tag:theconversation.com,2011:/ca/topics/shareholder-value-20830/articlesshareholder value – The Conversation2023-07-11T12:28:34Ztag:theconversation.com,2011:article/2055522023-07-11T12:28:34Z2023-07-11T12:28:34ZLiberal CEOs were more likely to exit Russia following its invasion of Ukraine than more conservative corporate leaders<figure><img src="https://images.theconversation.com/files/534665/original/file-20230628-21915-rn71zb.jpg?ixlib=rb-1.1.0&rect=94%2C49%2C2901%2C1944&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Burberry was one of the first Western companies to announce it was suspending sales in Russia after the invasion. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-tower-of-kremlin-reflexing-in-a-window-of-closed-news-photo/1239055957">Oleg Nikishin/Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em> </p>
<h2>The big idea</h2>
<p>Companies led by liberal-leaning CEOs were more likely to leave Russia following its invasion of Ukraine in 2022 than those helmed by conservatives, according to <a href="https://doi.org/10.1016/j.jwb.2023.101475">our new study</a>. We measured their political leanings based on how much they donated to the two main U.S. political parties over five recent federal election cycles. </p>
<p>In the aftermath of Russia’s invasion on Feb. 24, 2022, <a href="https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain">over 1,000 companies said they would divest</a>, abandon or pause their operations in the country. Some, however, chose to stay. We wanted to understand what drove that decision, and we felt that their executives’ political leanings might be a driver, <a href="https://hbr.org/2022/03/in-light-of-russia-sanctions-consider-your-conditions-for-doing-business-in-other-countries">given the frequent references to ethics</a> and ideology in the corporate statements of businesses exiting Russia.</p>
<p>So we took a list of 189 U.S.-based public companies that <a href="https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain">had business in Russia prior to the invasion</a> from a website run by a team at Yale University that has been tracking the corporate response since Feb. 28, 2022. To determine political leanings, we examined the donations of their CEOs during every federal election from 2012 through 2020 and gave them a score depending on how much they gave to Democrats versus Republicans.</p>
<p>We then looked at how the companies responded during the war’s first 40 days, relying on the Yale database, with a focus on whether they chose to abandon Russia or not. </p>
<p>A tad over 30% of companies in our sample chose to leave Russia at the onset of the conflict, while 39% suspended their operations at least temporarily and another 8% scaled back their investments. On the other hand, 14% put new projects on hold but carried on existing operations, and 8% carried on business as normal. </p>
<p>Overall, we found that companies with more liberal CEOs – including ride-hailing app Uber, vacation rental company Airbnb and computer maker Apple – were more likely to either leave or suspend their operations. Conservative-led businesses, such as hotel chain Hilton and consumer goods company <a href="https://us.pg.com/blogs/pg-european-operations-update/">Procter & Gamble</a>, tended to be the ones that maintained business as usual or did little more than pause new investments. </p>
<p>We didn’t track corporate actions after the first 40 days, but we do know that some of these companies continue to do business in Russia – <a href="https://www.reuters.com/business/oreo-maker-mondelez-faces-nordic-backlash-over-russia-business-2023-06-12/">despite pressure to cease operations</a>.</p>
<p>We also considered 18 other variables that may have had some impact on a company’s decision to stay or go, such as their industry, size and board composition. We found that although CEO ideology had one of the strongest impacts on the decision, some other factors mattered more, such as industry. </p>
<h2>Why it matters</h2>
<p>Companies have traditionally <a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html">made most business decisions</a> – including whether or not to abandon an entire market – by gauging economic or financial factors. And they’ve tended to stay out of politics to avoid alienating their customers.</p>
<p>In recent years, corporate CEOs <a href="https://doi.org/10.5465/amr.2018.0084">have become more willing to disclose</a> their ideological position on controversial social issues. And increasingly, political ideology of the CEO has become another key factor driving business decisions, as our own research confirms. </p>
<p>Because the U.S. <a href="https://doi.org/10.1177/0149206320909419">appears increasingly polarized</a> along a conservative-liberal axis, it’s important to be aware of how corporate leaders’ personal politics are affecting their decisions. And that creates the possibility that such decisions are informed by ideological biases rather than purely objective economic data.</p>
<p>The costs of these choices are high, as some companies said they <a href="https://www.washingtonpost.com/business/2022/05/03/bp-profit-russia/">lost billions of dollars</a> in revenue because of their decision to leave the Russian market.</p>
<h2>What still isn’t known</h2>
<p>A big question remains over what this means for the role of corporations in society. </p>
<p>On the one hand, corporations have long been expected to <a href="https://corpgov.law.harvard.edu/2020/09/17/the-friedman-essay-and-the-true-purpose-of-the-business-corporation/">put the interests of shareholders</a> – and their profits – above pretty much everything else. On the other, there’s growing evidence that companies are taking a much broader perspective on the purpose of the corporation, notably <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">expressed in a 2019 pledge</a> by 131 companies to “promote an economy that serves all Americans.”</p>
<p>Liberal CEOS <a href="https://doi.org/10.1177/0001839213486984">are more likely to take</a> on that broader perspective than conservative executives, who still tend to put a greater emphasis on shareholder wealth.</p><img src="https://counter.theconversation.com/content/205552/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new study found that a CEO’s political ideology was correlated with the decision of whether to leave or suspend operations in Russia following the 2022 invasion.Yannick Thams, Associate Professor of Strategy and International Business, Florida Atlantic UniversityLuis Alfonso Dau, Associate Professor of International Business and Strategy, Northeastern UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1996352023-02-10T13:58:48Z2023-02-10T13:58:48ZWhat are stock buybacks, which critics are blaming for hastening Bed Bath & Beyond’s bankruptcy? A finance professor explains<figure><img src="https://images.theconversation.com/files/522689/original/file-20230424-1075-lx31id.jpg?ixlib=rb-1.1.0&rect=175%2C18%2C3850%2C2661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bed Bath & Beyond has spent billions in recent years on share buybacks.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BedBathandBeyond/ea8ce516b7be471c88b518eef7cb9ec2/photo?Query=bed%20bath%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=117&currentItemNo=8">AP Photo/Ted Shaffrey</a></span></figcaption></figure><p><em>Bed Bath & Beyond <a href="https://www.marketwatch.com/story/bed-bath-beyond-bankruptcy-heres-what-happens-next-7697ed3d">filed for bankruptcy</a> on April 23, 2023, and <a href="https://wolfstreet.com/2023/04/23/after-wasting-11-6-billion-on-share-buybacks-to-return-value-to-shareholders-lol-bed-bath-beyond-goes-bankrupt-will-liquidate/">some analysts</a> <a href="https://news.yahoo.com/bed-bath-beyond-how-stock-buybacks-undermined-the-company-154202427.html">are blaming</a> the billions of dollars the retailer spent on share buybacks as one of the reasons for its downfall. In total, the company has spent nearly US$12 billion buying back its own stock since 2005, including $1 billion in 2021 alone – cash that could have potentially <a href="https://www.therobinreport.com/the-share-buyback-that-killed-bed-bath-beyond/">helped stave off bankruptcy</a>.</em></p>
<p><em>Bed Bath & Beyond is hardly alone in snapping up its own stock. Companies <a href="https://www.bloomberg.com/news/articles/2022-08-18/all-about-stock-buybacks-a-1-trillion-market-force-quicktake?sref=Hjm5biAW">have been buying back</a> record amounts of their own shares in recent years, which prompted President Joe Biden to <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">propose quadrupling the tax on buybacks to 4%</a>.</em> </p>
<p><em>But what are stock buybacks, and why do some people consider them to be a bad thing? The Conversation tapped <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">D. Brian Blank</a>, who studies company financial decision-making at Mississippi State University, to fill us in.</em> </p>
<h2>1. What are stock buybacks?</h2>
<p>Before we can answer that question, first we need to understand the basics of how stock works.</p>
<p>Stock <a href="https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks">represents an ownership interest in a company</a>, such that stockholders have a stake in the business. Companies use stock as one way to <a href="https://hbr.org/1989/11/everything-you-dont-want-to-know-about-raising-capital">raise capital</a> by selling their shares to investors, usually in an <a href="https://theconversation.com/investors-swoon-over-bumbles-ipo-but-what-exactly-is-an-initial-public-offering-155084">initial public offering</a>. </p>
<p>Most stockholders, however, obtain stock by buying it on a secondary market, like the New York Stock Exchange. In this case, <a href="https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/primary-vs-secondary-market-definition">one person chooses to sell their ownership</a> in the company, while another person buys it.</p>
<p>As partial owners, shareholders see the value of their stock rise when the company does well. </p>
<p>One way investors can benefit from holding the stock is that some corporations <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/dividend">pay dividends</a>, which are payments made directly to shareholders. Another way that stockholders can benefit is by selling the stock for more than they paid for it. Together, this creates a return on investment.</p>
<p>And this brings us to share buybacks – and <a href="https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns">why investors like them</a>.</p>
<h2>2. Why do companies buy back their own stock?</h2>
<p>When <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469">companies have extra capital</a>, they might go into the secondary market and buy back stock from investors. This is often referred to as a stock repurchase or <a href="https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company">buyback program</a>. Companies that are older and less focused on rapid growth tend to do them more often. </p>
<p>Companies do this for <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">a variety of reasons</a>, <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">such as because</a> they think their shares are undervalued and want to signal optimism to Wall Street, or because they simply want another way to distribute profits to shareholders – <a href="https://corpgov.law.harvard.edu/2018/05/23/why-shareholder-wealth-maximization-despite-other-objectives/">a key goal of any company</a> – <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">other than through dividends</a>. </p>
<p>Shareholders like buybacks because companies <a href="https://corporatefinanceinstitute.com/resources/accounting/dividend-vs-share-buyback-repurchase/">often pay a premium</a> over market price. And when companies buy their own stock, this removes those shares from the market, which has the effect of lifting share prices as supply goes down, benefiting existing stockholders.</p>
<p>It’s estimated that American companies <a href="https://www.bloomberg.com/news/articles/2023-01-09/corporate-america-is-still-lining-up-to-buy-back-its-own-stock-shares?sref=Hjm5biAW">bought back a record $1 trillion</a> of their own stock in 2022. And Apple is the <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469#:%7E:text=Apple%20Inc.%20is%20the%20biggest,of%20the%20S%26P%20500%20companies.">biggest user of buybacks</a>, having spent $557 billion over the past decade repurchasing its own shares. </p>
<figure class="align-center ">
<img alt="elderly white man with gray hair stands in front of lectern and appears to speak while gesticulating with his hands" src="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Joe Biden said companies should ‘do the right thing’ and stop buying back their own shares.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BidenOil/e9009d5ff31a4a7792593c5974d1d79f/photo?Query=biden%20union&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2242&currentItemNo=1">AP Photo/Patrick Semansky</a></span>
</figcaption>
</figure>
<h2>3. Why do Biden and others dislike buybacks?</h2>
<p>Critics like Biden contend that share buybacks represent short-term thinking that doesn’t actually create any real value. They <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">argue instead</a> that companies should use more of their profits to invest in more productive activities like business operations, innovation or employees.</p>
<p>Returning money that a company makes to stockholders does mean <a href="https://www.cfo.com/corporate-finance/2021/02/shareholder-distributions-vs-reinvestment-the-gap-grows/">less capital is available</a> for other investments. In his speech, Biden specifically <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">called out “Big Oil” companies</a> for using the <a href="https://www.cnbc.com/2023/02/08/big-oil-rakes-in-record-annual-profit-fueling-calls-for-higher-taxes.html">record profits</a> they’ve earned from high energy prices to buy back their stock rather than investing in new wells to increase supply – and <a href="https://www.washingtontimes.com/news/2023/feb/7/biden-rips-outrageous-big-oil-profits-calls-quadru/">help reduce gas prices</a>. </p>
<p>But the decision whether to invest to increase domestic production is a complicated one. For example, the reason companies aren’t investing in new wells right now is not simply because they are buying back stock. The reason has more to do with how oil companies, and their shareholders, don’t think it is profitable to invest in more supply for a <a href="https://www.npr.org/2021/03/06/973649045/hold-that-drill-why-wall-street-wants-energy-companies-to-pump-less-oil-not-more">whole host of reasons</a>, including the global push for greener energy by both policymakers and consumers, which is bound to reduce demand for fossil fuels in the future.</p>
<p>It’s also worth noting that while share repurchases are becoming <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1745-6622.2000.tb00040.x">increasingly common</a> and controversial, they remain very <a href="https://noahpinion.substack.com/p/stock-buybacks-dont-really-matter">similar to dividends</a>, which don’t prompt the same concerns among politicians. </p>
<h2>4. Would increasing the tax result in fewer buybacks?</h2>
<p>The 1% tax on buybacks is actually brand new. </p>
<p><a href="https://www.mayerbrown.com/en/perspectives-events/publications/2023/01/1-stock-buyback-tax-us-treasury-irs-release-interim-guidance">Congress passed the tax</a> in 2022 as part of the Inflation Reduction Act. It took effect at the beginning of 2023 and only affects buyback programs of $1 million or more. </p>
<p>Usually when an activity is taxed, it happens <a href="https://www.americanexperiment.org/tax-something-you-get-less-of-it-policymakers-have-always-known-that/">less frequently</a>. So, I expect the tax to nudge companies to spend less on buybacks and more elsewhere. While politicians intend more of the money to be used to invest in their productive capacity, companies may simply spend more on <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">paying shareholders dividends</a>.</p>
