This blog was written by Bobby Reddy, University Lecturer in Corporate Law at University of Cambridge and fellow of Churchill College, Cambridge.
Corporate governance initiatives have historically bemoaned the lack of institutional shareholder activism in UK listed companies, and have focused on promoting institutional shareholders as effective stewards of managerial monitoring. However, the rise of activist US hedge funds has once again come into stark focus in Europe with the news that the French media company, Vivendi, has threatened legal action against the US hedge fund P. Schoenfeld Asset Management LP (“PSAM”) in relation to its attempts to garner support from other shareholders to, amongst other things, force Vivendi to pay out €9bn in dividends this year<1>. Traditionally, hedge fund activism in Europe has been less prevalent than in the US, partly due to cultural distinctions meaning that European boards are more resilient to noisy activism, and also due to the fact that major institutional investors are often resistant to acting in line with hedge funds that pursue an excessively short term agenda<2>. Although there is no suggestion that PSAM is acting on the basis of solely short-term considerations<3>, from a general perspective, it will be fascinating to see whether Vivendi’s major institutional investors take a more activist approach in what is becoming a very public battle. France has often been ahead of the game in instituting policies designed to curb short-termism among investors in public companies, and the European Union has been exploring the feasibility of similar mechanisms being rolled-out on an EU-wide basis. France, for example, has established automatic increases in voting rights for longer-term shareholders, unless the relevant company has specifically opted-out from the rule (known euphemistically as the “Florange law”). In fact, another minority shareholder in Vivendi, PhiTrust, is lobbying for Vivendi to exempt itself from such rules. Today, in an open letter to the board of Vivendi, PSAM also supported PhiTrust’s proposition. The Futures Project by Tomorrow’s Company will be an innovative and thought provoking discussion on the role of business in society, including an examination of the potential consequences of various options to foster a long-term approach to corporate governance. For instance, is the French approach of enhanced voting rights for long-term shareholders conducive towards long-term benefits for companies? On the one hand, by granting long-standing shareholders a disproportionately greater influence over voting, the incentive for management to sacrifice long-term growth for short-term profits is necessarily blunted. However, such rights can entrench management and disenfranchise minority shareholders in situations where a dominant enduring shareholder or shareholders hold sway (particularly in France, where there is a relatively large number of government and family owned companies). Indeed, PSAM and PhiTrust have expressed concerns that such rights would give Vincent Bolloré, the chairman of Vivendi and also a long-term shareholder, de facto control of the company. Furthermore, are such voting structures actually required? An individual hedge fund rarely holds more than a small proportion of the shares in a listed company – therefore, in order to drive influence in corporate governance, a hedge fund would need to secure the cooperation of other institutional investors, many of whom, particularly in Europe, support a long-term outlook. At Vivendi, PSAM holds only a 0.8% stake in the company’s share capital. That all said, if, as has been encouraged by various corporate governance committees, major institutional shareholders become more active in voting matters, and begin to collaborate with activist hedge funds on a regular basis, does the Florange law become more attractive; or are companies better served by the democratic concept of “one share, one vote”? We await with interest the response and actions of the other institutional shareholders of Vivendi <1> FT Weekend Saturday 28 March / Sunday 29 March 2015 - Companies & Markets p.13: “Vivendi warns activist fund” <2> Hedge Fund Activism in Japan – The Limits of Shareholder Primacy by John Buchanan, Dominic Heesang Chai and Simon Deakin <3> PSAM has been a shareholder of Vivendi since July 2012