cms structure koguan law school zhou renjie. i. definition of cms controlling-minority structure...
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CMS StructureKoGuan Law School
Zhou Renjie
I. Definition of CMS
Controlling-Minority Structure (CMS)
Dispersed Ownership (DO)
Controlled Structure (CS)
DO CMS CS
Combine the incentive problems
associated with both the CS and DO in
a single ownership structure?
I. Definition of CMS
Cash Flow
Agency Cost
I. Definition of CMS
Separation of Control from
Cash Flow Right
Dual Class Equity Structure
Stock Pyramids
Cross-ownership Structures
II. Three CMS Forms
II. Three CMS FormsA. Dual Class Equity Structure
Controller’s Share
• More voting rights
Other Shareholders’
Share
• Less voting rights
1. Structure
II. Three CMS FormsA. Dual Class Equity Structure
2. Incidence
Not the most common CMS
structure
Reason Corporate Law Restrictions
Partly
Common in Sweden and
South Africa
II. Three CMS FormsB. Stock Pyramids
1. StructureControlling Sharehold
er
CompanyA
Control Company
AControl
Company B
CompanyN
Company in CMS Form
…
…
II. Three CMS FormsB. Stock Pyramids
1. Structure
Controlling
Shareholder
Company A
…………
Company N
Cash Flow R ightsIn Company N
II. Three CMS FormsB. Stock Pyramids
2. Incidence
the most common CMS
structureQuite common in Asian
companies
II. Three CMS FormsC. Cross-ownership Structures
1. Structure
Company A
Company B
II. Three CMS FormsC. Cross-ownership Structures
1. Structure
Controller
1
2 ……n
II. Three CMS FormsC. Cross-ownership Structures
1. Structure
𝒔𝒊+∑𝒋=𝟏
𝒏
𝑺𝒊𝒋>𝟏𝟐
Sij: the fraction of company i’s shares held by company j
Si: the fraction of company i’s shares held by the controller
The controller controls all n companies
If for each i, the controller maintains
2. Incidence
Popular in Asia
Reasonthey make the locus of control over companies
less transparent
II. Three CMS FormsC. Cross-ownership Structures
The Geography of Shareholder Engagements
KoGuan Law SchoolZhou Renjie
I. Definition ofShareholder Engagement
Shareholder Engagement is a strategy used to open channels
of communication between a shareholder and a company to improve performance of the
company.
Main Engagements Tools
Active Voting / Shareholder Proposals at Annul General
Meeting
Class Action Lawsuit
Direct Engagements
Management Meeting
Telephone Call
……
……
II. Engagement Tools
II. Engagement Tools
Main Engagements Tools
Active Voting / Shareholder Proposals at Annul General
Meeting
Class Action Lawsuit
Direct Engagements
Management Meeting
Telephone Call
……
……
• Shareholder proposals, class action lawsuits and the Wall Street Walk are the most important engagement tools available to shareholders.
Gillan and Starks (2000); Romano (1991);Edmans (2009);
Admati and Pfleiderer (2009)
II. Engagement Tools
Author’s
View
Wall Street WalkMy View
• 1. It is a form of shareholder activism.• 2. It does not fall within the definition of
“shareholder engagement”.Lack of
Communication
II. Engagement Tools
Main Engagements Tools
Active Voting / Shareholder Proposals at Annul General
Meeting
Class Action Lawsuit
Direct Engagements
Management Meeting
Telephone Call
……
……
• The most often adopted engagement tools are also private dialogues and direct management meetings.
McCahery, Sautner and Starks (2011)
• Private engagements may be even the most powerful way of engaging with firms in the United States.
• About 20 % of all shareholder proposals are withdrawn by the lead sponsoring shareholder after private negotiations with the management of the target firm have taken place.
Bauer, Moers, and Viehs (2012)
II. Engagement Tools
Problems in Collective
Engagements
Coordinating Cost
Free Rider Problem
II. Engagement Tools
Why to take private engagements?
Dispersed Shares
Coordinating Cost
Collective Action
Free Rider
Problem
Inefficiency
in Collective
Action
40%
28%
32%
Governance Issues
Social Issues
Environmental Issues
III. Issues of Shareholder Engagements
IV. Institutional Investors
• Institutional investors are important corporate monitors.
• The Reason is that they have more power and incentives to monitor the firm and also to promote changes.
Burkart, Gromb, and Panunzi (1997)
Shleifer and Vishny (1986)
• Pension funds and hedge funds are important institutional activist investors.
Del Guercio and Hawkins (1999)Klein and Zur(2009)
V. Does Shareholder Engagements Matters?
• Corporate engagements at 613 US corporations from 1999-2009
• An annul abnormal stock price reaction of 4.4% to firms
Dimson, Karakas, and Li (2012)
• 1,894 US firms• Firms are significantly more likely to honor
engagements of any kind as soon as firms do receive shareholder proposals and corporate engagements by the institutional investor at the same time.
Bauer et al. (2012)
√
Questions
Which firms does the institutional investor engage with and how does
geography drive the intensity of such engagements?
Does geography drive the success of engagement
activities?
a British asset manager
the investee firms changed their policies
Sample
SampleAll of the asset manager’s engagement activities at 397 unique “priority” firms located in 37 different countries from 2006-2011
Priority FirmsFor these firms, both the engagement agent and the institutional clients view immediate engagement action regarding ESG policies as necessary.environmental,
social and governance
Phenomenon 1Firms from the UK get significantly more objectives (设定了更多政策目标 )
Home Bias
Reasons
Proximity to Target Firms
Better Knowledge of the Regulatory Environment
Reduced Information Asymmetries
VI. Question 1: Which firms does the institutional investor engage with and
how does geography drive the intensity of such engagements?
Phenomenon 2Larger firms get relatively more objectives than their smaller counterparts.
VI. Question 1: Which firms does the institutional investor engage with and
how does geography drive the intensity of such engagements?
Determinants other than Geography
ExplanationThese firms make up for a large part of the relevant investment portfolio.
More
benefits!
VI. Question 1: Which firms does the institutional investor engage with and
how does geography drive the intensity of such engagements?
Determinants other than Geography
Explanation1. A closer collaboration on particular issues raises the number of objectives that a particular firm receives in the future.2. Poorly performing firms are more frequently targeted with private engagements.
Phenomenon 3There is a positive relationship between the number of past engagements and the number of current engagements.
What drove more past engagements?1. Closer Collaboration2. Poorer Performance
“Path Dependency”!
PhenomenonFirms originating from the United States and Continental Europe do have higher success ratios than their UK counterparts.
VII. Question 2: Does geography drive the success of
engagement activities?
Explanation1. The institutional investor is particularly
targeting those foreign firms for which the necessity of engagement is also highest and which therefore have the highest potential to change.
2. Firms from the UK have a tight nationwide regulation with respect to corporate governance and environmental standards that the potential of a change is also limited for domestic firms.
√
Vobis Gratias Ago