<p>Since the tax is new, it’s hard to evaluate its actual impact. <a href="https://www.kiplinger.com/investing/stocks/why-stock-buybacks-could-accelerate-in-q4">Companies reportedly accelerated</a> their repurchase programs in 2022 to avoid paying the tax.</p>
<p>But early data from 2023 suggests the 1% tax isn’t significantly deterring buybacks. <a href="https://www.bloomberg.com/news/articles/2023-02-02/stock-buybacks-hit-132-billion-as-companies-snub-all-warnings?sref=Hjm5biAW">Companies announced $132 billion</a> in buybacks in January, three times as much as a year earlier and the most for the month on record.</p>
<p>Biden’s <a href="https://www.reuters.com/world/us/biden-address-bring-buybacks-billionaire-tax-investor-focus-2023-02-07/">proposal to boost</a> the tax to 4% may alter corporate behavior more. But again, it may just lead to greater dividend payments, not the other types of investments he and others hope for.</p>
<p>In addition, given that Republicans control the House, and Democrats have only a narrow majority in the Senate, this proposal <a href="https://www.cnbc.com/2023/02/07/biden-buyback-tax-isnt-working-in-state-of-the-union-he-wants-more.html">has little chance</a> of becoming law anytime soon.</p>
<p>The reasons why large corporations make the decisions they do about where to allocate capital – whether to build a factory, hire more workers or buy back stock – are complicated and, in my view, never taken lightly. These decisions have many <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">facets and implications</a>, and are not necessarily bad. I believe this is something worth remembering the next time you hear <a href="https://www.barrons.com/articles/corporate-stock-buyback-tax-51675805358">politicians</a> <a href="https://ca.finance.yahoo.com/news/president-biden-calls-out-stock-buybacks-in-state-of-the-union-address-104810205.html">saying</a> “<a href="https://www.cnn.com/interactive/2023/02/annotated-fact-checked-president-biden-sotu/">corporations should do the right thing</a>.”</p>
<p><em>This is an updated version of an article originally published on Feb. 10, 2023.</em></p><img src="https://counter.theconversation.com/content/199635/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The retailer has spent nearly $12 billion buying back its own stock since 2005, money that could have been used to invest in its business.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1943332022-11-10T07:05:46Z2022-11-10T07:05:46ZMark Zuckerberg can sack 11,000 workers but shareholders can’t dump him: it’s called ‘management entrenchment’<p>“I want to take accountability for these decisions and for how we got here,” tech billionaire Mark Zuckerberg <a href="https://www.cnbc.com/2022/11/09/meta-to-lay-off-more-than-11000-thousand-employees.html">told</a> the 11,000 staff he sacked this week. </p>
<p>But does he really?</p>
<p>The retrenchment of about <a href="https://www.cnbc.com/2022/11/09/meta-to-lay-off-more-than-11000-thousand-employees.html">13% of the workforce</a> at Meta, owner of Facebook and Instagram, comes as Zuckerberg’s ambitions for a “metaverse” tank. </p>
<p>The company’s net income in the third quarter of 2022 (July to September) was <a href="https://investor.fb.com/home/default.aspx">US$4.4 billion</a> – less than half the US$9.2 billion it made in the same period in 2021. </p>
<p>That’s due to a 5% decline in total revenue and a 20% increase in costs, as the Facebook creator invested in his idea of “an embodied internet – where, instead of just viewing content, you are in it” and readied for a post-COVID boom that never came.</p>
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Read more:
<a href="https://theconversation.com/is-the-metaverse-really-the-future-of-work-192633">Is the metaverse really the future of work?</a>
</strong>
</em>
</p>
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<p>Since he changed the company’s name to Meta a year ago, its <a href="https://finance.yahoo.com/quote/META/">stock price</a> has fallen more than 70%, from US$345 to US$101. </p>
<figure class="align-center ">
<img alt="Facebook became Meta in 2021, expressing founder Mark Zuckerberg's enthusiasm for the 'metaverse'." src="https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Facebook became Meta in 2021, expressing founder Mark Zuckerberg’s enthusiasm for the ‘metaverse’.</span>
<span class="attribution"><span class="source">Godofredo A. Vásquez/AP</span></span>
</figcaption>
</figure>
<p>Selling is really all the majority of shareholders can do. They are powerless to exert any real influence on Zuckerberg, the company’s chairman and chief executive. </p>
<p>If this had happened to a typical listed company, the chief executive would be under serious pressure from shareholders. But Zuckerberg, who <a href="https://capital.com/facebook-shareholder-who-owns-the-most-meta-stock34">owns about 13.6%</a> of Meta shares, is entrenched due to what is known as a dual-class share structure. </p>
<p>When the company listed on the NASDAQ tech stock index in 2012, most investors got to buy “class A” shares, with each share being worth one vote at company general meetings. </p>
<p>A few investors were issued class B shares, which are not publicly traded and are worth ten votes each. </p>
<p>As of <a href="https://capital.com/facebook-shareholder-who-owns-the-most-meta-stock">January 2022</a> there were about 2.3 billion class A shares in Meta, and 412.86 million class B shares. Although class B shares represent just 15% of total stock, they represent 64% of the votes. It means Zuckerberg alone controls more than 57% of votes – meaning the only way he can be removed as chief executive is if he votes himself out.</p>
<h2>A trend in tech stocks</h2>
<p>Meta is not the only US company with dual-class shares. Last year almost half of tech companies, and almost a quarter of all companies, that made their initial public offerings (stock exchange listing) issued dual-class shares. </p>
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<div style="width:100%!;margin-top:4px!important;text-align:right!important;"><a class="flourish-credit" href="https://public.flourish.studio/visualisation/11765510/?utm_source=embed&utm_campaign=visualisation/11765510" target="_top"><img alt="Made with Flourish" src="https://public.flourish.studio/resources/made_with_flourish.svg"> </a></div>
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<p>This is despite <a href="https://www.sec.gov/news/speech/fleming-dual-class-shares-recipe-disaster">considerable evidence</a> of the problems dual-class shares bring – as demonstrated by Meta’s trajectory.</p>
<p>Protection from the usual accountability to shareholders leads to self-interested, complacent and lazy management. Companies <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01477.x">with dual-class structures</a> invest less efficiently and make worse takeover decisions, but pay their executives more. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-metas-share-price-collapse-is-good-news-for-the-future-of-social-media-193482">Why Meta's share price collapse is good news for the future of social media</a>
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</em>
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<p>Investors cannot vote Zuckerberg out. Their only real option is to sell their shares. Yet despite shares falling 70% in value, Meta’s approach has yet to change.</p>
<p>It’s a cautionary tale that should signal to investors the risks of investing in such companies – and highlight to policymakers and regulators the danger of allowing dual-class structures.</p><img src="https://counter.theconversation.com/content/194333/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With less than 14% of shares, Meta’s chairman and chief executive controls the majority of votes because of the tech company’s dual-class share structure.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1819552022-04-27T05:30:11Z2022-04-27T05:30:11ZElon Musk’s Twitter takeover isn’t quite a done deal: what happens now<figure><img src="https://images.theconversation.com/files/459954/original/file-20220427-20-6sb9v2.jpg?ixlib=rb-1.1.0&rect=0%2C349%2C2068%2C1076&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Miguel Roberts?AP</span></span></figcaption></figure><p>Elon Musk’s US$44 billion offer to buy Twitter and turn the social media platform into a private company is almost a done deal. </p>
<p>But not quite. While Twitter’s board has endorsed his offer, Musk now needs the nod from a majority of Twitter’s shareholders and US corporate regulators.</p>
<p>Before we get on to the details of these remaining hurdles, let’s recap the tumultuous events that got us to this point. </p>
<p>It became public in early April that Musk – an avid Twitter user – had <a href="https://www.aljazeera.com/economy/2022/4/4/elon-musk-buys-9-2-stake-in-twitter-sending-shares-higher">acquired 9.2%</a> of the company’s shares, making him the biggest shareholder. There were talks about him joining Twitter’s board, but <a href="https://www.npr.org/2022/04/11/1091969075/elon-musk-will-not-join-twitter-board">Musk demurred</a>. </p>
<p>About a week later, <a href="https://www.bloomberg.com/news/articles/2022-04-14/elon-musk-launches-43-billion-hostile-takeover-of-twitter">on April 14</a>, Musk launched a full takeover bid, offering US$54.20 a share – about 38% more than the company’s share price on April 1. </p>
<p>Twitter’s board responded with a “poison pill” provision. This would allow other shareholders to buy new shares issued by the board at a discount if Musk acquired a 15% stake (more than 15% is considered a controlling stake). This would have diluted Musk’s stake, thwarting his takeover ambitions.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/do-poison-pills-work-a-finance-expert-explains-the-anti-takeover-tool-that-twitter-hopes-will-keep-elon-musk-at-bay-181447">Do poison pills work? A finance expert explains the anti-takeover tool that Twitter hopes will keep Elon Musk at bay</a>
</strong>
</em>
</p>
<hr>
<p>Musk responded to that by flagging a <a href="https://www.sec.gov/Archives/edgar/data/0001494730/000110465922048128/tm2213229d1_sc13da.htm">hostile takeover</a>. This involved bypassing the board with a “tender offer” direct to shareholders, asking them to tender their shares for sale despite the board’s opposition. </p>
<p>With no competing bidder, and with no alternative plan to create value for shareholders, Twitter’s board this week finally <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/0001418091/000119312522120461/d310843d8k.htm">accepted Musk’s bid</a> of US$54.20 a share in cash. </p>
<p>Musk plans to finance the bid using <a href="https://www.sec.gov/Archives/edgar/data/0001494730/000110465922048128/tm2213229d1_sc13da.htm">equity and debt</a>, according to his filings with the US Securities and Exchange Commission. He has secured about US$25.5 billion in loans. He has also raised his own equity, totalling around $21 billion, including through margin <a href="https://www.sec.gov/Archives/edgar/data/0001494730/000110465922048128/tm2213229d1_ex99-d.htm">loans</a> against Tesla stock. </p>
<h2>How might regulators react?</h2>
<p>The acquisition still requires regulatory and shareholder approval. While these are unlikely to sink the deal, they are not trivial. </p>
<p>There are two main regulatory approvals here. First the Securities and Exchange Commission – which is akin to a financial watchdog – must approve the takeover. Then the <a href="https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/antitrust-laws">Federal Trade Commission</a> and <a href="https://www.justice.gov/atr/antitrust-laws-and-you">Department of Justice</a> will consider if the takeover may reduce competition.</p>
<p>Musk has had negative interactions with the SEC in the past. In 2018 it charged him with fraud over him tweeting he had funding to take his electric vehicle company Tesla private. Musk ultimately <a href="https://www.sec.gov/news/press-release/2018-226">settled</a>, paying a <a href="https://www.abc.net.au/news/2022-04-17/judge-deemed-elon-musk-tesla-tweet-false-and-misleading-claims/100996212">US$20 million fine</a> and stepping down as chair of the Tesla board. Some shareholders are <a href="https://www.cnbc.com/2022/04/16/elon-musk-funding-secured-tweets-ruled-false-new-court-filing-suggests.html">suing</a> him for losses suffered as a result of his tweet.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&rect=745%2C0%2C4072%2C2162&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459706/original/file-20220426-18-5a9mxt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Elon Musk has been offside with US regulators previously over his use of Twitter.</span>
<span class="attribution"><span class="source">Christian Marquardt/EPA/Pool</span></span>
</figcaption>
</figure>
<p>Musk’s conduct during his bid for Twitter could also influence regulators. There are questions about whether he disclosed his 9.2% holding in a <a href="https://www.cnbc.com/2022/04/04/elon-musk-thumbs-his-nose-at-the-sec-again-with-twitter-stake.html">timely enough manner</a>. Ordinarily a shareholder should disclose their stake once they own <a href="https://www.sec.gov/education/smallbusiness/goingpublic/officersanddirectors">5% of a company</a>. Musk appears to have acquired more than 5% of Twitter on <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922042863/tm2211757d1_sc13d.htm">March 11 2022</a> but filed with regulators on <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922041911/tm2211482d1_sc13g.htm">4 April</a>. </p>
<p>Further, Musk appears to have made a “<a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922041911/tm2211482d1_sc13g.htm">short form</a>” filing with the SEC, reserved for passive shareholders. His subsequent behaviour, however, suggests he is an activist investor. </p>
<p>Given Musk’s disclosure record, the SEC is likely to be be especially careful to ensure Twitter’s shareholders are properly informed. If it finds Musk violated any laws, it could impose penalties or require undertakings covering Musk’s role with Twitter after the acquisition. It is, however, unlikely to stop the deal. </p>
<p>The other US anti-trust and competition regulators are also likely to scrutinise the bid, given its high profile and <a href="https://www.vox.com/recode/22822916/big-tech-antitrust-monopoly-regulation">bipartisan concerns</a> about the power of Big Tech. </p>
<p>But it is also unlikely they would block Musk’s bid, because he has little other financial interest in tech companies to clearly suggest his takeover is anti-competitive. </p>
<h2>How will other shareholders respond?</h2>
<p>Shareholders must approve the deal via a shareholder vote, which is yet to be scheduled. If a <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000119312522120461/d310843dex21.htm">majority</a> approve the bid, then all shareholders must sell. </p>
<p>In making their vote, some shareholders might consider non-financial matters, such as their view of Musk and what - if anything - the acquisition means for free speech. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/twitter-not-even-elon-musk-is-wealthy-enough-to-bring-absolute-free-speech-to-the-platform-heres-why-181981">Twitter: not even Elon Musk is wealthy enough to bring absolute free speech to the platform – here's why</a>
</strong>
</em>
</p>
<hr>
<p>But for most price is the key. </p>
<p>Some shareholders have complained that Musk’s $54.20 bid is <a href="https://twitter.com/Alwaleed_Talal/status/1514615956986757127">too low</a>. Twitter briefly traded above US$70 in July 2021 – in line with the rise of tech stocks generally in 2021, but it fell steadily thereafter to US$32.42. In February 2022, Goldman Sachs <a href="https://twitter.com/elonmusk/status/1514726980909948928">valued</a> Twitter shares US$30 over the next 12 months based on its most recent earnings. </p>
