- MASTER THESIS IB&M -
“Can Strategic Hedge Fund
Intervention Affect Corporate
Strategic Output?”
Case Research: into the Strategic Intervention Approaches by
Hedge Funds
MAARTEN PEIJNENBURG (S1508121) UNIVERSITY OF GRONINGEN
FACULTY OF MANAGEMENT & ORGANIZATION THE NETHERLANDS
m.c.peijnenburg@student.rug.nl
“Can Strategic Hedge Fund
Intervention Affect Corporate
Strategic Output?”
Case Research: into the Strategic Intervention Approaches by
Hedge Funds
MAARTEN PEIJNENBURG University of Groningen
SUMMARY
TABLE OF CONTENTS
INTRODUCTION...5
Research question...6
Conceptual model...6
Sub-questions: ...7
Organization of the paper...7
THEORETICAL FRAMEWORK ...9
Hedge Funds...9
Principle-agent conflicts ...14
Corporate governance practices ...16
Shareholder versus Stakeholder model...19
Actor Based Model...20
Capital...21 Property rights ...21 Financial system ...23 Interfirm networks ...24 Labour ...27 Representation rights ...27 Union organization ...28 Skill formation...29 Management...30 Ideology ...31 Career Patterns...32 METHODOLOGY ...33 Explorative Research ...33
Research method and data collection ...34
Case study approach ...36
RESULTS ...41
Hedge fund in Dutch, German and UK based firms ...41
Hedge funds as shareholders...43
Cross-country comparison ...46
CASES...47
1. The Netherlands...47
Case 1.1: Ahold ...47
Case 1.2: Stork...48
Case 1.3: ASM International...50
Case 1.4: Versatel Telecom International ...52
2. Germany...54
Case 2.1: Deutsche Telekom AG ...54
Case 2.2: IWKA ...56
Case 2.3: Deutsche Börse...58
Case 2.4: Tui...60
Case 2.5: Techem ...63
3. United Kingdom ...64
Case 3.2: The Carphone Warehouse...66
Case 3.3: WM Morrison Supermarkets ...68
Case 3.4 Woolworths Group ...69
Case 3.5 British Energy ...71
ANALYSES...74
The Netherlands ...74
Germany...78
United Kingdom ...81
THEORY SHAPING...84
Inter-country analyzes and proposition shaping...84
Principle-agent theory embedded in the results ...89
Corporate Governance Systems. ...90
CONCLUSION ...92
Strategic Intervention strategies ...92
Changes in corporate governance systems ...93
Shareholder relationship ...93
Institutional Convergence ...93
LIMITATIONS & RECOMMENDATIONS ...95
Limitations ...95
Recommendations ...95
LITERATURE ...96
APPENDIX A: Excluded Companies ...108
APPENDIX B: Variable definition ...110
APPENDIX C: Shareholder Structure...112
APPENDIX D: No intervention ...113
INTRODUCTION
Hedge funds are increasingly under a great deal of attention these days: by governments, investors, financial markets, regulatory agencies and the media. The attention focuses on the role hedge funds play in financial markets, especially in the way these funds are organized, how they collect their money to invest, why they are expelled from regulatory agencies disclosure and how they try to outperform market indexes to generate a higher return on investment. Recently hedge funds have become an important source of private funding for public companies (Brophy et al, 2006). Hedge funds are increasingly ubiquitous in the financial markets; Hedge Fund Research (HFR)1 estimated the number of hedge funds to be 3,617 in 1999 versus the latest estimate of 8,219 as of the end of June 2006. The amount hedge funds can invest is totaled at 1,500 billion dollar in 2006 alone and is expected to increase the next couple of years.2
Hedge funds increasingly utilize their ‘power’ as shareholders to promote corporate policies and decisions mainly focused on short term benefits. This increased utilization is three-fold: Firstly, hedge funds are under increased pressure to outperform market-indices, secondly hedge funds are short-term orientated, ‘cash and run’ and thirdly they have the ability as shareholders to influence corporate processes, hedge funds use the (re-) new (ed) corporate governance codes, which provides shareholders with more (voting) power. A recent example is the shake-up the hedge funds Centaurus and Paulson provoked in the Dutch based company Stork. The two hedge funds have a 32% share in Stork and teamed-up to pressure the management team to split its three divisions. This put a lot of emphasize on how shareholder power is organized and to what extent hedge funds can determine strategic output termed strategic shareholder intervention in this research.
The existing literature focuses on corporate governance codes and the extent to which companies implement these codes as a set of best practices. However, the academic literature has attempted no research on the extent to which hedge funds are represented in firms and to what extent hedge funds use their shareholder representation to influence strategic output and what type of shareholder intervention strategy they utilize. Hence, this research will elaborate on the extent to which hedge funds use increased shareholder power - mainly due to the
introduction of corporate governance codes - to influence management decisions and will determine the causes for the unexpected role hedge funds play in the principle-agent theory.
Research question
“To what extent are hedge funds represented in Dutch, German and UK publicly quoted firms, what is the role of the introduced corporate governance codes as an underpinning for strategic intervention and which constructions of strategic intervention do hedge funds as activist shareholders utilize to influence corporate strategy?”
Conceptual model
Figure 1: Conceptual model Strategic Shareholder Intervention Corporate Strategic Change? Corporate Governance Systems Hedge funds/ Activist
shareholders
is not satisfying for the involved parties and codes need to be adjusted to ease the process. This assumption will not be researched in this research. This research will focus on the interrelationship between strategic shareholder intervention and corporate strategic change and will research the types of interventions initiated by activist shareholders mainly identified as hedge funds. The role of the corporate governance systems and codes of the three researched countries (The Netherlands, Germany and the UK) will be analyzed and implemented in the relationship between the hedge funds, the types of intervention and management, who ultimately decide to adopt or reject the change proposed by the shareholders.
Sub-questions:
1. How is shareholder structure organized in Dutch, British and German firms and to what extent are hedge funds involved in firms in these countries?
2. What type of strategic intervention methods do hedge funds utilize to influence corporate strategic output in the Netherlands, Germany and the UK?
3. To what extent are the principle-agent theory relations recalibrated due to the active role of hedge funds in firms?
4. What is the influence of the introduced corporate governance codes in the UK, the Netherlands and Germany on the strategic position of hedge funds and how did the introduction of these codes influence shareholder power?
