Factors that affect stakeholder relationships and corporate governance are classified as market factors, which originate from capital markets, and non-market factors, which do not.
Market factors include shareholder engagement, shareholder activism and competitive forces.
- Shareholder engagement: companies have realized it is useful to continuously engage shareholders year-round, and not just in annual general meetings. This can help companies fight out short-term activist investors, proxy battles, etc.
- Shareholder activism refers to strategies used by shareholders to compel a company and its management to act in a desired manner. Even though it may have social or political factors, the primary goal is to increase shareholder value. Shareholder activists engage in proxy battles, propose shareholder resolutions, create awareness, initiate shareholder derivative lawsuits—lawsuits against a company’s management or board of directors (which may be restricted in certain jurisdictions). Hedge funds have greater room to act as activist shareholders.
- Competitions and takeovers: when there is competition, management realizes that they must perform well or else lose their jobs. Similarly, when there is an active takeover market, management knows that shareholders may replace them with another group if they do not do well. Corporate takeovers can be executed via proxy contest (proxy fight) in which shareholders are persuaded to vote for directors of a new group of investors seeking controlling positions, or tender offer, in which shareholders sell their shares to the controlling group, or hostile takeover, in which a company attempts to acquire another company without approval of its management.
However, these market forces may have counterproductive effects too. For example, management may adopt anti-takeover measures, such as staggered board, because all of the directors may be replaced in a single election, shareholders rights plan (poison pill), in which a company entitles its shareholders to buy shares at a discount if a company is taken over. This increases the cost of takeover and reduces its likelihood.
Non-market factors include a company’s legal environment, the role of the media, and the corporate governance industry.
- Legal environment: countries with common law (UK, US) generally offer better protection to shareholders and creditors than the civil law countries. It is because in civil law jurisdictions, a judge cannot create a law but must follow a statute solely; while in common law countries, a court’s decision is based on both statues and/or judicial opinions. In the common law system, shareholders or creditors may appeal to judge against management actions. Regardless of the legal system, creditors generally have better success in enforcing their rights because their relationship is not as complex as those of shareholders.
- Media: media has enabled fast dissemination of information which has reduced the cost of monitoring management activities. Further, it has motivated politicians and regulators to promulgate and implement new laws and regulations. Social media has been particularly disruptive because it has enabled all stakeholders to voice their opinions.
- The corporate governance industry: as a result of increased focus on corporate governance, an industry has developed which includes companies that provide governance monitoring, governance ratings and proxy advice. Since this industry is concentrated, companies must pay attention to what they have to say.