<hr>
<p><strong>Twitter’s share price</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459960/original/file-20220427-14-vxjnjz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Twitter’s end-of-day closing stock price, in US dollars.</span>
</figcaption>
</figure>
<hr>
<p>Twitter’s earnings have been variable and face continued pressure. While revenues have increased, Twitter is not profitable, owing partly to a <a href="https://abcnews.go.com/Technology/wireStory/twitter-posts-q3-net-loss-due-lawsuit-settlement-80800292">litigation charge</a>. </p>
<p>Other tech firms have signalled continued pressure to advertising revenue. For example, Google’s parent company, Alphabet, reported a <a href="https://abc.xyz/investor/static/pdf/2022Q1_alphabet_earnings_release.pdf?cache=d9e9d97">decline in YouTube ad revenue</a> in the first quarter of 2022, relative to the end of 2021. </p>
<hr>
<p><strong>Twitter’s earnings</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=369&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=369&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=369&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=464&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=464&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459717/original/file-20220426-22-f76h67.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=464&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Earnings in millions of dollars (US)</span>
</figcaption>
</figure>
<hr>
<p>These facts should influence how most shareholders vote. Musk’s US$54.20 bid price offers a solid takeover premium: 18% above the price before the takeover bid, 38% above the price on April 1, and about 50% above the price before Musk accrued shares on <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922042863/tm2211757d1_sc13d.htm">January 31 2022</a>. This is on the upper end of takeover premiums <a href="https://www.bcg.com/en-au/publications/2019/mergers-and-acquisitions-report-shows-downturns-are-a-better-time-for-deal-hunting">reported by Boston Consulting Group</a>.</p>
<h2>So what now</h2>
<p>So Musk is very likely to complete the acquisition for Twitter. Regulators may impose conditions but are unlikely to block the deal.</p>
<p>The big questions now are how Musk will enable “free speech” without turning Twitter into a cesspool, how he will deal with censorious countries in which his other companies (Tesla, SpaceX, Starlink and others) do business, and if he will make money from Twitter. </p>
<p>But these headaches will be Musk’s alone, not the former shareholders.</p><img src="https://counter.theconversation.com/content/181955/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To complete his deal, Elon Musk now needs the nod from a majority of Twitter’s shareholders and US corporate regulators.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1814472022-04-18T21:53:41Z2022-04-18T21:53:41ZDo poison pills work? A finance expert explains the anti-takeover tool that Twitter hopes will keep Elon Musk at bay<figure><img src="https://images.theconversation.com/files/458450/original/file-20220418-22-zqvagf.jpeg?ixlib=rb-1.1.0&rect=0%2C170%2C5631%2C3781&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Poison pills usually work, but Elon Musk appears undeterred.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/USMuskTwitter/fedcb2f8588c49438ad65a137fec18c6/photo?Query=Twitter&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6113&currentItemNo=8">AP Photo/Ringo H.W. Chiu</a></span></figcaption></figure><p>Takeovers are <a href="https://techcrunch.com/2022/04/14/what-hostile-takeovers-are-and-why-theyre-usually-doomed/">usually friendly affairs</a>. Corporate executives engage in top-secret talks, with one company or group of investors making a bid for another business. After some negotiating, the companies engaged in the merger or acquisition announce a deal has been struck. </p>
<p>But other takeovers are more hostile in nature. Not every company wants to be taken over. This is the case with <a href="https://www.bloomberg.com/news/articles/2022-04-14/elon-musk-launches-43-billion-hostile-takeover-of-twitter?sref=Hjm5biAW">Elon Musk’s US$43 billion bid</a> to buy Twitter. </p>
<p>Companies have various measures in their arsenal to ward off such unwanted advances. One of the most effective anti-takeover measures is the shareholder rights plan, also more aptly known as a “poison pill.” It is designed to block an investor from accumulating a majority stake in a company. </p>
<p>Twitter <a href="https://www.cbsnews.com/news/twitter-poison-pill-elon-musk/">adopted a poison pill</a> plan on April 15, 2022, shortly after <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922045641/tm2212748d1_sc13da.htm">Musk unveiled his takeover offer</a> in a Securities and Exchange filing.</p>
<p>I’m a <a href="https://www.loyola.edu/sellinger-business/academics/departments/finance/faculty/chuluun">scholar of corporate finance</a>. Let me explain why poison pills have been effective at warding off unsolicited offers, at least until now.</p>
<h2>What’s a poison pill?</h2>
<p>Poison pills <a href="https://heinonline.org/HOL/LandingPage?handle=hein.journals/intfinr3&div=61&id=&page=">were developed in the early 1980s</a> as a defense tactic against corporate raiders to effectively poison their takeover efforts – sort of reminiscent of the suicide pills that <a href="https://www.wired.com/2013/04/oh-those-movie-spies-and-their-cyanide-pills/">spies supposedly swallow if captured</a>. </p>
<p>There are many <a href="https://www.investopedia.com/terms/p/poisonpill.asp">variants of poison pills</a>, but they generally increase the number of shares, which then dilutes the bidder’s stake and causes them a significant financial loss.</p>
<p>Let’s say a company has 1,000 shares outstanding valued at $10 each, which means the company has a market value of $10,000. An activist investor purchases 100 shares at the cost of $1,000 and accumulates a significant 10% stake in the company. But if the company has a poison pill that is triggered once any hostile bidder owns 10% of its stock, all other shareholders would suddenly have the opportunity to buy additional shares at a discounted price – say, half the market price. This has the effect of quickly diluting the activist investor’s original stake and also making it worth a lot less than it was before. </p>
<p>Twitter adopted a similar measure. If any shareholder accumulates a 15% stake in the company in a purchase not approved by the board of directors, other shareholders would get the right to buy additional shares at a discount, diluting the 9.2% stake Musk recently purchased. </p>
<p>Poison pills are useful in part because they can be adopted quickly, but they usually have expiration dates. The poison pill adopted by Twitter, for example, expires in one year. </p>
<h2>A successful tactic</h2>
<p>Many well-known companies such as <a href="https://www.cnbc.com/2018/10/22/papa-johns-ex-ceo-schnatter-asks-board-to-amend-poison-pill-plan.html">Papa John’s</a>, <a href="https://money.cnn.com/2012/11/05/technology/netflix-poison-pill/">Netflix</a>, <a href="https://www.dallasnews.com/business/retail/2020/01/24/jc-penney-amended-its-poison-pill-extending-it-to-2023">JCPenney</a> and <a href="https://www.barrons.com/articles/poisoned-pill-avis-tumbles-following-efforts-to-block-activist-guidance-1516135943">Avis Budget Group</a> have used poison pills to successfully fend off hostile takeovers. And <a href="https://www.kramerlevin.com/en/perspectives-search/covid-19-pandemic-and-poison-pills.html">nearly 100 companies adopted</a> poison pills in 2020 because they were worried that their careening stock prices, caused by the <a href="https://doi.org/10.1016/j.frl.2020.101690">pandemic market swoon</a>, would make them vulnerable to hostile takeovers.</p>
<p>No one <a href="https://lawshelf.com/coursewarecontentview/poison-pills/">has ever triggered</a> – or swallowed – a poison pill that was designed to fend off an unsolicited takeover offer, showing how effective such measures are at fending off takeover attempts.</p>
<p>These types of anti-takeover measures are generally frowned upon as a <a href="https://www.reuters.com/article/us-dealtalk-poisonpills/poison-pills-drop-to-lowest-level-in-20-years-idUSTRE62T5D320100330">poor corporate governance practice</a> that can hurt a company’s value and performance. They can be seen as impediments to the ability of shareholders and outsiders to monitor management, and more about protecting the board and management than attracting more generous offers from potential buyers.</p>
<p>However, <a href="https://trace.tennessee.edu/cgi/viewcontent.cgi?article=3267&context=utk_chanhonoproj">shareholders may benefit from poison pills</a> if they lead to a higher bid for the company, for example. This may be already happening with Twitter as another bidder – a $103 billion private equity firm – <a href="https://www.reuters.com/business/musk-tweets-love-me-tender-days-after-twitter-takeover-offer-2022-04-18/">may have surfaced</a>. </p>
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<p>A poison pill isn’t foolproof, however. A bidder facing a poison pill could try to argue that the board is not acting in the best interests of shareholders and appeal directly to them through either a <a href="https://www.investopedia.com/terms/t/tenderoffer.asp">tender offer</a> – buying shares directly from other shareholders at a premium in a public bid – or a <a href="https://www.investopedia.com/terms/p/proxyfight.asp">proxy contest</a>, which involves convincing enough fellow shareholders to join a vote to oust some or all of the existing board.</p>
<p>And judging by his tweets to his <a href="https://www.wsj.com/articles/meet-the-twitter-army-of-elon-musk-superfans-11650137427">82 million Twitter followers</a>, that <a href="https://www.reuters.com/business/musk-tweets-love-me-tender-days-after-twitter-takeover-offer-2022-04-18/">seems to be what Musk is doing</a>.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-likethis">Sign up for The Conversation’s daily newsletter</a>.]</p><img src="https://counter.theconversation.com/content/181447/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tuugi Chuluun does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Twitter adopted a so-called poison pill to make it much harder for Musk to take over the company.Tuugi Chuluun, Associate Professor of Finance, Loyola University MarylandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1526222021-02-04T03:30:02Z2021-02-04T03:30:02ZNo more business as usual: in ‘The Great Reset’ business schools must lead the way<figure><img src="https://images.theconversation.com/files/381887/original/file-20210202-21-1vnl1up.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3391%2C2244&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">gallofoto/Shutterstock</span></span></figcaption></figure><p>Business schools have a major role to play in what the World Economic Forum calls “<a href="https://www.weforum.org/great-reset/">The Great Reset</a>” as the world adjusts to the COVID-19 pandemic. To contribute to their full potential, business schools must change. So too must universities and the businesses that support and engage with them. </p>
<p>Much of the focus on universities during the pandemic has understandably been on the crucial work of developing vaccines and medical equipment, and on fields such as epidemiology. Business schools can valuably contribute to these efforts too. For example, with their expertise in managing supply chains, operations and logistics they can advise on the massive challenge of manufacturing and distributing billions of vaccines, and scrutinising the integrity and ethics of vaccine testing and rollout.</p>
<p>Beyond these immediate challenges, business schools can help businesses redefine their purpose in the post-pandemic world. That starts with re-examining dated models, many of which have been driven since the 1970s by the <a href="https://www.forbes.com/sites/stevedenning/2019/08/19/why-maximizing-shareholder-value-is-finally-dying/">mantra of maximising shareholder value</a>. </p>
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Read more:
<a href="https://theconversation.com/its-a-myth-that-companies-must-put-shareholders-first-coronavirus-is-a-chance-to-make-it-stop-129104">It's a myth that companies must put shareholders first – coronavirus is a chance to make it stop</a>
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<p>Business schools possess expertise in fields as diverse as assessing and managing risk in highly uncertain circumstances, and in rebuilding trust with stakeholders that might have been adversely affected by the health crisis. Business schools can draw on their expertise in change management, organisational development, human resources and information systems to help sustain different patterns of organisation and work, including more decentralised decision-making and working from home.</p>
<h2>Business schools must change</h2>
<p>The mission of business schools has evolved. Today their horizons have expanded towards improving well-being in society. Their stakeholders extend beyond students and businesses to include governments and not-for-profits. </p>
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Read more:
<a href="https://theconversation.com/what-are-we-teaching-in-business-schools-the-royal-commissions-challenge-to-amoral-theory-110901">What are we teaching in business schools? The royal commission's challenge to amoral theory</a>
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<p>Business schools were already under pressure to respond to the pace of change in technology, competition and social expectations. COVID-19 has provided impetus to rise to the <a href="https://hbr.org/2020/01/making-stakeholder-capitalism-a-reality">call for business to lead social change</a>.</p>
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<figcaption><span class="caption">The World Economic Forum is calling for a new form of capitalism, one that puts people and planet first, to rebuild the world after COVID-19.</span></figcaption>
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<p>The key to meeting lofty stakeholder expectations is significant change management. Business schools need to become fully and authentically committed to resolving problems affecting not just business, but humanity as a whole. Central to their agendas should be applying all their knowledge and skills to dealing with wicked problems such as climate change, ethics and fairness, and disruption by digital technologies and artificial intelligence.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-a-3-point-plan-to-reach-net-zero-emissions-by-2050-132436">Vital Signs: a 3-point plan to reach net-zero emissions by 2050</a>
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<p>Business schools are now moving to focus on societal impact through closer research engagement with industry and society. Increasing philanthropic, government and student demand is driving this shift. </p>
<p>The University of Queensland Business School, for example, has established research hubs in trust, ethics and governance, and in business sustainability. Imperial College Business School has a program on the economics and finance of climate change.</p>
<p>Such changes are not assisted when the metrics of success in business schools continue to focus on ranking systems largely driven by graduate salaries, with a <a href="https://www.ft.com/content/8bb6737c-35ed-11ea-a6d3-9a26f8c3cba4">40% weighting</a> in the <a href="http://rankings.ft.com/businessschoolrankings/global-mba-ranking-2020">FT Global MBA rankings</a>, for example. Corporate social responsibility and ethics have a <a href="https://www.ft.com/content/8bb6737c-35ed-11ea-a6d3-9a26f8c3cba4">3% weighting</a>.</p>