Organization of the paper
THEORETICAL FRAMEWORK
Hedge Funds
Hedge funds experienced an explosive growth in the last decade, although they date back from 1949, their recent successes makes them omnipresent in the financial sector and increasingly under attention by numerous stakeholders varying from the media to the government, regulatory regimes, financial institutions and societies. Hedge funds are a form of private equity similar to the more established varieties including, among others, mutual funds, angel investing3 or pension funds. Private equity is a broad term used to define any form of capital raised for investment into an asset outside of public markets (Moon, 2006). Academic research on hedge funds started a decade ago with Fung and Hsieh (1997), Eichengreen et al. (1998), Schneeweis and Spurgin (1998), Ackermann, McEnally, and Ravenscraft (1999), and Brown, Goetzmann, and Ibbotson (1999). The hedge fund industry was in its infancy a decade ago and was considered, due to the tedious global equity markets, a viable alternative to other forms of private equity4 underperforming in the period after the burst of the internet bubble (Fung and Hseih, 2007). The first hedge fund was established by Alferd Jones, who developed a market neutral strategy,5 “by which long positions in undervalued securities would be offset and partially funded by short positions in others. This
3 “An angel investor (known as a "business angel" in Europe, or simply an "angel") is an affluent individual who
provides capital for a business start-up, usually in exchange for ownership equity. Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.” Quoted from <http://www. angelcapitalassociation.org>
4 Hedge funds are similar to private equity funds in many respects. Though there are differences, most hedge
funds invest in very liquid assets, and permit investors to enter or leave the fund easily. Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are "locked in" for the entire term of the fund. Partly quoted from <http://www.wikipedia.com>
5 “Borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that
“hedged” position effectively leveraged investment capital, and allowed large bets with limited resources” (Brown et al 1999). The number of hedge funds doubled in the past five years to 9,000 with 55% offshore based 6, and global hedge funds assets was $1,5 Trillion in January 2006, surging past $2 Trillion7 in January 2007 with $1,5 Trillion US based. In a Securities and Exchange Commission (SEC) report of September 2003, the SEC estimated that hedge funds operating in the US had approximately $600 Billion in assets an at that point in time expected this would be $1 Trillion in five to ten years. This emphasizes that even the well-informed SEC has underestimated the growth of hedge funds and additionally also the position they comprise in financial markets (SEC report 2003).
There is no legal or universally accepted definition of the term ‘hedge fund’. The academic literature is very indistinct on the matter. Halstead, Hegde and Schmid Klein (2005) define hedge funds as a “private investment partnerships that cater to sophisticated and wealthy individuals and institutional investors and are much less subject to regulation”. Eichengreen (1999) also says he can do no better than to define hedge funds as “…collective investment vehicles that operate largely outside the regulatory net, are largely free of disclosure requirements and have maximum flexibility in their investment strategies.” However, this does not emphasize the fee structure which makes hedge funds dissimilar to other private equity funds. Moreover, investors must commit their money to hedge funds for extended periods of time and cannot redeem an investment without prior notice8.The SEC characterizes a hedge fund as “ an entity that holds a pool of securities and perhaps other assets
that does not register its securities offerings under the Securities Act and which is not registered as an investment company under the Investment Company Act. Hedge funds are also characterized by their fee structure, which compensates the adviser based upon a percentage of the hedge fund’s capital gains and capital appreciation.” (SEC report, 2003). Hedge funds unlike any other fund do not have to register under the 1933 securities act due to the fact that hedge funds restrict their sales of securities to no more than 100 “accredited investors”9(beneficial owners). And the investors are eligible as “qualified purchasers”10.
6 Hedge Fund Research <http://www.hedgefundresearch.com> 7 Hedge Fund Intelligence <http://www.hedgefundintelligence.com> 8 http://www.sec.gov (30-03-2007)
Hedge fund managers (GP’s) also typically meet the “private manager” exemption from federal registration as an investment advisor, which requires that “they have had fewer than 15 “clients” in the past 12 months, do not hold themselves out to the public as an investment adviser, and do not act as an investment advisor to a registered investment company or business development company” (Edwards and Gaon, 2003). However, hedge funds are subject to the same prohibitions against fraud as are other market participants, and their managers have the same fiduciary duties as other investment advisers. In addition, hedge funds, like other investment funds, are subject to various regulatory reporting requirements11. In lack of a satisfactory definition I will define hedge funds as; Private Equity based vehicles
structured in a way that exempts from regulatory disclosure operating on a fee structure primarily for institutional investors and wealthy individuals, where investors cannot redeem without prior notice.
As discussed previously hedge funds generally are not subject to the reporting requirements of the Securities Exchange Act because they are operated so as not to trigger registration of their securities under that statute. Because of their rapid growth and prominent position in financial markets they confined themselves in the centre of attention. Hence, the SEC is working on new regulations, for instance hedge funds with assets more than $ 25 Million in assets have to register with the SEC, of which a few are in effect and others will be in the next couple of months. On December 4th, 2004 the first steps were initiated by introducing new rules. In support of Rule 203(b)(3)-2, the SEC argues that requiring the registration of hedge fund advisers is necessary to protect “… investors in hedge funds, and to enhance the Commission’s ability to protect our nation’s securities markets.” 12 “The Commission
cites two concerns about hedge funds: the growing incidence of fraudulent activity by fund advisers and the “retailization” of hedge fund investments”(Edwards, 2004). “In the last five
insurance company, an investment company, or a small business investment company licensed by the U.S. Small Business Administration. The purpose of these restrictions, obviously, is to limit hedge fund investors to wealthy and sophisticated investors, who do not need the protections afforded by the federal securities laws (SEC 1933 Securities Act)
10 “Qualified purchasers” are individuals or companies who own at least $5 million in investments.
11 “Hedge funds cannot trade in a ‘regulatory vacuum’ because they trade on regulated exchanges and deal and
interact with other regulated institutions. Hedge funds outsource most activities except trading decisions (for example, execution, settlements, clearing, leverage, risk management, etc.) to prime brokers which generally are major investment banks. Since prime brokers are regulated, their hedge fund business indirectly falls under supervisory oversight. For example, in the UK, the Financial Services Authority (FSA) is holding meetings with prime brokers over their links with hedge funds in order to assess the extent of due diligence and risk management, presumably partly with a view of using prime brokers as early warning signs of any risk to the financial stability posed or believed to be posed by hedge funds.” Qouted from Danielsson et al, 2005, pp. 525)
years, the SEC has brought 51 cases in which they have asserted that hedge fund advisers have defrauded hedge fund investors or used the fund to defraud others in amounts the SEC staff estimates to exceed $1.1 billion and another 400 cases are under investigation” (Danielsson et al, 2005)
In 1998 the hedge fund Long Term Capital Management Inc. (LTCM) nearly collapsed, with the encouragement of the Federal Reserve a consortium of investors and banks agreed to bail out LTCM. LTCM “exploited short-term pricing discrepancies in similar securities by using long-term position and offsetting these through short-term positions in different assets” (Halstead, Hegde and Schmid Klein 2005)13.
