Corporate management and corporate governance are becoming more and more crucial in today’s successful economies. With the increasing relevance of capital markets this subject
comes more into the focus of the public. Particularly, the fast growing importance of institutional investors is a key factor which helps to explain the changing attitude of managers
towards shareholders and corporate governance. In conjunction with the German capital market, a wide variety of mismanagement in
German public limited companies has revealed shortfalls of German top-management and corporate control in the last decade. This development was of fundamental importance for the development of the German Corporate Governance Code. Hence, the basic underlying
of corporate governance can be attributed to a conflict between the management of a listed corporation and its owners. More precisely, this conflict arises because the management does not adequately comprise the interests of shareholders. In Germany, assets under management of professional investors have increased at 92 percent from 1990 to 2001.1 In addition, a growing administration of private savings by professional fund managers as well as the intensified exercise of influence by institutional
investors on corporate governance and corporate management respectively corporate strategy is observable. Similarly, a growing importance of institutional investors could be observed
in the United Kingdom as well as in the United States. Within academic literature, the issue of activism by institutional investors in Germany is analyzed little, so far. Furthermore, there are only a few surveys on the outcome of the influence by institutional investors on corporate management. Therefore, this thesis aims to answer the following questions:
1. How was the development of shareholder activism in Germany and how can it be characterized and explained?
2. Is shareholder activism a superior tool in relation to the market of corporate control to solve the principal-agent problem?
3. What do institutional investors demand from German corporations and in particular from corporate management?
4. Which options do institutional investors have to influence corporate management?
5. How are these options for activism covered by the German Corporate Governance
Code and the German legal framework?
6. What is the optimum corporate governance from an institutional investor’s angle?
7. What is the empirical outcome?
Table of Contents
1. Introduction
2. Methodology
3. Theoretical Differentiation of the Object of Investigation
3.1 Shareholder Activism
3.2 Investors
3.2.1 Institutional Investors
3.2.2 Non-Institutional Investors
3.3 Corporate Governance
3.4 Corporate Management
4. Shareholder Activism by Institutional Investors in Germany – Status Quo
4.1 The Growth of Institutional Share Ownership
4.1.1 Renunciation from the “Wall Street Walk”
4.1.2 Liquidation of “German Inc.”
4.2 The Principal – Agent Theory and Agency Costs
4.2.1 The Principal – Agent Conflict in Listed Companies
4.4.2 Shareholder Activism as a Method to Solve the Agency Problem
4.3 Demands of Institutional Investors on Corporate Governance
4.4 Importance of Instruments used by Institutional Investors
4.4.1 External Instruments
4.4.2 Internal Instruments
4.5 Intermediary Result
5. Explanatory Models for Shareholder Activism by Institutional Investors
5.1 Single-Variable Explanation Approaches
5.1.1 Size of Stakes and Cross Holdings
5.1.2 Legal Explanations
5.1.3 Aftermarket Liquidity
5.1.4 Portfolio Management
5.2 Multi-Variable Explanation Approaches
5.2.1 The Model of Shleifer and Vishny
5.2.2 The European Governance Network Approach
5.3 Intermediary Result
6. The Corporate Governance System in Germany
6.1 The Need for Information versus the Protection of Information
6.2 Direct Firm Level Monitoring
6.2.1 Institutional Investors and the German Annual General Meeting
6.2.1.1 Commercial Banks
6.2.1.2 Mutual Funds
6.2.1.3 Insurance Companies
6.2.2 Indirect Firm Level Monitoring
6.2.2.1 Takeovers or the Market for Corporate Control
6.2.2.2 Board Composition and Board Structure in Germany
6.2.3 Institutional Investors and Board Independence
6.3 Implementation of the German Corporate Governance Code
6.4 Corporate Governance in an International Context
6.5 Intermediary Result
7. Empirical Results on the Success of Activism by Institutional Investors
7.1 Evidence on the Effects of Shareholder Activism in the USA
7.2 Evidence on the Effects of Shareholder Activism in Germany
8. Summary and Perspectives
Research Objectives and Topics
The primary objective of this thesis is to analyze the influence of institutional investors on corporate governance and corporate management within the German market. The study aims to characterize the development of shareholder activism in Germany, evaluate whether it serves as a superior tool to resolve principal-agent conflicts compared to the market for corporate control, and identify the specific demands institutional investors place upon German corporate management.
- Historical development and characterization of shareholder activism in Germany.
- Application of Principal-Agent Theory and analysis of agency costs.
- Classification and importance of various instruments for shareholder activism (internal vs. external).
- Development of explanatory models for institutional investor behavior.
- Assessment of the legal framework and the role of the German Corporate Governance Code.
Excerpt from the Book
4.1.1 Renunciation from the “Wall Street Walk”
Institutional investors like pension funds, commercial banks and insurance companies hold substantial fractions of shares in listed companies all around the world. As the reader might have noted, these fractions are increasing steadily from year to year in Germany.