<p>Vitally important will be the ways business schools <a href="https://www.weforum.org/agenda/2020/07/university-entrepreneurship-post-covid-19-world/">encourage the innovation and entrepreneurship</a> that will create the new businesses and jobs to replace those lost during the pandemic. As well as stimulating and guiding start-ups, business schools can advise existing businesses on how to adjust to the new realities. Their expertise in governance, leadership and strategy can help businesses build the diverse capabilities they need to thrive in turbulent and ambiguous environments.</p>
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Read more:
<a href="https://theconversation.com/brands-backing-black-lives-matter-it-might-be-a-marketing-ploy-but-it-also-shows-leadership-139874">Brands backing Black Lives Matter: it might be a marketing ploy, but it also shows leadership</a>
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<h2>Stakeholders also need to change</h2>
<p>Business schools attract <a href="https://www.dese.gov.au/higher-education-statistics/resources/2019-student-summary-time-series">large numbers of students</a>. They have continued to do so in many universities throughout the epidemic. This means they commonly account for a large share of university fee income. </p>
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<p>For business schools to contribute to The Great Reset, they need more than <em>juste retour</em>, or simply getting back from university budgets the income they attract. They need full recognition and support for the role they can play in creating the new and emerging world. Universities have to move beyond seeing business schools as cash cows to being jewels in their crown.</p>
<p>Research funders should consider how business school perspectives add value to research projects in the sciences, social sciences and humanities. From the economics and operations of drug development and new energy sources, to business approaches to diversity and equality, to the marketing of the arts, business schools have much to offer.</p>
<p>COVID-19 represents a tipping point for business schools to use their expertise to reset, reinvent and relaunch their role in promoting ethical and sustainable business practices. As well as being valuable sources of short-term advice, business leaders should use their links with business schools to discuss, reflect upon and adjust their long-term vision and strategy. There is much benefit for business, for example, in learning along with business schools about how responses to the COVID-19 crisis can be applied to achieving the United Nations <a href="https://sdgs.un.org/goals">Sustainable Development Goals</a>. </p>
<p>Business schools are testing sites for the creation of more ethical, dynamic and trustworthy leaders who in turn can influence broader societal issues.</p><img src="https://counter.theconversation.com/content/152622/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Business schools have vast and diverse expertise to contribute to rebuilding better in a post-pandemic world, but the problems it has laid bare require business schools to change too.Sarah Jane Kelly, Associate Professor, UQ Business School, The University of QueenslandMark Dodgson, Visiting Professor, Imperial College Business School, and Emeritus Professor, School of Business, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1136482019-03-19T18:48:55Z2019-03-19T18:48:55ZSuper power: why the future of Australian capitalism is now in Greg Combet’s hands<figure><img src="https://images.theconversation.com/files/264575/original/file-20190319-60986-1c70bkq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Greg Combet wants to use his super power to free business from being hostage to short-term share-price and profit measures.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Right now Greg Combet is arguably the most powerful man in Australia.</p>
<p>Earlier this month the former trade unionist and federal politician <a href="https://www.afr.com/personal-finance/superannuation-and-smsfs/not-activism-industry-supers-plan-to-reshape-business-for-the-long-term-20190228-h1btu5">declared his intention</a> to transform Australian business. His radical idea: to promote the concept of “long-term value”.</p>
<p>Combet is chairman of Industry Super Australia, which represents 16 of Australia’s biggest industry funds and thus the vast bulk of the <a href="https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y">A$630 billion</a> saved by more than 11 million Australians.</p>
<p>These super funds would use their massive clout as investors to transform corporate culture, Combet told the Australian Financial Review. He wants business to focus on long-term sustainability, not be “hostage to the short-term share price or six-monthly profit announcements”.</p>
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<a href="https://theconversation.com/with-a-billion-reasons-not-to-trust-super-trustees-we-need-regulators-to-act-in-the-public-interest-102441">With a billion reasons not to trust super trustees, we need regulators to act in the public interest</a>
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<p>“The energy sector is an example of where long-term thinking is needed,” he said. “We have to start making a significant transition from old coal-fired power plants to renewable energy generation and distribution.”</p>
<p>But his ambition is much broader than this one controversial issue.</p>
<h2>Not that revolutionary</h2>
<p>Not everyone is happy about the idea of industry super funds, which have strong links to trade unions, pushing companies to focus on environmental, social and governance performance. </p>
<p>This week the Australian Prudential Regulatory Authority, responding to Treasurer Josh Frydenberg’s “urgent” request for guidance on “aggressive union behaviour”, <a href="https://www.smh.com.au/politics/federal/super-funds-warned-by-regulator-over-social-activism-20190318-p5155k.html">warned super funds</a> to keep away from financial activism. </p>
<p>Heather Ridout, a former head of the Australian Industry Group who now chairs the AustralianSuper fund, has told Frydenberg to <a href="https://www.afr.com/personal-finance/superannuation-and-smsfs/stop-playing-politics-with-super-australiansupers-heather-ridout-tells-josh-frydenberg-20190304-h1byc6">stop politicising super</a>.</p>
<p>Combet says his agenda has nothing to do with “activism”.</p>
<p>He’s right. His ideas really aren’t that revolutionary. In other parts of the world they would simply be regarded as responsible investor behaviour.</p>
<p>Australian super funds have a legal obligation to manage their members’ funds for the long term. </p>
<p>Representing “retirement timeframe” interests means super funds want companies to think about how to sustain value over decades.</p>
<p>Up to now this has not necessarily translated into funds directly and consistently communicating their long-term interests to company boards. Combet’s declaration signals this is going to change.</p>
<p>There is plenty of <a href="https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off">research</a> to suggest this will be a good thing. </p>
<p>Companies focused on the long term are more successful. They prioritise ethical behaviour, customer service, community value, environmental stewardship and other non-financial outcomes. Over the longer term they also have stronger share price growth.</p>
<p>Investors who help companies focus on the long term thus help themselves. It is a virtuous circle.</p>
<h2>But revolutionary enough</h2>
<p>According to the <a href="https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf">ASX Corporate Governance Council</a>, not known for revolutionary subversion, the issues that effective boards must now take into account include “culture, conduct risk, digital disruption, cyber-security, sustainability and climate change”. There are others coming.</p>
<p>In the wake of the revelations of the banking royal commission, it would be irresponsible for the heads of superannuation funds to sit by as passive observers and not direct boards to these issues.</p>
<p>Globally, institutional investors, governments and companies are working together to move beyond solving specific issues such as corporate social responsibility, sustainability reporting and ethical investment. </p>
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Read more:
<a href="https://theconversation.com/what-is-corporate-social-responsibility-and-does-it-work-89710">What is corporate social responsibility – and does it work?</a>
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<p>In fact, the United Nations Principles of Responsible Investment initiative, boasting more than 7,000 corporate and investor signatories, <a href="https://www.unpri.org/asset-owners/investment-strategy">exhorts</a> investors to go beyond “strictly financial benefits” and engage with companies on environmental, social and governance factors. <a href="https://corporatereportingdialogue.com/">Integrated approaches</a> are at the forefront of practice.</p>
<p>Australia has been lagging behind. So for Combet to spell out a clear ambition to harness the power of the superannuation sector for long-term thinking is significant.</p>
<p>Perhaps he senses the opportunity to lead changes to the Australian economy, and society, that were out of reach during his 19 months as federal industry minister.</p>
<p>He wields immense power in a sector with even greater latent power. Superannuation assets now total <a href="https://www.superannuation.asn.au/resources/superannuation-statistics">A$2.7 trillion</a>, and funds own about <a href="https://www.businessinsider.com.au/australian-super-funds-now-own-almost-half-of-the-australian-stock-market-2018-3">half of Australian shares</a>. If Combet can leverage Industry Super Australia’s fund bloc to get the ball rolling, the momentum could be truly ground-breaking.</p>
<p>We will now see which of Australia’s economic elite join his mission and collaborate in building global momentum. Those who want to resist, or who cannot organise themselves to participate, should know the clock is now ticking.</p><img src="https://counter.theconversation.com/content/113648/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Davis is Executive Director of the Australian Institute of Performance Sciences</span></em></p>Superannuation fund supremo Greg Combet has a radical idea: to promote the business concept of ‘long-term value’.Danny Davis, Executive Director, Australian Institute of Performance Sciences, and researcher at, La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1089892019-01-30T19:08:13Z2019-01-30T19:08:13ZWhat banking regulators can learn from Deepwater Horizon and other industrial catastrophes<figure><img src="https://images.theconversation.com/files/256279/original/file-20190130-108367-1nul3y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Deepwater Horizon disaster in April 2010 killed 11 workers and caused the greatest environmental disaster in US history. Banking regulators can learn from the penalities introduced to motivate executive interest in putting safety first. </span> <span class="attribution"><span class="source">EPA/US Coast Guard/Handout </span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>In its <a href="https://financialservices.royalcommission.gov.au/Pages/interim-report.aspx">interim report</a> published four months ago, the Banking Royal Commission chalks up shocking misconduct in the finance industry to greed – “the pursuit of short-term profit at the expense of basic standards of honesty”. </p>
<p>“How else,” it asks, “is charging continuing advice fees to the dead to be explained?”</p>
<p>It is seductively easy to explain misconduct in terms of this base human motive, one of the seven deadly sins. But moral failure does not satisfactorily explain why humans misbehave in organisations. There are also organisational reasons. </p>
<p>The royal commission is, of course, aware this. Its interim report points to greed stimulated by incentive payments or bonuses: “From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”</p>
<p>Is the solution, then, to simply get rid of incentive payments?</p>
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<a href="https://theconversation.com/well-wait-an-eternity-for-the-banks-to-fix-themselves-heres-what-we-can-do-now-103098">We'll wait an eternity for the banks to fix themselves. Here's what we can do now</a>
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<p>My view, based on many years looking at the causes of catastrophes such as the <a href="http://www.processsafety.com.au/books/disastrous-decisions/">Deepwater Horizon disaster</a>, is that there is no easy way to do this.</p>
<p>The uncomfortable reality is that incentive payments are an inherent aspect of modern capitalism. </p>
<p>The only effective way to detoxify the incentive individuals have to do the wrong thing in pursuit of bigger profits is to counterbalance them with equally compelling incentives to not act dishonestly.</p>
<h2>The principal/agent problem</h2>
<p>The interim report does not explicitly say incentive payments should be done away with, but it is the implication of much of the commentary. </p>
<p>It states (on page 317) the premise that staff and intermediaries will not do their jobs properly without incentive payments “must be challenged”.</p>
<p>It suggests there is too much conflict of interest in “customer-facing staff” being paid according to what they sell or advise customers: “And if customer-facing staff should not be paid incentives, why should their managers, or those who manage the managers?”</p>
<p>But it also acknowledges that attempts to change the incentive culture would most certainly be resisted: “Changing culture in the Australian banks may not be easy and may take time. It cannot be assumed that entities will embrace change willingly or immediately.” </p>
<p>It’s important to understand why the banks would be so hostile to such a change.</p>
<p>Incentive payments are a way to address a fundamental problem in modern capitalism, particularly in large publicly listed companies with multiple layers of managers.</p>
<p>In business literature it is called the “principal/agent problem” – the principal being the owner (or shareholder) and the agent being the manager (or executive) hired to run the business on behalf of the owner (or, in the case of a large company, many thousands of owners). </p>
<p>Agents have legal duty to put shareholder interests above all others. The “problem” is that, if left to themselves, they may in act in their own interest, putting their own wealth, power and prestige before the interest of the owners. </p>
<p>Tying executive remuneration to company financial performance has developed as a way to mitigate this problem. Remuneration consultants have developed very finely tuned schemes with huge incentives for top executives enrich themselves only by enriching their principals, through maximising total shareholder returns. </p>
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Read more:
<a href="https://theconversation.com/will-hayne-blink-the-problems-with-banks-demand-tough-measures-that-neither-they-nor-their-regulators-want-107953">Will Hayne blink? The problems with banks demand tough measures that neither they nor their regulators want</a>
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<h2>Irresistable incentives</h2>
<p>The downside, as the royal commission has exposed, is that such incentives also encourage executives to consider customers as sheep to be fleeced. </p>
<p>Key to this is how long-term incentive schemes are structured. </p>
<p>Short-term incentives are bonuses paid to top executives annually. In addition to these, each year a large bonus equal to or greater than their base salary is provisionally awarded. The payment is deferred for a period, often three years. The executive gets this long-term incentive only if certain conditions are met.</p>