One of the major reasons hedge funds are growing fast is because they outperform market indices like S&P 500 (Liang, 1999). An early study of Fung and Hsieh (1997) on hedge fund performance, found that hedge funds outperform mutual funds. To motivate hedge funds managers and to align manager’s interest with the fund’s performance, incentive fees are designed (Liang, 1999). Incentive fees range from 5 – 25% and management fees are usually 1 – 2% of managed funds (Brown et al. 1999). There is empirical evidence for a strong correlation between incentive fees and performance (Ackermann et al. 1999; Liang 1999). Liang (1999) illustrates that ‘a majority of hedge funds have a “high watermark provision”14; this provision ensures that a manager should make up for its loses before an incentive fee is paid. Liang (1999) also argues that hedge fund managers are partner and personal wealth is closely tied to performance. These characteristics and the non-traditional and dynamic investment strategies, such as flexible investment strategies and utilizing
13 The Technique of LTCM did work for a while, but the Asian crisis and the devaluation of the Rouble made
investments and assets worth significantly less, with bankruptcy as a consequence. The Federal Reserve was concerned that the collapse of LTCM would exacerbate financial positions of other financial institutions and therefore encouraged to intervene. This case is a good example that bad management, low control over investments, lack of regulatory oversight and disclosure and no-compliance to voluntary disclosure could potentially lead to a financial break-down. This case illustrates that the lack of control and oversight enables al kinds of investors to be involved with hedge funds and not all of them have good intentions. Moreover, the uncontrolled explosive growth of hedge funds could imbalance financial markets and lead to a loss of money for a lot of people. Quoted from the following sources: (Eichengreen, 1999; Eichengreen and Mathieson, 1999; Eichengreen et al. 1998; Fung and Hsieh, 1999; Liang, 2001; Edwards and Gaon, 2003).
14 “High water mark means that “the manager does not receive incentive fees unless the value of the fund
techniques as a market neutral strategy15 or shorting16 should ensure that hedge funds outperform market indices and mutual funds. Liang (1999) argues that over a 7 year period from 1990 – 1996 hedge funds outperformed the S&P 500 by 52% and are not “necessarily” riskier . However, in a study in 2001 he calculates that the S&P 500 had an annual return from 1990 – 1999 of 18,8% and hedge funds of 14,2%. Because the year 199817 was included the results are difficult to interpret. The volatility was significantly lower for hedge funds than the S&P 500, due to the cross-style diversification18.
The investors in hedge funds – pension funds, university endowments, wealthy individuals – expect hedge funds to have a high rate of return on their investments. As discussed earlier, this is partly stimulated through high incentive fees. As they are typically structured in a way that exempts them from most of the laws and regulations that do apply to other means of investment, they can, among other things, “trade any type of financial instrument or security without restriction, engage in unlimited short selling, compensate their managers and charge their investors in any way they find appropriate and operate in any market anywhere in the world” (Edwards and Gaon, 2003). The structure and status of hedge funds provides potential gaps, where mutual funds, pension fund and other investment companies have no opportunity to manoeuvre, hedge funds are able to fill these gaps19. The
15 “A market neutral strategy is one where an investor takes a long position and a short position at the same time.
There are many ways of implementing this strategy but the basic premise is the same: at any given time some securities are overvalued and others are undervalued. An investor takes advantage of this temporary disequilibrium by buying undervalued securities and taking an equal, short position in a different and overvalued security.” http://www.marketneutralstrategy.com
16 “In finance, short selling or "shorting" is a way to profit from the decline in price of a security, such as stock
or a bond. Some investors "go long" on an investment, hoping that price will rise. To profit from the stock price going down, short sellers can borrow a security and sell it, expecting that it will decrease in value so that they can buy it back at a lower price and keep the difference. The short seller owes his broker, who usually in turn has borrowed the shares from some other investor who is holding his shares long; the broker itself seldom actually purchases the shares to lend to the short seller. For example, assume that shares in XYZ Company currently sell for $10 per share. A short seller would borrow 100 shares of XYZ Company, and then immediately sell those shares for a total of $1000. If the price of XYZ shares later falls to $8 per share, the short seller would then buy 100 shares back for $800, return the shares to their original owner, and make a $200 profit. This practice has the potential for an unlimited loss. For example, if the shares of XYZ that one borrowed and sold in fact went up to $25, the short seller would have to buy back all the shares at $2500, losing $1500.” http://www.langasset.com
17 In 1998 Russia defaulted on its Ruble debt and internal dollar debt, which caused panic among financial
markets, investment were placed in high-security markets. Hedge funds were forced to liquidate their investments, which led to low returns.
18 The S&P 500 is an equity index, whereas hedge funds hold: cash, bond, stock and other securities, this
cross-style diversification influences the volatility because hedge funds can diversify. (Ling, 1999)
19 Hedge funds are not subject to the same costly regulation as other institutions. Whereas mutual funds must
have independent boards and permit shareholders to approve certain actions, hedge funds can, if they choose, more completely separate ownership and control. The typical hedge fund is a partnership entity
managed by a general partner; the investors are limited partners who are passive and have little
monitoring role (as shareholders in large companies) was until recently predetermined to large institutional investors and hedge funds played no role. Due to the recent growth and the ability to adhere other tactics, hedge funds positioned themselves as activist shareholders. This increased activism by hedge funds, in their quest to generate higher returns, leads to numerous conflicts in past years and engenders hostility in the relationship between management, shareholders and stakeholders, the foundation of the principle-agent theory.
Principle-agent conflicts
The relationship between principles (shareholders) and agents (management) is a widely debated subject in the academic literature (Berle and Means, 1932; Coase, 1937, Jensen and Meckling, 1976; Fama and Jensen, 1983; Jensen and Murphy 1990; Hart, 1995). The principle-agency theory elaborates on the potential conflict between shareholders and management and problems arising due to low firm ownership of the management, which potentially leads to management opportunism and lower shareholder wealth. The relationship of the owners and the management is in conflict because the two parties pursue different interests, risk adverse managers versus wealth maximizing shareholders (Jensen and Meckling, 1976). Part of the problem is that shareholders do not have a complete overview of managers’ decisions and they do not have as much information as managers do (Hart, 1995). In addition, managers can very well have an own agenda that may not coincide with shareholder interests (Blanchard et al 1994). The agency theory retains that shareholders set the pay and create incentives for the management to align mutual interest (Conyon, 2006).
along” with the CEO’s pay arrangement. Secondly, directors do not have a clear overview or easy access to independent information on compensation practices. And thirdly, ‘market forces are not sufficiently fine-tuned to assure optimal contracting outcomes’. Due to this higher agency costs transpire, which is detrimental for the principles and therefore part of the agency problem remains intact.
