In their paper, Shareholder Voting and Corporate Governance Around the World, Peter Iliev, Karl Lins, Darius Miller and Lukas Roth come to the conclusion that activist U.S. institutional investors tend to vote against the recommendations of "entrenched" "insider" management of foreign firms.
At first blush, one might think these pro-democratic reforms in the style of corporate governance of foreign firms cannot be but a good thing.
But that blush arises from a misconception about how many foreign firms work.
The firms of many developed countries -- the U.S. and U.K. excluded -- do not operate as publicly traded companies. They have a few major (and often interrelated) family and corporate shareholders. They have relationships with house banks as business partners. They retain executive "insiders" that rise within the corporate ranks, hired for their firm- and industry- specific technical and operational knowlede. I.e., they do not arise from the ranks of "corporate management" professionals found in America.
Benefits of this business model include the embrace of long-term growth strategies and a certain operational "expertise." Standing debtor relationships with banks encourages those banks to invest for the long term and to monitor the activity of management (much in the same way shareholders are expected to in the U.S.). Long-term equity relationships with shareholders elicit the same benefits. Meanwhile, both banks and long-term shareholders have an interest in preserving the economic success of the surrounding community -- if the community falls apart, so do their investments.
It amounts to a pretty stable model for country-wide economic growth.
Drawbacks include, of course, the risk of self-dealing and channeling. See, e.g., Parmalat. And, of course, the inability for U.S. financiers to secure a piece of the profit for themselves. This is because of, in part, transparency problems - the banks and major shareholders can monitor corporate peformance without the benefit of 10-Ks and 10-Qs; the corporate books are always open for their inspection. Those books are, of course, closed to outsiders.
But what happens to this balance when you throw U.S. shareholders in the mix, giving them a voice in governance?*
Hopefully, the U.S. shareholders will look out for foreign companys' longevity and sustainability. I'd bet that certain activist investors might, especially the public-pension-fund kind. But, unfortunately, many U.S. investors are short-termers whose objectives for corporate growth may... diverge from those dasterdly foreign "insiders." Meaning: layoffs, exportation of jobs, and other short-term fixes that temporarily increase stock prices. Not to mention that U.S. investors, even the "nice" kind, probably don't have German workers' best intersts at heart, no matter how well meaning they are. Their job is to, after all, make money for pension funds.
Over the past decade or two, we have seen the growth of capital markets in Continental Europe and in Japan. One can only hope that these countries will, like the U.K., counter the increased short-term investor influence in these companies with robust social safety nets.
* Some argue that these countries opened up their markets to foreign investors as a reaction to economic slumps in the 1990s. Others argue that they wanted their own stock markets so they could get a piece of the High Finance Pie that was being scarfted down by the likes of Goldman, Lehman, etc. A topic to be addressed another time!