<p>Those conditions largely concern the company’s financial performance in the intervening years. In most schemes the company’s performance must also be better than most of its competitors. Typically this is determined by comparing it with a select group of companies. If it achieves less than the median, the executive loses all or most of the long-term bonus.</p>
<p>It is hard to imagine a system better designed to pressure a chief executive to put profit ahead of all else. </p>
<p>Long-term bonuses operate in this way in many sectors of the economy, not just banking. They lie behind many of the major accidents in the oil and gas industry that I have <a href="https://shop.wolterskluwer.com.au/items/39368AS">written about</a>.</p>
<h2>Penalty counterbalance</h2>
<p>So the problem with the banking and financial services sector is a whole system designed to maximise shareholder returns. It is the greed of shareholders that drives the system.</p>
<p>How can we mitigate the antisocial aspects? </p>
<p>One way is to ensure the huge incentives to do the wrong thing in pursuit of maximum profit are counterbalanced by the penalties. Right now that’s just not the case. The penalty for corporate malfeasance is often a fine, imposed on the company, not individuals.</p>
<p>We should hold top executives and even directors personally and criminally liable when companies fail to take proper account of the interests of consumers, customers and employees. This will ensures it will not always be in their interests to align their morality with the interests of shareholders. </p>
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Read more:
<a href="https://theconversation.com/confiscate-their-super-if-it-works-for-sports-stars-it-could-work-for-bankers-105833">Confiscate their super. If it works for sports stars, it could work for bankers</a>
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<p>Health, safety and environment laws impose such criminal liabilities on senior office holders when they fail to protect their employees and the environment. Acute awareness of this liability has resulted in a much greater concern for the lives of workers and the environment than would be dictated by shareholder interests alone. </p>
<p>In my own research I have found the influence of corporate safety risk managers is enhanced when they can highlight the legal liability of their bosses. One might expect the influence of chief risk officers in financial institutions to be similarly strengthened. </p>
<p>It will be interesting to see how far the royal commission ventures down this path in its final report.</p><img src="https://counter.theconversation.com/content/108989/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Hopkins does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Banking executives have huge incentives to maximise profits at all costs. They need equally compelling incentives to do the right thing.Andrew Hopkins, Emeritus Professor of Sociology, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1037812018-10-05T13:24:45Z2018-10-05T13:24:45ZHow shareholder profits conquered capitalism – and how workers can win back its benefits for themselves<figure><img src="https://images.theconversation.com/files/239159/original/file-20181003-52684-1rd4r5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wolves on Wall Street, but perhaps the time of shareholders' rule is drawing to an end.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wall-street-sign-focus-on-blurred-306271739">robert cicchetti/Shutterstock</a></span></figcaption></figure><p>In the early days of industrial capitalism there were no protections for workers, and industrialists took their profits with little heed to anyone else. Following the growth of the labour movement, the establishment of trade unions and the founding of the welfare state in the first half of the 20th century, corporations in decades after World War II embraced a more open, stakeholder capitalism, where profits were shared between employees, managers and shareholders. This led to a flourishing middle class as workers and communities benefited from the success of the corporations of which they were part.</p>
<p>But since the 1970s the pendulum has swung back towards a system where profits are shared less widely, causing major upheavals in society and the fortunes of labour and the middle classes. </p>
<p><a href="https://www.nytimes.com/2018/07/13/business/economy/wages-workers-profits.html">In the US</a>, labour’s share of income had been close to 70% until the 1970s, but had shrunk by the beginning of the 1980s even as profits increased. In the 21st century this accelerated: in 2000, labour’s share of income in the US accounted for some 66%, whereas corporate profits accounted for a little over 8%. Today, labour’s share has fallen to 62% while profits have risen to 12%. The same trend <a href="https://www.ippr.org/files/2018-08/1535639099_prosperity-and-justice-ippr-2018.pdf">is repeated in the UK</a>, where labour’s share of income has reduced from almost 70% in the 1970s to around 55% percent today.</p>
<p>Where has the money gone? For decades, real incomes for workers have largely stagnated while those of top executives have skyrocketed. In 2017, the top executives of America’s largest companies enjoyed an <a href="https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018">average pay increase of 17.6%</a>, while workers’ pay in those companies rose barely 0.3%. In 1965, the chief executives of the top 350 US companies earned salaries 20 times that of their workers. By 1989 that had risen to 58 times, and in 2017 <a href="https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018">the ratio was 312 times that of workers</a>. </p>
<p>Not surprisingly, compared to the middle-class prosperity that followed 1945, recent decades have seen widening inequality in society. The status quo overturned, capitalism has been hijacked by a profiteering elite. The question is whether society can find an alternative approach that shares the wealth more widely.</p>
<h2>Shareholders uber alles</h2>
<p>This trend coincided with the emergence of shareholder value as the overwhelming corporate ethos, as the interests of shareholders take primacy over those of other stakeholders in the business. With executives incentivised to maximise profits, meet quarterly share price targets and ensure profits are returned to shareholders, they have been able to game the system to ensure they receive excessive remuneration, while at the same time cutting costs and squeezing wage growth in search of higher profits. British housebuilder Persimmon this year paid its chief executive <a href="https://www.theguardian.com/business/2018/jan/09/persimmon-profits-chief-bonus-scheme">a £110m bonus, decried by critics as “corporate looting”</a>.</p>
<p>Outsourcing and offshoring have been examples of such cost-cutting, profit-driving initiatives: outsourcing low-skilled work is thought to account for <a href="https://www.nytimes.com/2018/09/08/business/economy/harvard-living-wage.html%20link">one-third of the increase in wage inequality</a> since the 1980s in the US. The percentage of US workers associated with temporary help agencies, on-call workers, or contractors <a href="https://www.nytimes.com/2018/06/07/opinion/trump-labor-capital-class-struggle.html">increased from 10.7% in 2005 to 15.8% by 2015</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pressure to maintain share prices and ensure profits return to shareholders have shrunk the share of company profits received by labour.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sao-paulo-brazil-march-14-2016-391295644">Alf Ribeiro/Shutterstock</a></span>
</figcaption>
</figure>
<p>Economists have been puzzled by stagnant wages and increased inequality. But as I highlighted <a href="https://www.ft.com/content/c269c3e6-c4c5-11e3-8dd4-00144feabdc0">as far back as 2007</a> and repeatedly since, the emphasis on shareholder value has contributed enormously. Management and leadership consultant and writer Steve Denning <a href="https://www.forbes.com/sites/stevedenning/2018/07/26/how-to-fix-stagnant-wages-dump-the-worlds-dumbest-idea/#2183fb441abc">wrote this year</a> that “shareholder value is the root cause of workers’ stagnant salaries”, with a corrosive effect on societal cohesion and stability – he believes the current rise of populism is one example of the fallout.</p>
<p>Demands for greater profits continue, as companies are pressured by share portfolio managers and activist investors to increase their profitability and share price. Private equity firms, which invest in companies in order to maximise returns, have expanded into many sectors of the economy. Most recently, this has seen the doctrine of maximising profits enter the <a href="https://www.nytimes.com/2015/09/29/business/dealbook/as-banks-retreat-private-equity-rushes-to-buy-troubled-home-mortgages.html">residential property and home mortgages</a> market.</p>
<h2>The pendulum swings back?</h2>
<p>Despite the stranglehold of shareholder value on corporate thinking, events suggest the pendulum may once more swing back to favour workers and other stakeholders. </p>
<p>In the US, the government’s Committee on Foreign Investment <a href="https://www.reuters.com/article/us-qualcomm-m-a-broadcom-cfius/qualcomm-takeover-battle-intervention-shows-u-s-security-panels-expanding-reach-idUSKBN1GI007">warned</a> that in its attempt to take over telecoms giant Qualcomm, Broadcomm’s private equity approach could compromise its target’s technological leading position in pursuit of value for Broadcomm shareholders. </p>
<p>In the UK, there was <a href="https://www.theguardian.com/business/2018/mar/15/airbus-warns-melrose-gkn-takeover">opposition to the takeover</a> of engineering conglomerate GKN by turnaround firm Melrose. Airbus, one of GKN’s major customers, argued that Melrose’s focus on shareholder value and short-term returns meant it might not be committed to long-term investment.</p>
<p>A chorus of voices has emerged advocating alternatives to the short-termist and shareholder-focused model of capitalism. The chief executives of investment and asset managers <a href="https://www.telegraph.co.uk/business/2018/01/28/larrys-letter-drives-charge-reimagining-global-capitalism/">Blackrock</a> (the world’s largest) and <a href="http://uk.businessinsider.com/vanguard-ceos-short-termism-bill-mcnabb-2018-3">Vanguard</a>, global engineering firm Siemens, and consumer goods giant Unilever have pursued a more stakeholder-centric model of capitalism. For example, Unilever by measuring its progress against <a href="https://www.unilever.com/sustainable-living/our-approach-to-reporting/our-metrics/">environmental and social</a> as well as financial targets, and Blackrock by investing in businesses that <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter">favour long-term investment over short-term profits</a>. Organisations such as the <a href="https://www.inc-cap.com/">Coalition for Inclusive Capitalism</a> and the <a href="http://pestakeholder.org/">Private Equity Stakeholder Project</a>, have emerged, seeking to ensure that all stakeholders in the business and their interests are included.</p>
<p>Prominent US senator Elizabeth Warren recently introduced the <a href="https://www.fastcompany.com/90223130/how-elizabeth-warrens-accountable-capitalism-act-works">Accountable Capitalism Act</a> to Congress. This would require company directors to consider the interests of all major corporate stakeholders, not just shareholders, in company decisions. It requires that workers are given a stronger voice in decision-making at large companies, such as electing 40% of company directors. As a way of addressing self-serving incentives, executives would have to retain company shares for at least five years after receiving them, or three years in the case of stock buybacks.</p>
<p>Finally, we cannot ignore that business schools played a critical role in how shareholder value emerged as the overwhelming corporate ethos – and they continue to indoctrinate new generations of students with the dogma of shareholder value today. Business school deans and faculty members should urgently revisit their curricula to ensure graduates understand the damaging impact of shareholder value on society and to emphasise alternative approaches.</p>
<p>Almost ten years ago, Jack Welch, who for many years championed shareholder value while at the helm of General Electric, <a href="https://www.ft.com/content/294ff1f2-0f27-11de-ba10-0000779fd2ac">pronounced</a> that: </p>
<blockquote>
<p>Shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … your main constituencies are your employees, your customers and your products.</p>
</blockquote>
<p>It is past the time that business schools should smarten up, jettison this “dumb” shareholder dogma, and start teaching a version of capitalism less damaging to the interests of society.</p><img src="https://counter.theconversation.com/content/103781/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Louis Brennan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Over two centuries, capitalist ethos has swung from profit-taking for the few, to a distribution of wealth to the many, and back again. Is the pendulum poised to swing once more?Louis Brennan, Professor of Business Studies, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1009512018-08-07T19:42:19Z2018-08-07T19:42:19ZWhat impacts do takeover defences have on shareholders?<p>It’s becoming the year of defence in Australian mergers and acquisition, with varying and fascinating defence tactics on display over the past six months.</p>
<p>Perhaps the most brazen defence this year in Australia was Healthscope’s <a href="https://www.theaustralian.com.au/business/companies/analysts-cautious-over-healthscope-outlook-after-rejected-takeover-bid/news-story/b28f8714943f33ce130955f7fab992ad">rejection of two rival bidders</a> while simultaneously announcing an earnings downgrade. Not only does this defy <a href="https://www.wiley.com/en-us/Applied+Mergers+and+Acquisitions-p-9780471395348">the maxim that the best defence is a high share price</a> but classic defence tactics also hold that rival bidders should be leveraged off each other to extract a higher offer.</p>
<p>In May, Brookfield lodged an A$6 billion (including debt) competing takeover proposal at A$2.50. This followed an $A2.36 proposal in April from a consortium that included BGH and AustralianSuper. Instead of pursuing the proposed takeovers, Healthscope launched a strategic review to explore selling its property portfolio. That prompted suggestions the move was more about creating a stalking horse defence.</p>
<p>Healthscope’s share price has partially held, trading at A$2.19 compared to a high of $A2.58 after the proposals were made public. It remains well above its $A2 level shortly before the first takeover proposal.</p>
<p>Santos is another storied defence saga involving protracted negotiations with Harbour Energy, including two improved offers over a dramatic May weekend. In all, the defence persuaded Harbour to improve its proposals five times since the A$4.55 it first offered in August 2017. </p>
<p>Harbour ended up offering A$7 if Santos agreed to hedge part of its oil-linked production. Santos still rejected the offer in a marginal decision. The <a href="https://www.fool.com.au/2018/07/19/santos-ltd-asxsto-just-flagged-a-return-to-sustainable-dividend-payments/">rise in the oil price aided Santos’s defence</a>, but its board is now exposed to shareholder pressure should the oil price fall sharply. </p>
<p>Harbour was left frustrated at what it considers the stop-go messaging of Santos, leading to the <a href="https://www.theaustralian.com.au/business/dataroom/santos-must-explain-why-it-rejected-harbour-bid/news-story/48a1271776cdeb6258f685cfb8c2b506">belief that Santos did not want to sell at any reasonable price</a>. Santos believes its existing strategy offers better shareholder value, the premium paid for gaining control of the company is inadequate and the transaction structure is too complex, risky and uncertain. Santos now trades around A$6.38.</p>
