Views on improving the integrity of global capital markets
01 July 2015

CorpGov Roundup: Executive Pay, Dual-Class Shares, Returns on Activist Investing

Should executives’ safety trump disclosing their pay? What is the future of dual-class shares in Hong Kong? Are there better returns in activist investing? These topics and more are examined in our June CorpGov Roundup.


The fear of kidnappings in Brazil has led to a tense tug of war around disclosure of executive pay. Companies have resisted calls for more transparency around pay, citing increased risk of kidnapping should executive pay details become public.

On the other side of the story — investors are asking for this information. The Association of Capital Markets Investors (AMEC) has asked a group of companies to waive the use of the injunction that exempts them from disclosing information regarding the remuneration of directors and senior managers, which is now required by Brazil’s Securities and Exchange Commission (CVM). AMEC argues that investors need to have this information to best understand how their capital is being used and whether the board has structured management incentives to align with the interest of shareowners.

Hong Kong

The issue of dual-class shares that was first explored with the Alibaba Group’s IPO last year (here’s what we wrote on it as news broke) has made its way to the country’s stock exchange and regulators. The Hong Kong Stock Exchange (HKEx) recently published a concept paper on weighted voting rights, to determine whether they should deviate from the one-share, one-vote standard.

The HKEx has concluded that there is support for a second-stage consultation on proposed changes to the one-share, one-vote structure. The HKEx plans to propose a structure that would allow weighted voting rights (WVR) under some circumstances.

According to HKEx’s Chief Regulatory Officer and Head of Listing David Graham, “Weighted voting rights structures should not be available in all circumstances. We are considering proposing that, generally, ‘one share, one vote’ should prevail, but that WVR structures should be allowed for certain companies in certain circumstances and with certain safeguards. It is not our intention that such structures become commonplace in Hong Kong.”

The Hong Kong Securities and Futures Commission (SFC) does not plan to wait for a second consultation, and has already come out against the plan, which may put an end to any dual-class share plan, at least for now. The SFC stated in an email that its board “unanimously concluded that it does not support the draft proposal” as there is “no assurance that a company would treat its shareholders fairly.”


Speaking of dual-class shares …

At the Toyota Motor Corp. annual shareholder meeting, shareholders approved a proposal to create a dual-class share structure at the company. The voting was opposed by many large international pension funds but still earned support of 75% of shareowners.

The new shares will be unlisted and only available in Japan, a stipulation that has come under criticism by governance experts outside the country. The new “Model AA” shares will be voting shares and dividends will rise the longer they are held. At the end of a five-year holding period, investors can convert them into common shares, or the company will repurchase the shares.

South Africa

The King III report from 2009 was one of the first corporate governance codes to advocate full integrated reporting, and was a pioneer in setting the standard for Environmental, Social and Governance (ESG) reporting. (As you can tell by the name, there were two corporate governance codes before that in South Africa). In the past month, the groundwork has been set for King IV, with the stated aim of shifting reporting from a compliance mindset to a more integrated reporting model that is focused on better communications.

United Kingdom

The Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) have issued a policy statement spelling out new rules on pay at financial institutions. The FCA and PRA state that more needs to be done to discourage excessive risk-taking and short-termism. The proposals are aimed to further align risk and reward in the banking sector.

The rules will increase deferral periods applied to variable pay for senior managers to up to seven years, and will increase the period in which pay can be clawed back for malfeasance to up to 10 years for some managers.

United States

Activist investors have been ascendant in recent years — Bill Ackman, David Einhorn, Dan Loeb to name a few — often pushing for improved corporate governance in the firms they target in order to unlock value. But are there better returns in activism? The Florida State Board of Administration (SBA) recently published its analysis of the effectiveness of activist investing to address this question. Some of the findings of the study — which evaluated SBA proxy voting decisions related to 107 distinct proxy contests, in which the SBA supported one or more dissident board candidates 65% of the time during the study’s time frame — are as follows:

  • Among SBA votes to support one or more dissident nominees where the dissident won seats, the company’s subsequent one-, three-, and five-year relative cumulative stock performance was positive, at levels of 12%, 21%, and 26%, respectively. The same returns for cases where SBA supported the dissident but management won all seats were negative, at -14%, -16%, and -15%. SBA votes supporting management in initial contests when management subsequently won all seats were associated with a positive economic portfolio gain equal to $137 million over the study’s time frame. When SBA supported the dissidents but management won all seats, SBA experienced an aggregate loss of $259 million over the study’s time frame.
  • SBA votes supporting dissident nominees where the dissident won in initial contests were associated with a positive economic portfolio gain equal to $51 million in the five years after a contest was announced, over the study’s time frame from 2006 to 2014.
  • SBA equity value linked to proxy contest holdings increased by $572 million (or $5.3 million per vote) in the five years after a contest was announced, during the study’s time frame from 2006 through 2014.

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Image Credit: YinYang

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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