Ch apte r 10. Mini -Case
Governance and Activist Investors Outside of the United States
Gove rnanc e in Japan , German y, an d China ha s bee n chang ing as “wes tern” gove rnanc e
sys tems hav e inc reas ing ly bee n adop ted . Trad itiona lly, boa rds of direc tors in thes e na tion s hav e
large ly bee n co mpose d of ins ide r manage r direc tors. In 2015 , Japa n adop ted a ne w gove rnanc e
cod e tha t strong ly emphas ize d the impo rtanc e of firms to elec t man y more independen t ou tside
direc tors. Ac tivist sha reho lde rs an d a stron g marke t for co rpo rate con trol hav e trad itiona lly bee n
absen t in Japan . More recen tly, sha reho lde rs hav e bee n more ac tive an d the mos t success ful
one s hav e bee n labe lled “engage men t” funds . Th e chang e is signa led , for exa mple, by the
Japanes e Gove rnmen t Pens ion Inves tmen t Fun d choos ing an ac tivist inves tor, the Taiyo Pac ific
Pa rtne rs LP — a U.S. base d engage men t fun d — to manag e so me of its $1 trilli on in asse ts.
Fu rthe rmore, the Japanes e Financ ial Se rvice s Agenc y ha s introduce d a “stewardsh ip code ” tha t
ca lls on inves tors to “pres s for grea ter returns .” As such , the Japanes e env iron men t is beco ming
more orien ted toward “sha reho lde r righ ts,” althoug h the app roac h co mpa rative ly is no t as
“ac tivist” as foun d else whe re in the world.
Bes ide s a ne w bran d of ac tivism in Japan , ac tivism is sp read ing aroun d the glob e inc lud ing
German y. Aga in, a rev ise d gove rnanc e cod e pushe d for more sha reho lde r-friend ly gove rnanc e
arrange men ts, inc lud ing an emphas is on ou tside direc tors an d stronge r emphas is on execu tive
long -term incen tive co mpensa tion . W ith stronge r emphas is on sha reho lde rs’ righ ts, ac tivist
fund s pu rsue d more ac tivity. Cev ian Cap ital, an ac tivist fund , is invo lve d in owne rsh ip with
ThyssenK rup p an d Bilfi nge r. Like wise , Elliott Manage men t, ano the r ac tivist fund , is invo lve d with
Celes io an d Kabe l Deu tsch land . Althoug h manage men t tea ms are qu ite susp iciou s of ac tivists in
German y an d othe r con tinen tal Eu ropea n coun tries , “German y is an area whe re ac tivists may
loo k becaus e of its protec tion s for mino rity inves tors in takeove r dea ls.” Howeve r, resea rch
sho ws tha t ac tivist inves tors hav e les s influenc e on top manage men t tea ms becaus e of
res trictive gove rnanc e regu lation . Fo r exa mple, on e stud y foun d tha t ac tivist inves tors’
invo lve men t did no t lea d to inc rease d CEO turnove r.
Althoug h som e ac tivism ha s take n plac e in mainlan d China , firms in Hon g Kon g hav e bee n
targe ted more by ac tivist funds . Hon g Kong -listed co mpan ies hav e bee n loosen ing rules for
foreign owne rsh ip and , the refore, co mpan ies hav e bee n pay ing more atten tion to wha t inves tors
think in rega rd to gove rnanc e an d transpa renc y. In mainlan d China , ho weve r, often sha res are
mos tly owne d by pa ren t bus ines s grou p firms as well as the gove rnmen t or, becaus e the y are
often younge r, the y are still owne d by the firm’s founde rs. As such , the re is les s po ten tial influenc e for foreign inves tors on co mpan y dec isions . Howeve r, the Shangha i-Hon g Kon g Stoc k
Connec t prog ram ha s acce lerated oppo rtun ities for ac tivists on the mainland . Th roug h the
Connec t prog ram, foreign financ ial ins titution s ca n hav e direc t acces s to mainlan d China ’s
cap ital marke ts. Th is mean s tha t foreign owne rsh ip will hav e more ac tivist influenc e becaus e of
sha reho lde r vo ting righ ts in loca l mainlan d China -listed firms. Also , man y ho me-grown Chines e
ac tivist fund s thrive d du e to the ir recen t inves tmen ts in the techno log y sec tor with the succes s of
Alibaba , Tencen t, an d man y othe r high techno log y firms.
Bu t ho w do owne rs from emerging marke t coun tries an d coun tries with sign ifican t gove rnmen t
owne rsh ip influenc e the firms the y inves t in ove rseas ? Interes ting ly, sove reign wea lth funds ,
man y from emerging econo mies , are play ing a do minan t role by inves ting in deve lope d
econo mies as well as othe r emerging econo mies . In the ir own way, the y are play ing an ac tivist
role. Fo r exa mple, sinc e the globa l financ ial crisis, man y German firms hav e sough t inves tmen t
from sove reign wea lth firms from Gulf States in the Mideas t. In pa rticu lar, man y German major
au tomob ile firms hav e rec ruited Gulf Coope ration Counc il (GCC ) sove reign wea lth fun d
inves tmen ts du ring the stresse s of financ ial res truc turing spu rred by the financ ial crisis. Thes e
sove reign wea lth fund s are long -term inves tors an d reduc e the poss ibilit y of a hos tile takeove r,
which ha s beco me a more prominen t fea ture in the German co rpo rate gove rnanc e landscape .