<h2>Holding out for better offers</h2>
<p>Aside from their bidders, which bought stakes in Healthscope and Santos to shore up their positions, both companies have wide shareholder registers without any anchor shareholder.</p>
<p>This is in contrast to APN Outdoor, Gateway and Mineral Deposits where a few large and decisive shareholders were clear that their boards should reject initial offers this year from <a href="https://www.afr.com/business/media-and-marketing/advertising/shareholders-say-apn-outdoor-worth-more-than-jcdecauxs-takeover-bid-20180621-h11obs">JCDecaux</a>, <a href="https://www.theaustralian.com.au/business/dataroom/hometown-eyes-gateway-as-brookfield-exits-race/news-story/130320707e8bb82bc581f3483407cfd1">Hometown</a> and <a href="https://www.afr.com/business/mining/mineral-deposits-labels-eramet-bid-inadequate-20180509-h0zvk6">Eramet</a> respectively. All three bidders improved their offers. </p>
<p>This led to a new board recommendation from APN whose defence was complicated by its <a href="https://mumbrella.com.au/apn-outdoor-ups-bid-for-adshel-to-540-million-524969">offer to buy Adshel</a>, JCDecaux’s biggest rival in Australia’s street furniture advertising segment, from HT&E. Once APN was <a href="https://www.smh.com.au/business/companies/oohmedia-boss-defends-570-million-spend-on-adshel-as-fair-value-20180625-p4znm9.html">outbid for Adshel</a> it <a href="https://www.smh.com.au/business/companies/jcdecaux-to-acquire-apn-outdoor-for-1-12-billion-20180626-p4znq0.html">negotiated improved terms from JCDecaux</a>.</p>
<p>Mineral Deposits waited for acceptances to approach 50% before <a href="https://www.reuters.com/article/us-mdl-m-a-eramet/australias-mineral-deposits-recommends-takeover-offer-as-eramet-builds-up-stake-idUSKBN1K014Z">changing its recommendation to accept</a>. This was an unusual switch for a defence board to make so late in the process. More typically a target board advises shareholders to take no action. It may suggest an offer is opportunistic or undervalued without recommending shareholders reject an offer. </p>
<p>Rather than being persuaded by a sufficiently attractive offer, Mineral Deposits was boxed in by two factors. The offer price was declared final at an early stage and shareholders were unwilling to remain invested in an Eramet-controlled company with <a href="https://www.investopedia.com/terms/d/dilution.asp">dilution</a> from likely capital-raising.</p>
<p>In the case of Gateway, disgruntled shareholders pushed the board to find a suitor. The company ended up with <a href="https://www.theaustralian.com.au/business/property/bidding-war-looms-for-gateway-as-brookfield-lobs-700m-offer/news-story/bcecd77ff78a1a4213252fb6ec67f06e">two competing offers</a> that it says it is considering. Other parties are <a href="https://www.theaustralian.com.au/business/dataroom/gic-mulls-rival-gateway-bid/news-story/c7355a5bb7712c0fcde559242302a1b8">reportedly weighing up making a bid</a>.</p>
<p>Another defence board that faced a difficult decision is Sirtex Medical. One day before a scheduled scheme meeting to approve a board-recommended A$28 offer from Varian Medical Systems, Sirtex received a A$33.60 proposal from Chinese asset manager CDH Investments. </p>
<p>Reflecting the fact that price is not the sole factor in defence, Sirtex had to weigh up complex regulatory approvals (particularly from the Committee on Foreign Investment in the United States), timing and other risks. The inclusion in CDH’s proposal of a A$200 million reverse break fee (if the bidder breaches or is unable to fulfil the acquisition agreement), Australia’s largest reverse break fee, reflects the risks Sirtex felt.</p>
<p>None of these defence tactics involved poison pills – making the target’s shares prohibitively expensive or the target unattractive to a bidder. The Australian <a href="http://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=panel_process/glossary.htm">Takeovers Panel notes</a> the “poison pill” term is loosely used in Australia to refer to a defence triggered by a hostile bid that makes a target unattractive, such as pre-emptive rights or share top-up rights.</p>
<h2>So what are the impacts on shareholders?</h2>
<p>As Harvard Business School professor <a href="http://www.nber.org/chapters/c5821.pdf">Richard Ruback observed</a>:</p>
<blockquote>
<p>I wish I could conclude that takeover defences are generally good or bad for stockholders, but the answer is not that simple. </p>
</blockquote>
<p>Even where offers were improved, it depends which stakeholders are referenced (target or bidder shareholders, employees, suppliers, customers, management, competitors, among a few) and at which point one compares.</p>
<p>Ruback concluded that:</p>
<ul>
<li>defences that give managers power to veto hostile takeovers seem to be harmful</li>
<li>defences that destroy assets are probably bad</li>
<li>defences that neither give managers veto power nor destroy assets are probably not harmful.</li>
</ul><img src="https://counter.theconversation.com/content/100951/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Segal is Editorial Consultant at Dealreporter </span></em></p>Australian companies have been employing many and varied takeover defences this year, including some that defy convention.Simon Segal, PhD research candidate, Business, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1003242018-07-26T02:43:42Z2018-07-26T02:43:42ZWhy shareholder value drives income inequality<p>The CEO of Domino’s Pizza takes home <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/CEO-Pay-in-ASX200-Companies-2017.Jul18.pdf">roughly 435 times the average full-time wage</a>. Jeff Bezos has become the <a href="https://www.bloomberg.com/news/articles/2018-07-16/happy-prime-day-jeff-amazon-ceo-s-net-worth-tops-150-billion">world’s richest person</a> with a A$200 billion fortune off the backs of low-paid Amazon warehouse workers. Rampant <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/CEO-Pay-in-ASX200-Companies-2017.Jul18.pdf">inflation in CEO realised pay</a> has continued unabated while wages for Australian working people have been <a href="https://au.finance.yahoo.com/news/reality-check-australian-labour-market-235542900.html">stagnant for years</a>. </p>
<p>As Reserve Bank Governor Philip Lowe <a href="http://www.abc.net.au/news/2017-08-02/why-you-dont-have-much-chance-of-a-pay-rise-anytime-soon/8764584">has said</a>: “If workers are getting no real wage increase year after year after year, that’s insidious.”</p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S1045235418301692">Our recent research</a> shows that this compounding inequality is being driven by the increasing <a href="https://www.investopedia.com/terms/f/financialization.asp">financialisation</a> of corporations and the focus on maximising shareholder value.</p>
<p>Financialisation has three significant elements: </p>
<ul>
<li>a process where financial markets and institutions increase in size and impact </li>
<li>financial corporations grow and become dominant players in the economy, and non-financial corporations become increasingly focused on financial activities and measures</li>
<li>finance penetrates every aspect of our lives, and people become increasingly dependent on credit to exist.</li>
</ul>
<p><iframe id="r5mfO" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/r5mfO/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>In this context of the globalisation of finance, Oxfam <a href="https://www.oxfam.org/en/pressroom/pressreleases/2018-01-22/richest-1-percent-bagged-82-percent-wealth-created-last-year">claims</a> the richest 1% seized 82% of the wealth created in the world in 2017. </p>
<p>A 2017 Credit Suisse Global Wealth Report <a href="http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=12DFFD63-07D1-EC63-A3D5F67356880EF3">stated</a>:</p>
<blockquote>
<p>While the bottom half of adults collectively own less than 1% of total wealth, the richest decile (top 10% of adults) owns 88% of global assets, and the top percentile alone accounts for half of total household wealth.</p>
</blockquote>
<h2>Shareholder primacy</h2>
<p>The dominant idea in corporate governance is that shareholders come first. This has produced a singular focus on rewarding shareholders and neglecting all other stakeholders, including customers, employees, suppliers and distributors. </p>
<p>Meanwhile the executives who maximise shareholder value have secured the stock options that have led to an explosion in their personal wealth.</p>
<p>Behind the gloss of the high-flying lifestyle of the 21st-century rich is a more prosaic reality. The debate in corporate governance for the last two decades has focused on <a href="https://theconversation.com/paying-ceos-with-stock-options-doesnt-drive-their-business-strategy-research-81082">how to align executive performance with shareholder value</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ceo-pay-is-more-about-white-male-entitlement-than-value-for-money-100245">CEO pay is more about white male entitlement than value for money</a>
</strong>
</em>
</p>
<hr>
<p>The drive to maximise shareholder value, to the <a href="https://theconversation.com/solving-deep-problems-with-corporate-governance-requires-more-than-rearranging-deck-chairs-99297">extent that corporations have adhered to it</a>, means the value generated by corporations services the increasing wealth of shareholders rather than taking all interests into account. </p>
<p>Firms neglect their wider social obligations, such as taxation, but also limit investment in human capital development, innovation and research.</p>
<p>Rather than investing in their future, companies are under constant market pressure to yield dividends and make huge share buy-backs. This leaves them without the funds for more productive investment.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-cant-rely-on-corporations-to-save-us-from-climate-change-86309">Why we can’t rely on corporations to save us from climate change</a>
</strong>
</em>
</p>
<hr>
<p>Economist Bill Lazonick <a href="https://www.ineteconomics.org/research/research-papers/innovative-enterprise-solves-the-agency-problem">has shown</a> that rather than shareholders investing money in companies, they have been ripping out corporate funds for decades now. Companies have been left with a net deficit rather than investment.</p>
<p>The profits of companies, in other words, have been distributed almost entirely to shareholders in the form of dividends and share buy-backs. </p>
<p>Investors have to be convinced of the importance of longer-term, sustainable investment, otherwise they will not only undermine the basis of industry and employment but also run out of viable businesses to invest in.</p>
<h2>A return to the 19th century?</h2>
<p>Compounding inequality has disfigured the world, with the super-rich monopolisation of assets. </p>
<p>Australians may have been lulled into believing we are firmly part of a property-owning democracy. But the reality is that, despite superannuation, all assets including all financial assets are extremely unequally distributed.</p>
<p>In the 19th century great fortunes were often inherited or derived by entrepreneurs from the ownership and control of productive assets.</p>
<p><a href="https://eml.berkeley.edu/%7Esaez/atkinson-piketty-saezJEL10.pdf">By the late 20th century</a> the sustained and rapid inflation in top income shares has significantly contributed to the accelerating rate of income inequality.</p>
<p>Explanations for the increasing rate of inequality have focused on changes made by the Reagan and Thatcher administrations, macroeconomic transformations and recurrent financial crises, the impact of globalisation, and the replacement of progressive by regressive taxation.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-everybody-knows-ceos-are-overpaid-but-nothing-happens-47769">Why everybody knows CEOs are overpaid, but nothing happens</a>
</strong>
</em>
</p>
<hr>
<p>But what has been ignored is the transformation of corporate governance in the later decades of the 20th century. This changed from one that regarded the objectives of the corporation as delivering value to all stakeholders, enhancing the prosperity of the economy and society in the process, to a much narrower goal. Maximising shareholder value became the sole objective of the corporation.</p>
<p>Shareholder primacy is a damaging ideology, which is destabilising industry and compounding inequality. A commitment to long-term value creation is required, which respects the contributions and interests of all stakeholders in business enterprise.</p><img src="https://counter.theconversation.com/content/100324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inequality is being driven by a focus on maximising shareholder value to the exclusion of other stakeholders.Thomas Clarke, Professor, UTS Business, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/951532018-04-22T19:17:08Z2018-04-22T19:17:08ZBig businesses who give shareholders tax credits pay more tax: study<p>Businesses who pay dividends to shareholders with tax credits attached pay more tax, new research finds. This occurs because of dividend imputation whereby shareholders get a credit for corporate tax the business pays, on the dividends they receive.</p>
<p>Over the period of 2004 to 2015, we studied financial statement data from companies listed on the Australian Stock Exchange. The study found that on average firms that pay dividends with tax credits have an effective tax rate of up to 16.9% higher than firms that don’t. They also have an effective tax rate of up to 14.7% higher than firms that do not pay dividends at all.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/government-defers-company-tax-cut-vote-for-want-of-numbers-94038">Government defers company tax cut vote for want of numbers</a>
</strong>
</em>
</p>
<hr>
<p>Because we looked at listed businesses the results encompass Australia’s largest corporations. We found these results stand, despite a variety of reasons for why businesses are not paying tax in the current year, such as carrying tax losses forward.</p>
<p>This study shows there is a strong case for keeping Australia’s dividend imputation system, but it also puts the debate on company tax cuts in a new light. If we reduced or changed the dividend imputation system, the budget impacts of a reduction in corporate tax would likely be offset by reduced imputation credits and by individual investors paying higher tax. </p>
<p>The largest potential beneficiaries of a reduction in the corporate tax rate are foreign multinationals with operations in Australia - but they tend not to pay tax in Australia anyway. In other words “much ado about nothing”.</p>
<h2>How Australia’s tax system works against tax avoidance</h2>
<p>In a “classical tax system”, as exists in the United States, the European Union and most other countries, corporate profits are first taxed within the company at the corporate tax rate. Those after-tax profits are then distributed to shareholders as dividends. Shareholders pay tax on those dividends at their individual marginal rate. </p>
<p>However, this arrangement has been labelled as “double taxation” because profits are taxed first, at the full corporate tax rate and then at the shareholders individual marginal tax rate.</p>
<p>In various countries governments adjust for this by taxing dividend income for shareholders at a lower tax rate. But this is also problematic. </p>
<p>Taxing income at different rates creates an incentive for both companies and individuals to make money in a way in which they will taxed the least, distorting the efficient allocation of resources and other investment decisions. For example, if capital gains are concessionally taxed, companies will repurchase shares, rather than pay dividends.</p>
<p>A more extreme problem is that it provides an incentive for big businesses to avoid corporate tax in order to maximise after-tax profits. But in Australia, the incentives for corporate tax avoidance are reduced because shareholders receive a benefit through dividend imputation. </p>
