October 19, 2018 • By Laurie McLaughlin
Shareholders have unprecedented access to information about the companies in which they have invested. Websites, such as SeekingAlpha.com and others, provide public information, and of course, many firms provide free online access to their annual reports, transcripts of conference calls, SEC filings and other investor materials. Plenty of information is also available from a wide selection of third-party providers; for example, EarningsCast.com offers digital recordings of earnings conference calls.
Information Systems Professor Vidyanand Choudhary of UCI’s Paul Merage School of Business, and UCI alumnus Joseph Vithayathil, assistant professor of computer management and information systems at Southern Illinois University Edwardsville, examined the potential for online information and electronic voting to improve shareholder surplus by facilitating an owner-governance structure versus the common delegated-governance by companies’ traditional boards of directors. They issued the results of this research in their study, “Governance of Corporate Takeovers: Time for Say-on-Takeovers?” published in the March 2018 MIS Quarterly.
With particular focus on unsolicited takeover actions, the study proposes “a new takeover governance model where shareholders directly control the takeover decision, bypassing the board.”
This would eliminate the agency problems that may arise from a “misalignment of interest between shareholders … and the board that is their agent,” state the authors. “While this proposed model eliminates the agency problem, it has the disadvantage that diffuse shareholders cannot negotiate with the acquirer and have less information compared to the board. However, the internet information age makes shareholders increasingly well informed and therefore, mitigates the informational disadvantage.”
Under the traditional delegated-governance structure, potential agency issues emerge with a takeover when board members weigh the tradeoff between reputational benefits of a successful takeover and the loss of incumbency. Boards may implicitly take into account the fact that a takeover will bring their directorship at the target firm to an end. Entrenchment through anti-takeover provisions reduces the likelihood of a successful takeover and thus benefits board members. Incumbent boards are widely known to protect themselves through poison pills and the use of staggered boards. Some have argued that such entrenchment helps them drive a hard bargain with an acquirer. The researchers believe that such entrenchment levels are often greater than what shareholders would prefer. Acquirers may not make takeover offers when they know that the board is entrenched. The resulting reduction in corporate takeovers is detrimental to shareholders and more broadly, it hurts the economy by allowing mediocre management to perpetuate itself.
Board-accepted takeover offers are routinely approved by shareholders, and when takeovers are not accepted, the shareholders do not have occasion to voice their preference. Boards also have both public and private information to inform their decisions (as does the acquirer), and shareholders get their information through publicly available information – the turning point was about the year 2000 for timely access to online, digital information on public companies – which has significantly increased in quality, quantity, variety and thoroughness in recent years.
The digital age also provides support for the practicality of owner-governance because the increased quality and accessibility of cost-effective electronic voting platforms have made proxy voting easier via the internet.
“Our proposed model of owner-governance is consistent with the trend toward greater shareholder control,” say the authors.
Choudhary and Vithayathil suggest a takeaway for shareholders is that “boards can survey their shareholders periodically and get hard data on the premium demanded by shareholders in order to sell. Alternatively, or in conjunction, third parties can survey shareholders, collect this information, and publish it.” As for acquirers, under the proposed takeover governance model, “they will know that any takeover offer made will be heard and voted on directly by the target firm shareholders. This is likely to encourage competitive offers, which will benefit the target firm shareholders.”
The authors suggest that if a delegated-governance structure remains in place, the board should be made aware of shareholders’ preferred premium at which each will sell. But, they underscore, actual “owner-governance gives control to shareholders, and there is a large body of evidence showing that securities providing greater control to the security holder command higher prices than securities with less control. Hence, it is conceivable that shares with owner-governance privileges on takeovers will be valued more highly in the securities markets.”