In the arm’s length bargaining over their contract managers utilize their power in favour for themselves. This so called managerial power approach emphasizes the shortcomings of the optimal contract and the position of managers as a stronger negotiating partaker in the principle-agent relation (Blanchard et al 1994). Hence, managers have the power to influence decision making processes and create a rent-opportunity. This rent-seeking behaviour of managers is higher when certain conditions are met. Bebchuk and Fried (2003) mention four patterns and practices ‘that at least partly explain power…’ (1). Power-Pay Relationship expressed in weak board, no large outside shareholder, fewer institutional shareholders, protection by anti-takeover arrangements. (2) Compensation consultants. (3) Stealth compensation and (4) Gratuitous good-bye payments. Other reasons for rent-seeking behaviour and part of the managerial power approach are cash windfalls for a company (Blanchard et al, 1995). Where managers get a ‘prize’ when a company encounters a cash windfall, for example in a lawsuit or the sell of a division. Managers of a company able to generate cash windfalls, generate more shareholder wealth maximization, this pleases the shareholders and managers in terms of bonuses or other firm performance enhancing deals, between shareholder and management. A good demonstration of managerial power uttered in cash windfalls is the case of Philips and its CEO Gerard Kleisterlee20. Philips received 4 Billion Euro for the sale of its semiconductor division in 2006, due to the sale the CEO received a 350,000 Euro additional bonus on top of his 2,5 million Euro salary and customary bonuses. According to the supervisory board, “the management did an exceptional job in an extraordinary situation” and a bonus of this magnitude was considered nothing abnormal in this situation. A few institutional shareholders raised questions during the shareholder meeting and were opposed to this bonus. They argued that this sale of a division was nothing extraordinary and considered a normal activity for a CEO. However, because the sale did raise a lot of money for the company, partly returned to the shareholders in dividends, many shareholders did not have any objection to the bonus. There was one thing that mattered more in this situation. The CEO was performing well and the company under his charismatic
leadership revived into a healthy company. For this reason the majority of the shareholders supported the CEO for a further 4 years. Due to this the CEO gained influence and power and this enabled him a 350,000 Euro additional bonus, which can directly be ascribed to rent-seeking and part of the managerial power approach.
The latter argument of cash windfalls has overlap with the information asymmetry model. Myers and Majluf (1984) predict in their classic adverse-selection model that information asymmetry between informed managers and shareholders will lead to underinvestment. This model argues that managers only invest in NPV positive projects and therefore more risky but profitable projects are avoided; this is not in all cases in the interest of shareholders because wealth maximization is not in optimal condition. Xueping and Zheng (2005) further extended the model and concluded in line with Myers and Majluf (1984) “The managers in our generalized model maximize their own wealth, which includes the value of insider equity holdings and private benefits of control.” Moreover, information asymmetry leads to higher discretion for the manager and thus, opportunities for managers to distort optimal outcomes for the principles.
In order to manage the principle-agent conflict there are two possible mechanisms to discipline companies and markets and to protect shareholders (Jensen and Meckling, 1976; Aguilera and Cuervo-Cazurra, 2004). Countries can reinvent their legal system and amplify shareholder protection. This is, however a lengthy and difficult to accomplish process, since introducing changes in a legal system are complicated to accomplish (Aguilera and Cuervo-Cazurra, 2004). Moreover, a legal system is a country’s institutional legacy deeply embedded in a society; overnight changes will encounter a lot of resistance (Coffee, 1999). Another alternative is the introduction of corporate governance codes or corporate governance practices to complement the binding legal system (Aguilera and Cuervo-Cazurra, 2004).
Corporate governance practices
“Corporate governance structures are the set of institutional arrangements that tend to align the interest of management and residual risk bearing shareholders that serve to economize on the transaction costs accompanying the specialization of organizational functions” (Williamson, 1984).
Corporate Governance essentially advocates the implementation of guidelines and mechanisms to ensure good behaviour. Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organization to be more fully informed in order to maintain or alter organizational activity (Cadbury report, 1992; Shleifer and Vishny, 1997; Kose and Senbeth, 1998; Reid, 2003; Chi-Kun, 2005). Corporate governance is the mechanism by which individuals are motivated to align their actual behaviours with the overall participants. Good corporate governance should provide proper incentives for the board and management to pursue objectives in the interest of the company and its shareholders and should facilitate effective monitoring (OECD report, 2004). Aguilera and Cuervo-Cazurra (2004) define codes of good governance as ‘a set of “best practice” recommendations regarding the behavior and structure of the board of directors of a firm’. In addition, they maintain that the codes are designed to “address deficiencies” in the corporate governance system and are a ‘comprehensive set of norms on the role and composition of the board of directors, relationship with shareholders and top management, auditing and information disclosure, and the selection, remuneration, and dismissal of directors and top managers.” However, the main emphasis is on the board of directors and the shareholders, Aguilera and Cuervo-Cazurra (2004) do not involve other stakeholders. Kose and Senbeth (1998) emphasize that all stakeholders have rights and exert control over corporations and board of directors should engage the interests of all parties. The Dutch corporate governance code (also known as Tabaksblat code) introduced in 2003 states that ‘The management board and the supervisory board have overall responsibility for weighing up the interests, generally with a view to ensuring the continuity of the enterprise. In doing so, the company endeavors to create long-term shareholder value.21 The management board and supervisory board should take account of the interests of the different stakeholders’. This outline is similar to codes of other countries and emphasizes shareholders’ rights and the urge for protection towards opportunistic managers. The general outline considers managers to act in accordance with shareholder value maximization, in the interest of all stakeholders and with integrity and in accordance with ethics.