<h2>Why we need to keep shareholder tax credits</h2>
<p><a href="https://theconversation.com/how-the-government-can-pay-for-its-proposed-company-tax-cuts-92739">Academics</a> and policymakers have called for Australia to dismantle the dividend imputation system, and this was canvassed in an <a href="http://bettertax.gov.au/publications/discussion-paper/">Australian Treasury Department discussion paper in 2015</a>. They make the argument that Australia is one of the few countries with a system of dividend imputation, that it costs government revenues over A$19 billion each year, and that it does little to attract foreign investment. </p>
<p>However, as a consequence of imputation, there is a much lower incidence of corporate tax avoidance by large domestic corporations <a href="https://doi.org/10.1016/j.jcorpfin.2017.10.007">in Australia than in other countries</a>. So any potential benefits to government revenues by dismantling or limiting dividend imputation would likely be diminished by increased corporate tax avoidance.</p>
<p>Australia would do better to focus its regulatory attention on foreign multinationals with operations in Australia. These companies do not utilise dividend imputation and <a href="http://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r5804_ems_5d93cda5-e8e4-4ed0-b40a-acd21555c8d6/upload_pdf/618592.pdf;fileType=application%2Fpdf">appear to pay little tax in Australia</a>.</p>
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<a href="https://theconversation.com/how-the-government-can-pay-for-its-proposed-company-tax-cuts-92739">How the government can pay for its proposed company tax cuts</a>
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<p>If we limit the refunds of imputation credits to shareholders, it could also reduce the incentives for corporations to pay dividends, and it could create an incentive for shareholders to invest instead in firms that don’t pay dividends with tax credits. </p>
<p>This may lead to less firms paying dividends with imputation tax credits and for these companies there will be increased incentives for corporate tax avoidance. This arises because limiting refunds for tax credits reduces the value of the credits to shareholders, and this restores the incentive for companies to engage in tax avoidance. </p>
<p>Tinkering at the edges of Australia’s system, such as getting rid of dividend imputation, is likely to have significant indirect and unexpected impacts. This identifies just one part of the complexity that exists within Australia, not only in the tax system but also with its interaction with other systems such as health and welfare. </p>
<p>What Australia still needs is broad tax reform and a much simpler system.</p><img src="https://counter.theconversation.com/content/95153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Businesses who pay dividends to shareholders with tax credits attached pay more tax, new research finds.Roman Lanis, Associate Professor, Accounting, University of Technology SydneyBrett Govendir, Lecturer, Accounting Discipline Group, University of Technology SydneyPeter Wells, Professor, Accounting Discipline Group, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/891532017-12-15T04:14:30Z2017-12-15T04:14:30ZCBA admissions will make class action easier but shareholders still have a lot to prove<p>The Commonwealth Bank of Australia recently admitted it breached Australia’s anti-money laundering and counter-terrorism financing laws. The <a href="http://www.abc.net.au/news/2017-12-13/cba-breached-money-laundering,-counter-terrorism-laws/9257224">admissions</a> in its response to allegations from the Australian Transaction Reports and Analysis Centre (AUSTRAC) will make it easier for shareholders to prove their claims of misleading and deceptive conduct in a class action launched against the bank in October.</p>
<p>CBA’s willingness to admit what it has done also signals a possibility the bank might resolve the class action through a settlement. In the meantime shareholders still need to prove their claims, even if some are on stronger footing thanks to the CBA.</p>
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<p><strong><em>Read more: <a href="http://insurance.moray.com.au/publication/in-the-matter-of-hih-insurance-limited-in-liquidation-ors-2016-nswsc-482/">APRA could have investigated CBA years ago: experts</a></em></strong></p>
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<p><a href="http://www.austrac.gov.au/sites/default/files/20170803-concise-statement-cba-s.pdf">AUSTRAC’s first lot of allegations</a> noted CBA failed to comply with its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 with respect to more than 778,000 accounts. The bank is obliged to assess the risk of, monitor and report suspicious deposit activity that was being conducted through intelligent deposit machines (IDMs). These machines are ATMs that accept cash deposits that are immediately available in the depositor’s account. </p>
<p>AUSTRAC then amended its complaint on December 14, 2017, to add a further 100 alleged contraventions.</p>
<p><a href="https://www.commbank.com.au/content/dam/caas/newsroom/docs/Concise%20Statement%20in%20Response%20-%2013%20December%202017_SIGNED_20171213_4.25pm.PDF">CBA’s response</a> to the original allegations admits that it did fail to comply with the Act in certain respects and accepts that these contraventions do subject it to a civil penalty. But the bank denies other alleged contraventions. </p>
<p><a href="https://www.mauriceblackburn.com.au/about/media-centre/media-statements/2017/cba-shareholders-to-file-federal-court-class-action-today/">Law firm Maurice Blackburn</a> filed a class action on behalf of shareholders with CBA shares between July 1, 2015 and August 3, 2017. The shareholders allege that CBA – and over a dozen of its officers and directors – knew or should have known about the non-compliance. They argue this failure to disclose or rectify the situation caused loss once the share price fell after AUSTRAC made CBA’s non-compliance public. </p>
<p>None of this is proved solely by the fact that CBA admitted committing some breaches of the Act. The additional claims brought by AUSTRAC this week do not alter the existing shareholder claims, but they may see the scope of the class action increased.</p>
<h2>What CBA admits and what shareholders need to prove</h2>
<p>CBA’s admissions may impact the efficiency and conduct of the class action, but they are unlikely to affect what shareholders need to prove. CBA’s response admits much of the conduct that contravenes the Act, but that’s not the same as an admission of liability in relation to the quite different legal claims made by the shareholders.</p>
<p>CBA admits that it did not conduct a proper risk assessment of its IDMs until more than three years after the machines had been put into operation. The bank also admits that it did not conduct adequate monitoring of IDM deposits, for example by introducing daily deposit limits. This is despite having assessed the risk of IDMs being used for money laundering or terrorism financing as high. </p>
<p>CBA further admits that in over 53,500 separate instances, it did not file reports whenever a deposit of more than A$10,000 was made, as required by the Act. It also failed to file either complete or timely reports of suspicious account activity in nearly 100 instances.</p>
<p>But the shareholders’ claims are based on something different: CBA’s non-compliance with securities disclosure rules and on misleading and deceptive conduct by CBA. </p>
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<a href="https://theconversation.com/naming-and-shaming-bankers-may-be-satisfying-but-could-backfire-74307">Naming and shaming bankers may be satisfying, but could backfire</a>
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<p>In order to win in the class action, the shareholders will have to prove the elements of the claims they allege, including that the lack of AUSTRAC compliance was the cause of the drop in CBA share price and that the plaintiffs suffered loss as a result of that drop. </p>
<p>The test for the link between non-disclosure and loss, and the way to calculate the amount of that loss, has not been determined in the class action cases so far. However, courts have heard similar shareholder arguments to those raised by the CBA shareholders in other cases, so the issues raised aren’t new. </p>
<p>For example, in the case <a href="http://insurance.moray.com.au/publication/in-the-matter-of-hih-insurance-limited-in-liquidation-ors-2016-nswsc-482/">surrounding the liquidation of HIH Insurance Limited</a>, Justice Brereton of the Supreme Court of New South Wales held that shareholders rely on the share price as an accurate reflection of share value. Accordingly, when corporate misconduct inflates the share price, the corporation indirectly causes shareholders to suffer loss.</p>
<p>A key issue the CBA class action will be whether CBA’s non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act, and the subsequent AUSTRAC civil penalty proceedings, impacted the share price and to what extent.</p><img src="https://counter.theconversation.com/content/89153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Legg receives research funding from IMF Bentham Ltd and the Law Society of New South Wales. He is a member of the Law Council of Australia's Class Actions Committee and a director of the Australian Pro Bono Centre. He consults to the law firm Jones Day. </span></em></p><p class="fine-print"><em><span>James D Metzger does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The CBA’s response to AUSTRAC’s claims means shareholders will be assisted in part of their class action claims, but a lot still needs to be proved.Michael Legg, Professor of Law, UNSW SydneyJames D Metzger, Scholarly Teaching Fellow in Civil Procedure, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/717102017-01-24T07:32:02Z2017-01-24T07:32:02ZDisappearing votes: why investors should steer clear of Snapchat’s dual-class shares<figure><img src="https://images.theconversation.com/files/153807/original/image-20170123-8051-1nnqzc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Snapchat's dual-class shares could leave a bad taste</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Snapchat’s parent company (Snap) is preparing for an intial public offering (IPO). But it seems that ordinary shareholders will <a href="http://www.theaustralian.com.au/business/wall-street-journal/in-snap-ipo-new-investors-to-get-zero-votes-while-founders-keep-control/news-story/75ee361a68f45369ce3f8644a39ac35c">not have voting rights</a>. Shares in the newly public Snap will either be dual-class or multi-class.</p>
<p>A dual-class structure creates two classes of shares, each with different voting rights; a multi-class structure has multiple share classes. This structure is allowed in the United States. However, <a href="http://www.asx.com.au/documents/rules/gn03_cooperatives.pdf">with a few exceptions</a>, it is not permitted in Australia. </p>
<p>A dual-class share structure is what allows Mark Zuckerberg, for example, to control Facebook. Zuckerberg <a href="https://origin-www.bloombergview.com/articles/2016-04-28/mark-zuckerberg-gets-to-control-facebook-a-while-longer">only owns about 15% of all outstanding shares</a> in Facebook, but he <a href="https://www.sec.gov/Archives/edgar/data/1548760/000119312514039819/d669093dsc13g.htm">owns a considerable amount of “class B” shares</a>. These receive ten votes for every vote a class A share receives.</p>
<p><a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/research-reports/the-case-for-investing-in-companies-with-dual-class-shares/article29638161/">Anecdotes abound</a> about whether dual-class structures benefit shareholders. However, cherry-picking individual corporate cases does not an argument make. Indeed, shareholders have good reasons to be concerned. </p>
<p>Dual and multi-class share structures have been shown to destroy shareholder value and many companies have ended up in litigation.</p>
<h2>Dual-class structures are quite common</h2>
<p>News Corp is <a href="http://abcnews.go.com/Business/story?id=3759233">another prominent example</a> of a dual-class share structure. This structure gives the Murdoch family super-normal voting rights. </p>
<p>Alibaba is listed in the US, rather than Singapore or Hong Kong, <a href="https://www.ft.com/content/0bc597ee-6b42-11e5-aca9-d87542bf8673">in part to achieve this structure</a>. Several tech firms, including <a href="http://blogs.wsj.com/cfo/2015/08/12/googles-multi-class-stock-structure-made-alphabet-move-unique/">Google</a> and even Australia’s <a href="http://www.smh.com.au/business/markets/atlassian-ipo-dual-class-shares-and-the-case-for-founder-control-20151110-gkvxfh.html">Atlassian</a> (which is listed in New York on the Nasdaq), also have this structure. </p>
<p>The number of firms listing with multi-class share structures has increased in recent years. In part, though, this reflects an increase in IPO activity as the market recovered from the financial crisis.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Initial public offerings with multi-class share structures. This includes limited partnerships with multiple share classes.</span>
<span class="attribution"><span class="source">Jay Ritter, https://site.warrington.ufl.edu/ritter/files/2017/01/IPOs-from-1980-2016-with-Multiple-Share-Classes-Outstanding.pdf . Accessed January 23 2017.</span></span>
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<p>But dual-class structures are not uncommon even among larger companies. According to <a href="https://www.issgovernance.com/controlled-companies-generally-underperform-boards-less-diverse-new-study-finds/">recent data</a> from Institutional Shareholder Services (ISS), an investor advocacy and advisory group, nearly 6% of the largest 1,500 listed US firms have a dual-class structure. But this has fallen slightly over time.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=435&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=435&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=435&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=547&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=547&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=547&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Proportion of S&P 1,500 firms with multi-class share structures.</span>
<span class="attribution"><span class="source">ISS data available on WRDS. Accessed on January 23 2017.</span></span>
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<h2>Resisting outside pressure</h2>
<p>Dual-class structures benefit the dominant shareholder group. This will be true in Snap’s case. </p>
<p>Super-voting rights “entrench” the dominant shareholders and the CEO. They do this by enabling CEOs to resist outside pressure from shareholders. </p>
<p>This also enables them to resist disciplinary takeovers. These are takeovers that are designed to remove poorly performing CEOs. Dual-class structures frustrate such deals because they enable dominant shareholders – including the CEO – to vote down a takeover offer. </p>
<p>News Corporation, for example, has <a href="http://www.asx.com.au/asxpdf/20150619/pdf/42z8q1dw9602d4.pdf">a poison pill</a>, allowing managers to resist takeover attempts. For some high-tech, and hard-to-value firms, giving managers some breathing room from hostile takeovers could enable them to <a href="http://dx.doi.org/10.1002/smj.2121">focus on long-term value-creation</a> without having to worry about short-term price movements. </p>
<p>But entrenching managers against hostile takeovers has been shown to <a href="http://dx.doi.org/10.1016/j.jfineco.2012.05.016">destroy shareholder value</a>. By removing the threat of external discipline, these structures can enable managers to <a href="http://dx.doi.org/10.1016/j.jfineco.2012.05.016">exercise less caution</a> when making investments.</p>
