turnover

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Portfolio Company

G&S Team

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

ExitDecision

VotingDecision

SLI UK Equities Team“Black Box”

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts1

TradingDecision

VotingDecision

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1

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

TradingDecision

VotingDecision

2

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2

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G&S Team’s motives for contacts and engagements

Note: Compensation is a frequent topic; financial underperformance is rarely a topic

Compensation35%

Governance Engagement

25%

Underperformance6%

Environmental and Social

18%

Research4%

Contact Initiated by Target

12%

2

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

TradingDecision

VotingDecision

3

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3

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

TradingDecision

VotingDecision

4

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Summary Statistics for Internal Analysts 4

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

5

TradingDecision

VotingDecision

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What management proposals does SLA vote against?

Year Board Compensation

Capital M&A SRI Articles Audit Routine Other Total

2004 18.4% 50.0% 2.6% 0.0% 5.3% 2.6% 13.2% 0.0% 7.9% 100.0%2005 9.0% 71.8% 0.0% 0.0% 6.4% 1.3% 3.8% 3.8% 3.8% 100.0%2006 9.7% 64.5% 1.6% 0.0% 8.1% 1.6% 4.8% 3.2% 6.5% 100.0%2007 13.6% 65.2% 0.0% 1.5% 1.5% 1.5% 7.6% 3.0% 6.1% 100.0%2008 18.1% 65.3% 0.0% 0.0% 0.0% 1.4% 8.3% 2.8% 4.2% 100.0%2009 14.7% 62.1% 5.3% 3.2% 0.0% 0.0% 7.4% 4.2% 3.2% 100.0%2010 13.9% 58.3% 9.7% 4.2% 0.0% 1.4% 2.8% 1.4% 8.3% 100.0%2011 15.7% 66.3% 6.7% 1.1% 2.2% 1.1% 1.1% 0.0% 5.6% 100.0%2012 5.0% 74.2% 10.0% 1.7% 2.5% 0.0% 3.3% 0.0% 3.3% 100.0%2013 30.7% 57.4% 4.0% 3.0% 0.0% 1.0% 2.0% 0.0% 2.0% 100.0%2014 16.5% 74.8% 5.8% 0.0% 0.0% 0.0% 0.0% 0.0% 2.9% 100.0%2015 17.3% 58.2% 12.2% 2.0% 1.0% 1.0% 3.1% 2.0% 3.1% 100.0%

Total 15.2% 65.0% 5.4% 1.5% 1.9% 0.9% 4.1% 1.6% 4.3% 100.0%

Note: Among all management proposals, the ones that SLA votes against are overwhelmingly related to board issues and compensation issues (together 80.2% of all votes against)

5

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Portfolio Company

G&S Group

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

TradingDecision

VotingDecision

6

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Active share and trading (turnover)

• Funds managed by UK equities team

• Cremers and Petajisto would classify equity funds with active share below 60 percent as “quasi indexers”

6

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Portfolio Company

G&S Team

Contacts

Sector Analysts

Contacts

Fund Managers

Contacts

ExitDecision

VotingDecision

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6 AGM/EGM VoteAGM

5 Analyst Report

7 Analyst Buy/Sell/Hold

1 Analyst Meeting

2 G&S Meeting

3 G&S Contact

4 G&S GHW Raised/Removed

8 Fund Manager Trades

AGM EGM AGM

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Case Studies

• Large widely held FTSE100 company (Vodafone)• Company transitioning from founder control to independence (easyJet)• Company de facto controlled by controversial founder (Sports Direct)

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Example 1: SLI Monitoring and Engagement of a FTSE100 Company (Vodafone)

SLI M

onito

ring

and

Enga

gem

ent A

ctivi

ty

01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016Date

Analyst Meeting CEO FD Chair NA G&S Meeting G&S Other RemGHW Active AGM EGM Against Director Against Rem Buy Hold Sell

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Example 2: SLI Monitoring and Engagement of a founder influenced company (easyJet)

SLI M

onito

ring

and

Enga

gem

ent A

ctivi

ty

01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016Date

Analyst Meeting CEO FD Chair NA G&S Meeting G&S Other RemGHW Active AGM EGM Against Director Buy Hold Sell

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Example 3: SLI Monitoring and Engagement of a de facto founder controlled company (Sports Direct)SL

I Mon

itorin

g an

d En

gage

men

t Act

ivity

01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018Date

Analyst Meeting Meet CEO Meet FD Meet Chair NA G&S MeetingG&S Other Rem GHW Active AGM EGM AgainstAbstain Buy Hold Sell

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Corporate Governance Through Voice and Exit

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Event Study

Event study of trading and abnormal returns around four events:I. Company meetingsII. Raising of internal governance warning*III. Internal analyst recommendations*IV. Voting**

Note: * information likely to be known to fund managers before date marker** outcome often predictable; residual uncertainty on outcome

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Event Study

I. Company meetingsII. Raising of internal governance warningIII. Internal analyst recommendationsIV. Voting

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Event Study

I. Company meetingsII. Raising of internal governance warningIII. Internal analyst recommendationsIV. Voting

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Event Study

I. Company meetingsII. Raising of internal governance warningIII. Internal analyst recommendationsIV. Voting

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Event Study

I. Company meetingsII. Raising of internal governance warningIII. Internal analyst recommendationsIV. Voting

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Engagement Activity & “Tone” around shareholder votes

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Trading and engagement around shareholder meetings with and without disagreement

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Trading, analyst signals and disagreement

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Conclusions

• SLI monitors, engages and votes.• Fund managers’ trades are (significantly) influenced by monitoring, engagements,

and voting.• Case studies show a link between monitoring, engagement, voting, trading and

outcomes (changes in corporate behaviour). Sample level research on these points is under way.

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Acknowledgement

We are very grateful to

Norges Bank Investment Management and its Norwegian Finance Initiative (NFI) for financial support and

Standard Life Aberdeen (SLA) for data access, discussions and patience.