Although, the introduction of the codes should impart more transparency of management decisions and ensure the interests of shareholders and other stakeholders, codes across countries do vary. Due to cultural and institutional differences among countries different mechanisms ensure compliance (Chi-Kun, 2005). The Netherlands operates with a
‘comply or explain’ code22, while in the US the 2003 enacted Sarbanes-Oxley act ensures compliance mandatory for companies. Within the countries path-dependent mechanisms should ensure a company’s internal control mechanisms. One example involves board structure within one or two-tier configurations (Owen, 1995) or the role of executive and non-executive managers, (Conyon, 1998) and how remuneration for the top management is organized. Multinational firms adopt best practices of existing systems to augment efficiency and to become more competitive (Prahalad and Oosterveld, 1999; Maher and Andersson, 2000; Chi-Kun, 2005). Two models of globalization and the effect on corporate governance are defined by Ahunwan (2003): Firstly, convergence; although a gradation of divergence can be observed in the academic literature (Guillén, 1999), convergence among National Business Systems is still an omnipresent theory among scholars (Boyer, 1996, Whitley, 1998; 1999), and how globalization, global trade, global financial markets, internationalization of production processes, etc. lead towards a unified model of corporate governance. These convergence processes have effect on corporate governance codes and best practice (Coffee, 1999; Stilpon and Thompson, 2000; Gilson, 2001; Schmidt and Spindler, 2002; Lane, 2003; Reid, 2003). Secondly, Path-dependence model: The evolution of corporate governance system is path-dependent, “with the national history trajectories and political considerations standing as strong barriers to convergence” (Bebchuk and Roe, 1999).
Although, the latter argument states that convergence of the codes is difficult and timely to achieve, the former argument seems to be the case for the criteria of the codes in the Netherlands, Germany and the UK. Atkins (2003) argues that common criteria include: “the need for transparency, accurate and timely reporting, management openness, ownership structure, functioning of the general meeting, establishment of remuneration and nomination committees, issues of board appraisal, training and composition (especially as regards separation of the roles of chairman and chief executive), and the role of independent directors.” The mechanisms’ that ensure compliance vary across countries; however this is not the case for the three researched countries. All three countries have codes, with a ‘comply or explain’ principle. Nonetheless, the codes do differ on some company level aspects, for instance the UK Cadbury code, argues that in the one-tier board structure, the CEO cannot be the same individual as the chairman of the board and at least three non-executive (outside
22 The Netherlands is a civil law country. Laws are written down, the application of customary law is the
directors) should be on the board (Dahyla et al., 2002). This does not apply in the Netherlands and Germany, because of the two-tier structure. Besides the similarities and differences one major difference is the development of the codes. The development of corporate governance codes is far more advanced in Anglo-Saxon economies. Respectively the UK and US accounted for 28 of the 72 introduced codes by 1999 in 24 countries (Aguilera and Cuervo-Cazurra, 2004). Within these economies, the importance of shareholder protection and wealth is highlighted to a greater extent; conversely other stakeholders are much less implicated and their role in the corporate governance process is limited; this view is known as the economic efficiency view. The opposite transpired in continental Europe, known as the stakeholder view, where a stakeholder model is ubiquitous, limiting shareholder power and emphasizing the interest of different stakeholders (Aguilera and Jackson, 2003).
Shareholder versus Stakeholder model
Most hedge funds, about 55%, is offshore based (HFR)23 , however the majority of the hedge funds originate from the US and, although less, many funds are UK situated. Hedge funds originating from Anglo-Saxon countries are familiar with the shareholder model, however these hedge funds increasingly invest in firms located in continental Europe. These firms are embedded in the stakeholder model implicating, apart from the shareholders, other stakeholders including: employees and unions, the government and even a society which is more involved in company processes. The diffusion between the two models, though arguably evolving to a hybrid, can be regarded the basis of the problem between the Anglo-Saxon based hedge funds and the continental European firms.
The shareholder value model or Anglo-Saxon model emphasizes the focus primarily on maximization of shareholder value. The stakeholder model or Rheineland model emphasizes the interest of all stakeholders: employees, the government, customers, etc. And these interests are balanced in the management decision making (Stadler et al, 2006). Hence, the stakeholder theory maintains “that a firm should be run in the interests of all its stakeholders rather than just the shareholders” (Vinten, 2001). In the academic literature much effort is squandered in determining which model works better, or leads to a better profit position for a company, this however, is not contemplated in this research. Therefore, only the
characteristics will be taken into account. The important differentiations are presented in table 1.
The focus on the two models implicates one major shortcoming, it is a rather broad perspective and provides only a limited view of differentiations between the nations (Barca and Becht, 2001). A more refined approach compels the institutional dimensions of Aguilera and Jackson (2003). Aguilera and Jackson (2003) have developed the Actor Based Model that identifies the social relations and these institutional arrangements that shape the rights and responsibilities among corporate stakeholders.
Actor Based Model
Figure 2: Corporate Governance Dimensions (Source: Copied from Aguilera and Jackson, 2003, pp. 451)
CAPITAL
Capital is the stakeholder group that holds property rights, such as shareholders, or that otherwise makes financial investments in the firm such as creditors (Aguilera and Jackson, 2003). I will describe differences between the Netherlands, Germany and the UK in terms of property rights, their financial system and interfirm networks.
Property rights
Property rights define mechanisms through which shareholders (capital) exert control, such as information exchange and voting rights, and how control is balanced with managerial discretion. Aguilera and Jackson (2003) define a dichotomy of either strategic or financial interest in the firm. Control is either exercised through commitment or liquidity. There are different mechanisms through which shareholders are able to exercise control. One of the mechanisms is the concentration of ownership. Various studies such as Shleifer and Vishny (1997), Claessens et al. (2002) suggest Berle and Means’ (1932) model of widely dispersed corporate ownership is not common, even in developed countries. Large shareholders control a significant number of firms in many countries, including developed ones (Faccio and Lang,
2002). The Netherlands, Germany and the United Kingdom however, differ in their structure concerning ownership concentration on a country level.
The Netherlands. In the Netherlands 40% of publicly quoted companies is widely held and about 35% is family owned (Barontini and Caprio, 2006). The Dutch applied legal framework is based on the civil law framework, in this framework shareholders and creditors have the weakest protection (La Porta et al, 1998). Becht (1999) argues that “The Netherlands has low levels of minority protection, a large stock market and sizeable domestic pension funds. The Netherlands is also one of the few countries where we can observe voting blocks and cash-flow stakes simultaneously”. Moreover, Becht (1999) argues that “poor shareholder protection should be associated with concentrated ownership, large outside voting blocks, and low global market capitalisation.
