Center for
Issue #49
October 2023
Relevant Shareholders and Corporate Governance
IESE Professor jordi canals

The fragmentation of corporate ownership in recent decades has been a critical feature in the development of capitalism in the US and Europe. Since the 1960s in the US and the 1990s in Europe, families as large shareholders have seen their role replaced by institutional shareholders and private equity firms. From a capital markets perspective, this shift could be understood as a normal, evolutionary process of capital allocation, somehow neutral in terms of the impact of the structure of ownership on value creation.
This perspective is incomplete, however, and may lead to the mistaken conclusion that the nature of ownership is irrelevant for long-term value creation. Ownership actually matters. Its significance also increases in a world with significant amounts of capital that includes the emergence of all types of shareholders, as well as a diversity of preferences, expectations and time horizons. Growing academic literature signals the positive effects of certain types of investors on value creation, mainly family offices, and the doubts surrounding the long-term effects of activist investors on value creation. In other words, shareholders matter.
Shareholders may influence value creation through three main mechanisms. The first is via long-term commitment, or absence of this, to the company and the support for board decisions that can take the company to the next level. This commitment is mainly shown not only by staying on as loyal shareholders but by ensuring the company has the right corporate governance arrangements for effective decision-making. Committed and engaged shareholders are concerned about the quality of governance, in particular, the nomination of the right people for the board of directors and top executive jobs, including the CEO. This quality of engagement highlights that some shareholders may be better than others at protecting the firm’s long-term orientation. Even if most shareholders may be committed to the long term, only those with a substantial stake in the firm and a clear commitment to it, such as the case of families or long-term infrastructure funds, hold this long-term orientation.
The second mechanism is that committed shareholders regularly engage with the board and try to offer sound advice on how to make certain that the company takes a healthy long-term orientation. This also includes shareholders´ approval for some strategic decisions, such as an investment or a potential acquisition. At the same time, wise shareholders understand that the responsibility of regular governance lies with the board, not with shareholders. This means that shareholders understand that the board has to do its job and respect its decisions when they are taken through a the long-term value creation perspective.
The third mechanism is that shareholders spend time in understanding and eventually supporting the firm’s strategy and business model approved by the board.  Ongoing shareholder support for the company and a strategy and business model that creates value is the best way to avoid activist investors.
The fourth mechanism centers on shareholders’ care for good governance. In particular, they should respect minority shareholders and their rights. Disgruntled minority shareholders generate fertile ground for activist shareholders to emerge, particularly when large shareholders are not large or committed enough.
Large shareholders that actively engage with the board to improve the quality of governance and the functioning of the board, as well as understand and discuss the firm’s strategy and strategic decisions with it,  guarantee the firm’s long-term orientation.  Companies with such engaged large shareholders enjoy a differential competitive advantage in quality governance. They are not only an effective way to dissuade undesired shareholders – engaged and committed shareholders that support good corporate governance are a powerful engine for value creation. 
Corporate Governance Trends and News.

The Conference Board has published its Global Forecast Update which offers useful insights on what is ahead in the global economy. The report highlights inflation and financial market stability as the two key risks that stand out in the global economic outlook. 
Read more here
Increasing geopolitical risks and advances in the development of artificial intelligence, among other factors, have created an uncertain and difficult international context requiring boards of directors to ensure that the firm’s strategy and business model are sufficiently solid and resilient for confronting this complex scenario. Lazard has recently issued a report that provides an interesting overview of the approach to AI by various countries and the potential consequences for businesses in different sectors. 
Read more here
Despite the decline in total shareholder return performance of the S&P 500 index, the number of companies failing to pass the say on pay vote in 2023 decreased by 50% compared to 2022. The 2023 Say on Pay Season - Outcomes and considerations report issued by Pay Governance provides an interesting analysis of the factors that may have contributed to the reduction of say on pay failures this season.
Read more here
The 2023 proxy season showed an increase in volume of shareholder proposals compared to 2022. However, general support for the proposals decreased, especially those focused on environmental and social topics. Find PwC’s recap of the 2023 proxy season here
The SEC has recently adopted amendments to the rules governing beneficial ownership reporting to improve transparency and provide more timely information for shareholders and the market. These new rules shorten the deadlines by which certain investors must report and disclose their stakes in public companies. Hedge funds have highly criticized these shorter reporting deadlines which can make activist investment less attractive.
Read more here
IESE's Recent Research.

Cohen, S., Kadach, I., Ormazabal, G. (2023). Institutional Investors, Climate Disclosure, and carbon emissions. Journal of Accounting and Economics, 81.
Know more here
Bonetti, P., Cho, C., Michelon, G. (2023). Environmental Disclosure and the Cost of Capital: Evidence from the Fukushima Nuclear Disaster. European Accounting Review.
Read here
Antón, M., Giné, M., Ederer, F., Schmalz, M. (2023). Common Ownership, Competition, and Top Management Incentives. Journal of Political Economy.
 Read here
Bonetti, P., Ormazabal, G.  (2023). Boosting Foreign Investment: The Role of certification of corporate governance. Journal of Accounting Research, 61(1), 95-140.
Read here
Fernandes, N. (2023). Climate Finance.
Know more here
Cohen, S., Kadach, I., Ormazabal, G., Reichelstein, S. (2023). Executive Compensation Tied to ESG Performance: International Evidence. Journal of Accounting Research, 61 (3), 805-853.
Read here
Almandoz, J. (2023). Inside-out and outside-in perspectives on corporate purpose. Strategy Science.
Read here
Canals, J. (2023). Boards of Directors in Disruptive Times. Cambridge: Cambridge University Press.
Know more here
Upcoming programs.