In the past, institutional investors played only a limited role in overt forms of activism in Germany, e.g. takeovers, proxy fights, strategic voting, shareholders’ proposals, etc. Only in the recent past and in conjunction with the takeover attempt by Deutsche Boerse AG, some forms of activism appeared before the public. In particular, Deutsche Boerse AG tried to take over the London Stock Exchange in 2005. After announcing the takeover attempt, one institutional shareholder, namely The Children’s Investment Management Fund (further, TCI), called for an extraordinary general meeting to dismiss the supervisory board of Deutsche Boerse AG. TCI considered that the price offered for the stocks of LSE was too high. Instead, they suggested a repurchase of own stocks. As a result and in coalition with Fidelity Investments and an investment company of Merrill Lynch and others, more than 50 % of the shareholders ruled against the takeover attempt and voted for a repurchase of own stocks.
But, why is it that shareholders and especially institutional investors do not publicly act in such a manner more often? One possible explanation is the so called “Wall Street Walk” or “Wall Street Rule”. Based on the view of an individual shareholder, the “Wall Street Rule” indicates that if a shareholder is not pleased with the policy of his shareholding company, he should sell all his shares rather than actively trying to change the company’s policy. Nevertheless, Admati and Pfleiderer pointed out that “[…] the threat of exit itself can be a form of shareholder activism”. If the manager’s compensation is depending on the actual stock price, a threat of selling all shares could negatively influence the stock price and therefore the bonus of a manager.
Summary of Chapters
1. Introduction: The introduction outlines the growing importance of institutional investors in modern economies and highlights the lack of academic analysis regarding their influence on German corporate management.
2. Methodology: This chapter details the thesis structure, explaining how theoretical foundations, historical developments, explanatory models, and empirical evidence will be combined to address the research questions.
3. Theoretical Differentiation of the Object of Investigation: This section defines core terms such as shareholder activism, institutional versus non-institutional investors, corporate governance, and corporate management as a basis for the analysis.
4. Shareholder Activism by Institutional Investors in Germany – Status Quo: This chapter traces the growth of institutional share ownership in Germany and examines the Principal-Agent Theory as the primary driver for activism.
5. Explanatory Models for Shareholder Activism by Institutional Investors: The chapter evaluates single-variable and multi-variable models (e.g., Shleifer and Vishny, ECGN) to explain the behavior and engagement strategies of institutional investors.
6. The Corporate Governance System in Germany: This chapter analyzes the German legal and regulatory environment, including the role of the AGM and the effectiveness of different monitoring instruments used by banks, mutual funds, and insurance companies.
7. Empirical Results on the Success of Activism by Institutional Investors: This section reviews existing studies on the success of shareholder activism in the USA and examines the impact of such engagement on German corporations.
8. Summary and Perspectives: The final chapter synthesizes the main findings and suggests that while institutional activism is on the rise in Germany, it remains constrained by the specific structural characteristics of the German corporate governance system.
Keywords
Shareholder Activism, Institutional Investors, Corporate Governance, Corporate Management, Principal-Agent Theory, German Inc., Annual General Meeting, Proxy Voting, Supervisory Board, Market for Corporate Control, Agency Costs, Free-rider problem, Transparency, Capital Markets, Equity Holdings
Frequently Asked Questions
What is the core focus of this thesis?
The work examines the influence of institutional investors on corporate governance and management in Germany, particularly how these investors seek to influence corporate behavior through various activism strategies.
What are the primary themes discussed?
Key themes include the rise of institutional investors in Germany, the application of Principal-Agent Theory to explain corporate conflict, the importance of shareholder rights, and the role of legal frameworks like the German Corporate Governance Code.
What is the primary objective or research question?
The main goal is to characterize the development of shareholder activism in Germany, assess if it is an effective solution to the principal-agent problem, and understand what institutional investors demand from management.
Which scientific methods are employed?
The thesis utilizes a literature-based theoretical approach, combining economic theory (e.g., Agency Theory) with empirical evaluations of activism studies and analysis of the German legal framework.
What is treated in the main body of the work?
The main body covers the historical status quo of institutional activism, the theoretical models explaining investor behavior, an analysis of the German corporate governance system, and an empirical assessment of the outcomes of activism.
Which keywords best characterize this work?
The work is best defined by terms such as Shareholder Activism, Institutional Investors, Corporate Governance, Corporate Management, and Principal-Agent Theory.
How do institutional investors in Germany differ from those in Anglo-Saxon countries?
Unlike Anglo-Saxon markets, Germany has historically been characterized by concentrated ownership (the "German Inc." structure), significant influence of banks through proxy voting, and a two-tiered board model, which restricts the independence of directors compared to international standards.
What is the "Wall Street Walk" and why is it relevant?
The "Wall Street Walk" refers to the rule that an unsatisfied investor should simply sell their shares rather than engage in activism; the thesis argues this is often impractical in Germany due to the illiquidity and concentrated ownership of the capital market.
What role does the German Corporate Governance Code play in this analysis?
The Code serves as the mandatory framework for corporate monitoring; the thesis examines how institutional investors use it to push for greater independence, transparency, and accountability on supervisory boards.
- Quote paper
- Sebastian Sturm (Author), 2008, The Influence of Institutional Investors on Corporate Management and Corporate Governance in Germany , Munich, GRIN Verlag, https://www.grin.com/document/125705