Germany. Faccio and Lang (2002) found that on average about 10% of owner rights in Germany is widely held and Barontini and Caprio (2006) found that 40% of the total ownership rights are held by blockholders. Concentrated share ownership is a key mechanism of German corporate governance: large blockholders motivate shareholders to undertake monitoring and also provide the leverage necessary to exercise control (Jensen and Meckling, 1976). In Germany large shareholders have more incentives to monitor the CEO performance. They have more shares (meaning more voting rights) and are able to force a decision at an (annual) shareholder meeting. Monitoring may weaken the position of minority shareholder nevertheless in some way, it reduces asymmetric information (Jackson et al., 2004). Mainly because a large blockholder has a lot of information and is much concerned about the well-being of the company. In Germany property rights favour large shareholders, capital tends to pursue strategic interest towards the firm and control is exercised through commitment. (Aguilera and Jackson, 2003)
to force a decision. Dispersed ownership creates a free-rider problem in corporate control. No investor has many incentives to engage in active corporate governance, because they capture a small proportion of the benefits associated with active governance. The UK has strong minority shareholder protection through high disclosure requirements and strong law (Aguilera and Jackson, 2003). In the UK property rights favour minority shareholders, capital tends to pursue financial interest towards the firm and control is exercised through liquidity. (Aguilera and Jackson, 2003)
Financial system
The financial system influences the relationship of capital to the firm. The two major alternatives for financial mediation are bank-based or market-based systems (Aguilera and Jackson, 2003). Both alternatives generate different patterns of control. In bank-based financial institutions, banks are the key institutions, mediating deposits from households and channelling them into loans for firms. In market-based financial institutions, households invest directly in companies’ publicly issued equity (Aguilera and Jackson, 2003). Germany, the Netherlands and the UK differ in their financial systems.
The Netherlands. The stock market, banks and private equity through large pension funds are an important source for liquidity in the Netherlands. Both the banking system and the stock market are well developed in the Netherlands (Demirguc-Kunt and Levine, 1999). The separation between market-based and bank-based can not be applied in the Dutch financial system. A properly functioning hybrid is the result. Therefore both banks and public investors pressure companies. This emphasizes that in Dutch firms both an exit strategy through financial instruments on the stock market as well as a long-term commitment transpires (Aguilera and Jackson, 2003).
reported that 80% of the listed companies had a non-financial owner holding with at least 25% of the shares. Germany has a debt based financial system, with commitment through the supervisory board.
United Kingdom. Equity in the UK tends to be dispersed (Mayer, 2000). Households invest in companies’ publicly issued equity (stocks and bonds), thereby expanding the size and liquidity of capital markets and leaving the primary monitoring role to institutional investors and other shareholders (Aguilera and Jackson, 2003). Capital ties tend to be dominated by purely financial interests. Dispersed ownership also promotes liquidity in stock options by making a high proportion of shares available for trading. The UK has an equity-based financial system, and control is exercised through liquidity. Liquidity is the option to “exit” if the company does not fulfil the investors’ interest (Aguilera and Jackson, 2003). The UK predominately has a market-based-financial system.
Interfirm networks
Interfirm networks is the relationship of capital to the firm. It influences the behaviour of the firm through access to critical information and resources (Aguilera and Jackson, 2003). The Netherlands, Germany and the UK have different levels of multiplexity of their networks. There are different indicators of this multiplexity. Indicators are shareholding, cross-board representation and supplier relations. According to Aguilera and Jackson (2003) these indicators fit better with the German and Dutch system than with the UK system
The next part focuses on the board structure of the three countries in defining the multiplexity. Dutch and German corporations have a two-tier board structure, UK companies have a one tier board structure.
The Netherlands. Dutch companies have a two-tier board structure, which consists of a management board and a supervisory board. The management board makes the day-to-day business decisions (Douma, 1997), and consists of executive directors (Maassen and Bosch, 1999). The power of a Dutch supervisory board, which consists of non-executive directors (Maassen and Bosch, 1999), is to a large extent determined by the legal structure of a firm.24
24 If the subscribed capital of an enlisted firm exceeds 25 Million Guilders (or 11,34 Million Euro), employs at
The members of the supervisory board are experienced managers, often chairman of the managing board in other companies. The Dutch two-tier system seeks to balance the interests of not only the shareholders, in the Dutch system the supervisory board as to act in accordance with the best interest of the company’. Consequently the position of the shareholders in the Dutch two-tier system can be considered weak. Moreover, the Dutch supervisory board has the major disadvantage that shareholders cannot directly fire the management board, because the supervisory board has to authorize such a decision. Furthermore, shareholders can not fire the supervisory board or change its composition (Douma, 1997). “The incumbent members of the supervisory board appoint members of the supervisory board for four-year terms by co-option” (Ees et al, 2003). In addition, the work council has equal rights as shareholders in shareholder meetings, this undermines the position of the shareholders even more. A supervisory board is often named an advisory board25, the extent to which the supervisory board can monitor is limited because of the limited information flow, hence asymmetric information processes between management and supervisors. The Dutch two-tier system differs from the German two-tier system. In Germany the supervisory board is appointed by both the employees and the shareholders and “exerts substantial independent influence on management.” The close ties between management and supervisory boards makes the Dutch two-tier system somewhat similar to the U.S. system, where executive managers sit on the board of directors and the CEO often chairs the board of directors (CEO-duality) (Ees et al, 2003).
Germany. Goodijk (2000) states that countries with influential supervisory boards (as Germany) can have an “old boys network” culture. In that case their control function will be less important. The boards are not necessarily independent; frequently the chairman is the former CEO in Germany, which makes the objectivity debatable. German supervisory boards are larger than the Dutch supervisory boards, up to 20 members, and the board is presented by shareholders and employees equally. However, due to the voting system shareholders can exert ultimate control in the supervisory board26 (Douma, 1997). In Germany, as opposed to the Netherlands, firms of all sizes and regardless of listing are required to adopt the two-tier
objectives: (1) to monitor the management board and if necessary fire board members. (2) scrutinize and sanction major decisions, for example a joint venture or take-over, etc. and (3) to draft the annual financial statement ( Jong, 2002; Ees et al. 2003).
25 How German Boards Work Oct 2006, Vol. 32 Issue 9, p16-16, 1/4p
26 “In Germany large companies have a supervisory board consisting of 50% of persons representing the
structure. The supervisory board controls management (not the firm) and is involved in processes resolving firm issues, moreover their task is to remain in contact with al stakeholders and to represent their interests. However, this might seem as a good thing, in practical terms the execution is entangled in conflicts of interest (Hopt and Leyens, 2004).
LABOUR
Aguilera and Jackson (2003) conceptualize employees’ role in corporate governance in terms of their ability to influence corporate decision making and to control firms’ resources. According to their Actor-based model of corporate governance labour consist of representation rights, union organization and skill formation.
Representation rights
Representation rights give employees individual rights to voluntarily elect their own representation and compelling management to bargain over a prescribed range of issues (Aguilera and Jackson, 2003).