Sove reign wea lth fund s are also tak ing ac tive roles in climate change . Fo r ins tance , the
Norweg ian sove reign wea lth fun d is dives ting its asse ts in coa l an d othe r foss il fue ls. Its strateg y
is to focu s its wea lth to hav e an influenc e on sa lien t sus tainab ilit y issues , suc h as climate
Ano the r exa mple is the acqu isition ac tivity of Braz ilian multina tiona ls, which hav e bee n
suppo rted by its sove reign wea lth fund , the Braz ilian Deve lop men t Ban k (BND ES ). BND ES ha s
bee n “invo lve d in seve ral large -sca le ope ration s an d he lpe d orches trate merge rs an d
acqu isition s to bu ild large ‘na tiona l cha mpions ’ in seve ral indus tries .” Fo r exa mple, “BND ES
he lpe d rescu e Braz ilian mea tpacke r JBS -Fribo i, which agg ress ive ly expande d interna tiona lly by
acqu iring large U.S. produce rs Swift an d Pilgrim’ s Pride , amon g othe rs. In su mm ary, wes tern
gove rnanc e dev ice s an d sha reho lde r ac tivism hav e bee n sp read ing globa lly, an d owne rs in
emerging econo mies are pa rticipa ting in the marke t for co rpo rate con trol an d in res truc turing
inves tmen ts, espec ially sove reign wea lth fund s tha t also exe rcise influenc e in deve lope d as well
as deve lop ing coun tries . Thes e fund s often focu s to suppo rt gove rnmen t strateg ies , suc h as in
China ’s ene rgy sec tor, whe re the Chines e gove rnmen t is seek ing to acqu ire more ene rgy asse ts
an d na tural resou rce s to suppo rt its econo my. So metimes thes e sove reign fund s also suppo rt
gove rnmen t pos itions , suc h as Norway, which is us ing asse ts to emphas ize sus tainab ilit y, an
impo rtan t soc ial an d po liti ca l move men t. Sou rces : M. Almad i & P. Laz ic, 2016 , CEO incen tive co mpensa tion an d ea rning s manage men t,
Manage men t Dec ision , 54 (10 ): 2447 –2461 ; J. Brauns tein, 2017 , Th e do mes tic drive rs of state
financ e ins titutions : Ev idenc e from sove reign wea lth funds , Rev iew of Interna tiona l Po liti ca l
Econo my, 24 (6): 980 –1003 ; L. Fletche r & E. Johann ings meier, 2017 , Hedg e fund s prospe r on
China tec h bu t bubb le fea rs emerge , W all Stree t Jou rna l, ww w.wsj.co m, Sep tembe r 12 ; N.
Hasega wa, H. Kim, & Y. Yasuda , 2017 , Th e adop tion of stoc k op tion plan s an d the ir effec ts on
firm pe rformanc e du ring Japan ’s pe riod of co rpo rate gove rnanc e reform, Jou rna l of the
Japanes e an d Interna tiona l Econo mies, 44 : 13 –25 ; T. Kaspe reit, K. Lopa tta, & D. Onnen , 2017 ,
Sha reho lde r Value Implica tion s of Complianc e with the German Corpo rate Gove rnanc e Code ,
Manage rial an d Dec ision Econo mics, 38 : 166 –177 ; K. Naga ta & P. Nguyen , 2017 , Ow ne rsh ip
struc ture an d disc losu re qua lity: Ev iden ce from manage men t forecas ts rev ision s in Japan ,
Jou rna l of Accoun ting an d Pub lic Po licy , 36 (6): 451 –467 ; O. Noreng , 2017 , Norway ’s
dive rsifica tion , W orld Oil, 238 (12 ): 23 ; M. Stanca ti & M. Fa rrell, 2017 , Saud i Sove reign W ea lth
Fun d se ts growth targe ts, W all Stree t Jou rna l, ww w.wsj.co m, Octobe r 26 ; X. Geng , T. Yosh ika wa,
& A. M. Colpan , 2016 , Leve rag ing foreign ins titutiona l log ic in the adop tion of stoc k op tion pa y
amon g Japanes e firms, Strateg ic Manage men t Jou rna l, 37 (7): 1472 –1492 ; B. Alhashe l, 2015 ,
Sove reign wea lth funds : A literature rev iew, Jou rna l of Econo mics an d Bus ines s, 78 : 1–13 ; K.
Narioka , 2015 , Ac tivist inves tors in Japa n find so me doo rs crack ing open , W all Stree t Jou rna l,
ww w.wsj.co m, Janua ry 29 ; S. G. Lazza rini, A. Musacch io, R. Bande ira-de -Mello, & R. Marcon , R.
2015 , W ha t do state-owne d deve lop men t bank s do ? Ev idenc e from BND ES , 2002 –09 W orld
Deve lop men t, 66 : 237 –253 ; A. Musacch io & S. G. Lazza rini, 2014 , Reinven ting State Cap italism:
Lev iatha n in Bus iness , Braz il an d Beyon d, Cambridge : Harva rd Unive rsity Press ; X. Sun , J. Li, Y.
W ang , & W . Clark, 2014 , China ’s sove reign wea lth fun d inves tmen ts in ove rsea s ene rgy : Th e
ene rgy secu rity pe rspec tive , Ene rgy Po licy , 65 : 654 –661 .
Cas e Discuss ion Ques tion s
1. W hy are man y coun tries adop ting “wes tern” gove rnanc e sys tems similar to thos e foun d in the
United States an d the United Kingdo m tha t are more sha reho lde r friend ly?
2. W ha t pa rticu lar gove rnanc e dev ice s are he lping or hinde ring goo d gove rnanc e in thes e
coun tries tha t are chang ing the ir gove rnanc e sys tems?
3. How do sove reign wea lth fund s affec t gove rnanc e of firms in ho me an d foreign coun tries ?
4. W ha t wou ld yo u reco mm en d to improv e the gove rnanc e sys tems in Japan , German y, an d
China , respec tive ly, give n the gove rnanc e dev ice s desc ribe d in Chap ter 10 ?