<p>Dual-class structures go further than mere protection from takeovers. They also enable managers to resist shareholder advocacy as other shareholders lack voting rights. This effectively removes shareholders’ rights to pressure managers over performance. This is problematic as pressure from institutional investors helps to restrain, and discipline, managers. </p>
<h2>Destroying shareholder value</h2>
<p>The academic literature firmly shows that <a href="http://dx.doi.org/10.1111/j.1540-6261.2009.01477.x">dual-class companies underperform</a> in terms of acquisition performance and returns to cash holdings and capital expenditure. This is backed up by <a href="https://irrcinstitute.org/reports/new-study-says-multiclass-voting-companies-underperform-riskier/">shareholder activists’ reports</a>. A 2016 <a href="https://irrcinstitute.org/wp-content/uploads/2016/03/Controlled-Companies-IRRCI-2015-FINAL-3-16-16.pdf">study</a> by ISS shows that CEOs of multi-class companies receive more compensation, but generally generate lower stock returns, revenue growth and ROE (return on equity) growth.</p>
<p>These structures also clearly have the potential to allow managers to act against shareholders’ interests. For example, Bombardier’s talks seeking aid from the Canadian government <a href="http://business.financialpost.com/news/transportation/bombardier-aid-talks-said-to-stall-on-trudeaus-3-billion-pitch">stalled</a> after the founding family objected to relinquishing its dual-class share structure. Mobile games maker Zynga has underperformed the market, was forced to <a href="http://www.forbes.com/sites/erikkain/2015/05/10/zynga-needs-a-hit-as-employees-face-layoffs-data-centers-shut-down/#e3ccef14a80d">retrench</a> staff and is <a href="http://www.businessinsider.com/delaware-court-revives-case-mark-pincus-zynga-stock-sale-2016-12">embroiled in a lawsuit</a> over executives dumping shares before its stock plummeted. </p>
<p>By contrast, the end of Yelp’s dual-class structure in 2016 coincided with positive returns and talk that it <a href="http://seekingalpha.com/news/3210618-yelp-caught-m-chatter-2_6-percent-ends-dual-class-shares">could come into play</a> as a takeover target. </p>
<p>This all implies that dual-class structures exacerbate agency conflicts in general. This has led ISS to <a href="https://corpgov.law.harvard.edu/2016/08/10/the-impact-of-iss-new-policy-on-ipo-company-director-elections/">recommend generally voting against</a> directors involved in establishing dual-class structures. </p>
<p>Major investor Calpers has <a href="http://www.reuters.com/article/us-iac-interactive-lawsuit-calpers-idUSKBN1412Q5">sued</a> over the issuance of non-voting stock. Facebook has <a href="http://www.reuters.com/article/us-facebook-stocks-lawsuit-idUSKCN0XQ2LM">faced litigation</a> over plans to issue non-voting shares.</p>
<p>Snap has time to change its plans before its IPO. The IPO’s offer terms are not set in stone and new information comes to light over time. Potential investors can only hope that Snap amends its voting structure. If Snap does not, its share price will very likely suffer.</p><img src="https://counter.theconversation.com/content/71710/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council</span></em></p>Investors in Snapchat’s upcoming initial public offering could find themselves without voting power. Research shows these kind of share structures end badly.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/488852015-10-29T04:43:10Z2015-10-29T04:43:10ZThe ‘Aldification’ of Woolworths is destroying its value<p>Woolworths shareholders have had a torrid couple of years. The company’s <a href="http://www.asx.com.au/asx/research/company.do#!/WOW">market capitalisation</a> is down around a third since mid-2014 – quite a hit for a company once worth almost A$50 billion dollars. Today it forecast a 35% fall in half-year profit, sending its shares plunging by more than 9%.</p>
<p>The disastrous Masters foray is partly to blame. Conceived in oligopolitical hubris, <a href="https://theconversation.com/masters-has-machismo-but-needs-aldi-smarts-25258">Masters</a> has been an unmitigated disaster for Woolworths shareholders. They were right to expect far better from the company’s exceedingly <a href="http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf">well-remunerated board</a> and <a href="http://www.smh.com.au/business/cbd/the-long-kiss-goodbye-will-be-a-sweet-one-for-woolworths-boss-grant-obrien-20150617-ghpwvp.html">senior executives</a>. The fact that Masters has ended quite a few careers is cold comfort for shareholders who have lost hard earned savings and superannuation.</p>
<p>Today’s <a href="http://www.asx.com.au/asxpdf/20151029/pdf/432hwtmcy6cq24.pdf">results</a> open a new chapter of woe. Once, Masters was seen as an unfortunate sideshow, able to be separated from the Goliathan strength of Woolies’ grocery cash machine. Today, the illusory nature of that misapprehension has emerged – with sales in decline year-on-year for like stores, and a flagged collapse of earnings by up to a third and, most tellingly, no end in sight.</p>
<p>While the problems of the last 18 months at Woolworths have often been ascribed to the Masters debacle, analysts have long been worried about the main game in groceries. Aldi, the privately-held German multinational, has been playing a cautious and patient long game. </p>
<p>Aldi’s “value proposition” to consumers is starkly different to both Woolworths and Coles, and it’s clear Australians have warmed to what Aldi has to offer – a narrow range of good quality products at prices equivalent to the majors’ “specials”. The narrow range and small format stores have the additional benefit of quick and easy shopping for busy consumers. Woolworths has been <a href="http://www.smh.com.au/business/retail/coles-woolworths-iga-to-lose-market-share-to-aldi-david-jones-says-moodys-20150813-giy6x0.html">losing market share</a> quickly.</p>
<p>Its response has so far been too little and too late. Woolworths has tried to “shoehorn” an Aldi equivalent into the lower shelves of its large format stores. It suggests to consumers that they can get a basket of goods similar to Aldi’s at the same price within their stores if they look hard enough. In this regard – to paraphrase the late, great Z.Z. Hill - what Woolies are selling, Australians <a href="http://connection.ebscohost.com/c/articles/26915327/retail-price-drivers-retailer-profits">ain’t buying</a>.</p>
<p>The limited success of this “Aldification” of Woolworths stores has, however, done damage to Woolworths’ core business of groceries. Whenever consumers choose the low cost goods within Woolworths, it is <a href="http://onlinelibrary.wiley.com/doi/10.1002/mde.2737/abstract">at the expense of the higher margin goods</a> they also have for sale. This is evidenced by the steep decline in margins reported today – with sales in slight decline (2.5%) and projected earnings in free fall (28 to 35%). Woolworths is learning the hard way that while revenues are easy to lose, the same can’t be said for the fixed costs involved in running a national retailer.</p>
<p>In the background, again, lies Masters. Its disastrous drain on revenues has meant Woolworths has had little to invest in new stores elsewhere. While Woolworths has opened six new stores during the quarter, Aldi has <a href="http://www.theaustralian.com.au/business/companies/aldi-to-open-80-new-stores-and-step-up-supermarket-war/story-fn91v9q3-1227506815155">flagged the opening of up to 80 new stores</a> during 2016, on top of the 80 it opened this year. Its expansion is uncannily like a German train timetable and its geographical spread means most of these new stores will not cannibalise existing sales – something Woolworths can rarely achieve.</p><img src="https://counter.theconversation.com/content/48885/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is a member of the ALP and the NTEU.</span></em></p><p class="fine-print"><em><span>Nigel Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The retail giant’s attempt to head off Aldi’s growing market share is causing more headaches for shareholders.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/481232015-09-25T05:28:38Z2015-09-25T05:28:38ZWhy the Volkswagen share price slump goes beyond market logic<p>It has been an extraordinary week for Volkswagen managers and investors alike as markets <a href="http://fortune.com/2015/09/23/volkswagen-stock-drop/">issued their punishment</a> for the company’s admission of emissions test cheating. Standard financial economics theory states that trading trends are based on rational investors’ expectations of future cashflows, discounted back to wherever the stock had got to at that point. But has the VW share price reaction followed that rationale?</p>
<p>In the immediate aftermath of the news, when details were spare and traders at their most skittish, there was a sharp 25% wiped off of the VW share valuation. There has been a further drift downwards since: to date, approximately 30% has been wiped off of the share valuation. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/96078/original/image-20150924-17074-1o09lg7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The share price slump.</span>
<span class="attribution"><a class="source" href="https://uk.finance.yahoo.com/q/bc?s=VOW.DE&t=5d&l=on&z=l&q=l&c=">Yahoo Finance</a></span>
</figcaption>
</figure>
<p>But is this a pure assessment of economic fundamentals, or are there extra factors at play here? Behavioural economists may ask: how much of the negative reaction is based on emotions, such as disgust, despair, abhorrence, at such unethical behaviour? It has long been recognised that investors have complex motivations behind their stock purchase decisions.</p>
<h2>Confidence is a preference</h2>
<p>Investors are heterogeneous in their behaviour and preferences. Some are primarily focused on the pure economic fundamentals of companies. However, a growing proportion of investors focus on issues beyond the pure economics. They might look at issues such as <a href="http://link.springer.com/article/10.1007/s10551-007-9401-9#page-1">a company’s ethical behaviour</a>, social impact, corporate social responsibility policies or its environmental behaviour. They might also consider the treatment of its other stakeholders (customers, employees, the surrounding community, the planet!). </p>
<p>A key issue for many investors is the confidence that they have in the trustworthiness of the company management. Thus, there is much evidence that many investors (<a href="http://www.sciencedirect.com/science/article/pii/S1053535701001032">sometimes termed ethical investors</a>, “green” investors, social investors) are prepared to pay a price premium (and are thus prepared to take a hit on returns) for shares in companies that are committed to acting in a socially responsible, ethical, fair, environmentally and stakeholder-friendly, and trustworthy manner. One recent report suggests <a href="http://www.investopedia.com/university/ethical-investing/ethical-investing2.asp">massive growth in ethical investing</a> in the US alone, and the sector’s success means that some of its priorities have started to bleed into mainstream investing.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/96075/original/image-20150924-17100-jje4vq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A world of stakeholders.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ricardo/3035228108/in/photolist-5Cdkz7-4Wdzti-Hrxm6-6oHRLQ-6pR7Tq-Afy4X-6rmSqc-dNWtc5-dagTsX-rYNaiD-7vgsev-7hEDyp-E1wvy-5drWst-qcBr6Q-9wKyGd-dGdmPb-6sczpL-5XTyMK-nyT1qD-j3LVA-toMj7-4rF17Y-5dwhw5-24sTze-dJJQ4W-6GzycS-fe8rQd-3GvRBy-tunVF-z33fy-8gzSTq-6Dsj4m-85hX3Y-5YFMWT-24sTDF-airid3-dLU66a-5oPwQ9-787XhH-dMiBYN-371X8q-4GyeEA-sRsn6-e3oar-4kEKd1-9eEHe-qwW5g4-aCna2-6rmSuK">ricardo</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<p>On the other hand, companies who appear to act in the contrary manner (tending towards the unethical and untrustworthy, and with little regard for stakeholders, the environment, and the wider community) face the danger of extreme negative investor reaction, as VW has found to its cost. <a href="http://www.sciencedirect.com/science/article/pii/026323739500050X">Evidence shows that trust is easy to destroy</a>, but much harder to re-build. </p>
<h2>Reputational cost</h2>
<p><a href="http://www.economist.com/news/business-and-finance/21665452-18-billion-fine-not-carmakers-only-worry-why-volkswagens-share-price-has-fallen-so">It has been argued</a> that the sharp negative stock reaction to VW’s unethical behaviour far exceeds the potential economic effects on its future cashflows. In other words, the negative reaction dwarfs the expected litigation costs. However, the situation is more complex than just examining the immediate negative costs. Such behaviour also damages both investor and consumer trust in VW’s future integrity, and that means markets must factor in reputation costs to the share price discounted cashflow formula. </p>
<p>So, both litigation and reputation costs can be considered as economic factors in the price reaction of VW shares. It is interesting to consider whether, in addition to these factors, a large element of the 33% fall in share value is due to negative behavioural and emotional feelings towards the company (investor and consumer disgust and abhorrence at such unethical behaviour). </p>
<p>You might imagine the stock market trader as a calculating, implacable beast, buying and selling based on logic alone. However, a <a href="http://www.morexpertise.com/download.php?id=144">recent development in scholarly research</a>, emotional finance, conceptualises how unconscious emotions may affect investor attitudes towards a stock. This approach focuses on the “love” that investors have when initially investing in a favourite and trusted company There then comes a tipping point (such as VW’s unethical behaviour) where like a jilted lover, an investor switches sharply to hate of the company shares, sparking mass-selling, and massive share price reductions beyond the fundamentals.</p>
<h2>Shareholder value</h2>
<p>The economist, Milton Friedman, <a href="http://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/">once famously argued</a> that the only ethical and moral responsibility a company has is to its shareholders. He reckoned that the board should act to maximise shareholder wealth, even if that is at the expense of other stakeholders, and the planet. </p>
<p>VW may have even believed that it was following this mantra when it engaged in the emissions testing manipulation. It has been argued that the company was facing extreme competition from other car manufacturers, and emission -testing was extremely tough, so they may have believed that this justified their behaviour in terms of maintaining market share, and upholding shareholder value. </p>
<p>However, as we have witnessed this week, the financial markets have passed their crushing judgement on the emissions fiasco, and the slump in share value probably combines economic and emotional factors, as investors demonstrate their shock at the behaviour on show. </p>
<p>It is a useful reminder that for shareholder value to retain any relevance, you must imagine that the shareholder will still own the stock when the chickens come home to roost – or when a clean air NGO <a href="https://theconversation.com/how-volkswagen-got-caught-cheating-emissions-tests-by-a-clean-air-ngo-47951">calls you out on some dodgy software</a>. A failure to understand that simple fact has left VW facing a long battle to restore investor trust and confidence in its integrity.</p><img src="https://counter.theconversation.com/content/48123/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Fairchild does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The market reaction to the VW emissions scandal is just like that of a jilted lover.Richard Fairchild, Senior Lecturer in Corporate Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.