The Netherlands. Labour is an important stakeholder in Dutch corporations, employee representation rights are consequently considered an essential component in Dutch corporate governance. Employees are internally represented by work councils. Work councils have advisory rights, co-determination rights, control rights and enabling rights27 and are consulted by the management board on all major issues (such as a merger or a reorganization etc.). Work councils are elected by the employees and meet frequently; they can count up to 25 members and have a minimum of 3 members in companies with more than 50 employees. The number of members gradually increases when a company has more employees (Engelen, 2004). The importance of internal influence of employees is emphasized through the introduction of the Works Councils Act in 1950 (Berg, 2004).
Germany. German workers enjoy a dual system of representation, collective bargaining rights and co-determination rights through the institution of the works council and the supervisory board (Royle, 1999). Germany is a country with a civil law system, hence
27 “Advisory rights allow the works council to give voluntary advice to the board of executives on each and
Germany uses statutes and comprehensive codes as a primary means for ordering legal material (Aguilera and Cuervo-Cazurra, 2004). In the aforementioned subject on interfirm networks employees have 50% of the representation rights in the supervisory board. Although, the shareholders have ultimate power, the employee representatives can influence processes within the board. The persons representing the employees are mostly union officials. German employees need internal control to bargain with the management. The main difference compared to the Netherlands is the presence of employees in the supervisory board whereas in the Netherlands a separate body with extensive rights influences management and the supervisory board. The main resemblance compared to the UK is the high level of employee representation and the relative power they have.
United Kingdom. The United Kingdom is a country with weak representation rights, hence there are no internal channels to represent employees within the firm’s decision making processes. Management’s recognition of unions is entirely voluntary. “Employees seek to control firms’ decisions externally, with a treat of collective action. Job insecurity is the “unacceptable face” of flexible and unprotected labour markets” (Lea, 2003). Along with a strong culture of individualism, combined with the political dominance of capital the British provided a legal framework which ensured that capital had the freedom to develop unhindered by the actions of the state. In the UK this well developed legal framework is called the common law system (Aguilera and Cuervo-Cazurra, 2004) .
Union organization
Union organization is a continuous association of wage-earners for the purpose of maintaining or improving the conditions of their employment (Thelen, 1999).
Germany. Germany is characterized by institutional tensions between multi-employer industrial unions and enterprise-based works councils (Thelen, 1999). These multi-employer unions have been set up as industry-unions. In 1999 Germany had 11 of these unions Germany and a union density of 25.8 % (Streeck and Visser, 1998).. This number is relatively small, but employers’ associations bind their members to these agreements. (Hall and Soskice, 2001) Workers earn the same salary as their fellow industrial union-members, leading to few incentives to switch jobs.
The enterprise-based work-councils recruit members among employees to support internal participation. Their main aim is preservation of long-term employment contracts and the deregulation of internal promotion. (Aguilera and Jackson, 2003).
United Kingdom. The United Kingdom is a country with a great history of labour rights, started during the industrial revolution. Margaret Thatcher's governments however weakened the powers of the unions in the 1980s with her policy of privatization and liberalization. The International Labour Organization (ILO) researched in 2000 the union density of several OECD countries and found that in the UK 19% of the total workers joined trade unions in the mid nineties and that 35% of the workers was covered by collective agreements. Labour tends to pursue strategies of external control, with predominately class-based and craft-class-based unionism (Aguilera and Jackson, 2003).
Skill formation
The development of skills or competencies relevant to the workforce.
aspects. However, companies are improving their in-house education more focussed on the required skills for students from higher education.
Germany. In Germany, the government encourages the development of a strong system of technical education to supply the emergent industries with skilled personnel. (Ashton et al. 2000) Because Germany makes a lot of use of labour with high industry-specific skills, they depend more on education and training systems capable of providing workers with such skills. Germany’s skill formation can by typified as a dual system, where industry-wide employer associations and trade unions supervise a publicly standardized training system as well as firm specific training (Hall and Soskice, 2001).Labour tends to pursue internal strategies of skill formation.
United Kingdom. The system of industrial relations in the UK operates with a relatively high degree of autonomy in relation to the state; employers and unions are left to form their own “voluntary” agreements to govern their relationship (Ashton et al. 2004). Training is seen as a responsibility of the individual or the employer. According to Green (1990) the main focus of education is social control, providing some basic education. The government further focuses on the unemployed. A widespread belief is that Britain invests too little in vocational education (Stevens 1999). Labour tends to pursue external strategies of skill formation.
MANAGEMENT
control via financial mechanisms. Functional emphasis is on control through strong personal involvement and integration of operational functions.
Ideology
“Ideology is an institutional variable that influences management by imposing constraints as taken-for-granted world views by creating normative expectations that become ‘focal points’ for firm decision making to provide value based legitimation to managerial authority” (Aguilera and Jackson, 2003)
The Netherlands. The main characteristics a Dutch manager should encompass, are: reliability, good communication skills, and inspirational behaviour (Hartog et al. 1997). According to Hofstede (1993) Dutch managers express modesty in their behaviour. The basic management principle in the Netherlands is driven on consensus among all parties based on an open-ended exchange of views (Hofstede, 1993). In a research of Hartog et al. (1997) on leadership and culture they found, that Dutch managers find ‘integrity’ an important aspect and that visionary leadership is imperative. Moreover, Dutch managers tend to value collectivism higher than individualism, and therefore are more team-driven.
Germany. When looking from an ideological perspective to Germany, many German managers hold a PhD (over 50% of the top managers hold doctorates), and are technically educated (26% of CEO’s in 1993 was technical educated) (Mayer and Whittington, 1999). In a research of Felix et. al. (2002), among 50 German firms, the following characteristics of German managers are identified: high performance orientation, low compassion, low self-protection, low team orientation, high autonomy and high participation. Moreover, the German business leader is described as someone “with a formal interpersonal style and straightforward behaviour, a specialist rather than a generalist, who emphasizes on "Technik" as both means and ends” (Littrell and Valentin, 2005).
as described by Mayer and Whittington (1999), the increasing global competition and the augmentation of corporate governance in the recent years, are of influence on managerial behaviour, through the process of education and ethical norms. The focus on education on technical studies is only 9 % (compared to Germany’s 26%) in 1993.
Career Patterns
Career patterns reflect the complex incentives and opportunities for top managers’ mobility. There is a distinction between closed (internal managers are promoted) and open (external labour market is of importance, however, higher risks of termination between principle and agent) labour markets. “careers are determined largely by the nature and stability of organizational structures” (Aguilera and Jackson, 2003).
