Mini-Case Governance and Activist Investors Outside of the

United States

Governance in Japan, Germany, and China has been changing as “western” governance systems

have increasingly been adopted. Traditionally, boards of directors in these nations have largely

been composed of insider manager directors. In 2015, Japan adopted a new governance code that

strongly emphasized the importance of firms to elect many more independent outside directors.

Activist shareholders and a strong market for corporate control have traditionally been absent in

Japan. More recently, shareholders have been more active and the most successful ones have

been labelled “engagement” funds. The change is signaled, for example, by the Japanese

Government Pension Investment Fund choosing an activist investor, the Taiyo Pacific Partners

LP—a U.S. based engagement fund—to manage some of its $1 trillion in assets. Furthermore,

the Japanese Financial Services Agency has introduced a “stewardship code” that calls on

investors to “press for greater returns.” As such, the Japanese environment is becoming more

oriented toward “shareholder rights,” although the approach comparatively is not as “activist” as

found elsewhere in the world.

Besides a new brand of activism in Japan, activism is spreading around the globe including

Germany. Again, a revised governance code pushed for more shareholder-friendly governance

arrangements, including an emphasis on outside directors and stronger emphasis on executive

long-term incentive compensation. With stronger emphasis on shareholders’ rights, activist funds

pursued more activity. Cevian Capital, an activist fund, is involved in ownership with

ThyssenKrupp and Bilfinger. Likewise, Elliott Management, another activist fund, is involved

with Celesio and Kabel Deutschland. Although management teams are quite suspicious of

activists in Germany and other continental European countries, “Germany is an area where

activists may look because of its protections for minority investors in takeover deals.” However,

research shows that activist investors have less influence on top management teams because of

restrictive governance regulation. For example, one study found that activist investors’

involvement did not lead to increased CEO turnover.

Although some activism has taken place in mainland China, firms in Hong Kong have been

targeted more by activist funds. Hong Kong-listed companies have been loosening rules for

foreign ownership and, therefore, companies have been paying more attention to what investors

think in regard to governance and transparency. In mainland China, however, often shares are

mostly owned by parent business group firms as well as the government or, because they are

often younger, they are still owned by the firm’s founders. As such, there is less potential

influence for foreign investors on company decisions. However, the Shanghai-Hong Kong Stock

Connect program has accelerated opportunities for activists on the mainland. Through the

Connect program, foreign financial institutions can have direct access to mainland China’s

capital markets. This means that foreign ownership will have more activist influence because of

shareholder voting rights in local mainland China-listed firms. Also, many home-grown Chinese

activist funds thrived due to their recent investments in the technology sector with the success of

Alibaba, Tencent, and many other high technology firms.



But how do owners from emerging market countries and countries with significant government

ownership influence the firms they invest in overseas? Interestingly, sovereign wealth funds,

many from emerging economies, are playing a dominant role by investing in developed

economies as well as other emerging economies. In their own way, they are playing an activist

role. For example, since the global financial crisis, many German firms have sought investment

from sovereign wealth firms from Gulf States in the Mideast. In particular, many German major

automobile firms have recruited Gulf Cooperation Council (GCC) sovereign wealth fund

investments during the stresses of financial restructuring spurred by the financial crisis. These

sovereign wealth funds are long-term investors and reduce the possibility of a hostile takeover,

which has become a more prominent feature in the German corporate governance landscape.

Sovereign wealth funds are also taking active roles in climate change. For instance, the

Norwegian sovereign wealth fund is divesting its assets in coal and other fossil fuels. Its strategy

is to focus its wealth to have an influence on salient sustainability issues, such as climate change.

Another example is the acquisition activity of Brazilian multinationals, which have been

supported by its sovereign wealth fund, the Brazilian Development Bank (BNDES). BNDES has

been “involved in several large-scale operations and helped orchestrate mergers and acquisitions

to build large ‘national champions’ in several industries.” For example, “BNDES helped rescue

Brazilian meatpacker JBS-Friboi, which aggressively expanded internationally by acquiring

large U.S. producers Swift and Pilgrim’s Pride, among others. In summary, western governance

devices and shareholder activism have been spreading globally, and owners in emerging

economies are participating in the market for corporate control and in restructuring investments,

especially sovereign wealth funds that also exercise influence in developed as well as developing

countries. These funds often focus to support government strategies, such as in China’s energy

sector, where the Chinese government is seeking to acquire more energy assets and natural

resources to support its economy. Sometimes these sovereign funds also support government

positions, such as Norway, which is using assets to emphasize sustainability, an important social

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