The Netherlands. A recent development has led from an ‘old boys network’ to a more professional board. However, still many former CEO’s are presented in supervisory board of other companies, though less than in Germany. Managers in the Netherlands do not have the level of portable skills as in the UK, and the level of vocational training is limited (Goodijk, 2000). Therefore the Dutch labour market can be considered moderately open, when comparing this with Germany and the UK. Where skills are to some extend portable and the costs to fire a manager are at the level between Germany and the UK
Germany. Due to the large boards and the old boys network characterized in German business society, Germany seems to have a closed managerial labour market, which emphasizes on in-house education and more commitment to a company (Dore, 2000). Soskice (1999) argues that education and training systems encourage initial vocational training in which companies are closely involved. This leads to more specialist knowledge, described by Aguilera and Jackson (2003) as a feature of a closed labour market.
METHODOLOGY
Explorative Research
This research is an explorative research conducted to explore and scrutinize the ‘strategic shareholder intervention’ phenomenon. The research will focus on cases were a hedge fund as activist shareholder is identified using the Amadeus database and focuses on literature, news papers and other secondary internet resources as source of information. The Netherlands, Germany and the United Kingdom are selected because of their large differences in the institutional frameworks and their economic and financial systems. Emphasis is put on a bank-based system for the former two and market-based system for the latter. To determine to what extent differences occur within one system, the Netherlands and Germany are compared. To determine if there are differences between the systems, the UK is compared with the other two countries. Moreover, the Netherlands and Germany are recently confronted with shareholder activism (the UK for a slightly longer period), to be able to identify the differences in shareholder intervention, the occurrence of shareholder intervention needed to be present.
In this research I chose for a case study that relies on the theory of Flyvbjerg (2006), who argues that: “Rather than using large samples and following a rigid protocol to examine a limited number of variables, case study methods involve an in-depth, longitudinal examination of a single instance or event: a case. They provide a systematic way of looking at events, collecting data, analyzing information, and reporting the results. As a result the researcher may gain a sharpened understanding of why the instance happened as it did, and what might become important to look at more extensively in future research. Case studies lend themselves to both generating and testing hypotheses.” I will make use of an explorative case study which helps to “identify questions, select measurement constructs, and develop measures; they also serve to safeguard investment in larger studies “ (Takala and Urpilainen, 1999).
selected by using criteria which are likely to replicate or extend the emergent theory (Eisenhardt, 1989). To be able to identify cases of strategic intervention, the following methodology is designed.
Research method and data collection
The dataset is composed of 100 companies form each of the three countries (the Netherlands, Germany and the UK). The data is extracted from Amadeus database; this database allocates companies in the pre-selected countries and imparts shareholder information for each company. Amadeus lists the name of the shareholder and the amount of shares in percentages. I selected the largest 100 publicly quoted companies. For the data extraction I only selected shareholders with a 1% cut-off level or higher. Companies for which there is insufficient shareholder information will be excluded. Following the methodology of Barontini and Caprio (2006) companies owned by one shareholder or have a 95% owning shareholder are excluded. Moreover, in the Netherlands a couple of firms are registered for administration and tax redemption purposes only. To avoid contamination due to another background and therefore plausible other shareholder structure not representing Dutch firms, these firms are excluded. A list of the excluded firms and the reason for the exclusion can be found in appendix A. In total for the Netherlands 128 of the total 163 publicly quoted firms are analysed, 28 are invalid and excluded, leaving 100 suitable firms. In Germany 125 of the total 603 publicly quoted companies are analysed, 25 are invalid and excluded, leaving 100 suitable firms. In the UK 102 of the 1.334 publicly quoted firms are analysed, 2 are invalid and excluded, leaving 100 suitable firms.
For each company the shareholders are categorized in one of the 15 or 16 categories (for the Netherlands and the UK 15 categories and for Germany 16 categories) or the unidentified category when it was not possible to determine the shareholders background.
The dataset used for the second sub-question will be extracted from the first data-set. All companies having one or more hedge fund(s) as a shareholder are selected. Of the total 300 companies, 133 companies have at least one hedge fund registered as a shareholder. To be able to identify the shareholding party, I used the shareholder web pages which I tracked down using the web based search engine Google. When no company web site was found in the engine I used other results of the search, like news pages or government pages. These sites provided, in most cases, the nature of a company. When there was no information at all or the information was insufficient or contradicting the shareholder was labelled ‘unidentified’. When there were two or more shareholders in the same category the percentage was added, providing a total. For example when there are two shareholders identified as a mutual fund, one with a 12,63% stake and one with a 9,23% stake, the total mutual fund stake in that particular company is 21,86%. To be able to determine how many shareholders present one category the number of shareholders is also inserted. In the example of the mutual funds this would be 2. The list of companies with the percentage and number of shareholders categorized for each company are included in appendix C. To analyse the results I will use descriptive statistics.
To be able to discuss the differences in companies in which hedge funds have invested and the companies in which hedge funds do not, yet, have invested an analyzes on the size distribution and financial performance will be included. To give a better indication on size distribution the variables; revenue, total assets and number of employees are included and to provide financial performance information; profit or loss and return on shareholder funds are included. The data is extracted for each company from Amadeus database and includes for each country the 100 companies included in the previous analyzes. The data is extracted for the years 2002 until 2006 and averaged for these years, to provide a better picture on the mentioned indicators. The data is analyzed by using descriptive statistics and is for each country divided in companies with hedge funds as shareholders, companies without a hedge fund as shareholder and all companies together. The information of the five variables for each company is included with the shareholder structure appendix, which can be found in appendix C.
identified, the company was labelled as ‘no intervention recorded’. A list of the companies where no activist shareholder could be identified is inserted in appendix D. When the search results were not clear, no identification was possible or the role of the hedge fund was unclear the company was labelled ‘no clear intervention analyses possible’. Companies labelled in this category and the reason why no identification was possible can be found in Appendix E. This category also comprises a few exceptions. In some events hedge funds focused on a total (management) buy-out of a company, this could be argued as strategic shareholder intervention. However, when the hedge funds was an external party not registered as a current shareholder then technically there is no strategic shareholder intervention, where a shareholder tries to influence strategic output, merely because they are not a shareholder at that point. In addition when a hedge fund acquired a company through a buy-out, and intervened with management, and the company is not publicly quoted anymore, this also will not be included in this research. Because, this research only includes publicly quoted firms. Conversely, when a shareholder acts as an activist shareholder and one of their strategies to motivate management to derail the current strategy is to threaten with a take-over, this will be included in this research. In total 14 companies are identified or labelled strategic intervention. 4 in the Netherlands, 5 in Germany and 5 in the UK.
Case study approach
