Unlocking shareholder value: How finance professors enrich corporate governance, maximise wealth

I recently attended a conference “The AsianFA Annual Conference” at the University of Ho Chi Ming City (UEH University, Vietnam). The key note speech was delivered by Professor Roni Michaely, an Israeli academic specializing in Economics and Finance. Michaely is Professor of Finance at the University of Hong Kong, School of Business and Economics. Professor Michaely’s research has also received many awards and honours. Michaely published numerous works (several of which received best-paper awards) in high ranked academic journals. His research has been also frequently featured in the Wall Street Journal, the New York Times, the Economist, Investor’s Business Daily, the San Francisco Chronicle, BusinessWeek, Forbes, Barrons, Money, Reuters, Worth, among others.

Prof Michaely presented a paper utilizing a unique dataset comprising nearly one million voting rationales provided by investors. The research findings shed light on the motivations behind institutional investors’ voting decisions and their impact on corporate governance practices.

The first finding reveals that institutional investors are more likely to provide rationales when voting against management, indicating that they disclose their concerns over management practices.

The most significant reasons include board independence, board diversity, tenure, firm governance, and busyness. These factors play a crucial role in institutional investors’ decision-making process when opposing directors.

Furthermore, the research highlights an increasing trend among institutional investors to vote against directors who have failed to address environmental and social issues adequately. This indicates a growing emphasis on holding directors accountable for their actions and the impact of their decisions on broader societal concerns.

The study finds that institutional investors’ concerns are well-founded, as companies with low board gender diversity receive more rationales regarding board diversity. Similar patterns are observed for companies with long director tenure and directors with busy schedules.

Finally, the research demonstrates that companies that experience high dissent voting related to board diversity, tenure, and busyness tend to improve their board composition in the subsequent year. This suggests that voting rationales containing investors’ reasons for opposing directors serve as valuable information for firms, enabling them to address governance shortcomings and promote better practices within their portfolio companies.

In summary, this particular study shows that institutional investors are more likely to provide rationales when voting against management, indicating their concerns over management practices. Key factors driving opposition to directors include board independence, diversity, tenure, firm governance, and busyness. Institutional investors are increasingly voting against directors to hold them accountable for addressing environmental and social issues. Companies with low board diversity, long director tenure, and busy directors receive more rationales related to these factors. Moreover, companies with high dissent voting on board diversity, tenure, and busyness tend to improve their board composition in the following year. These findings suggest that voting rationales contain valuable information for firms and serve as a low-cost strategy to promote good governance practices in portfolio companies.

Another researcher revealed that to maintain diversity in corporate boards they hire finance professors from universities. That strategy serves many purposes;

Financial Expertise:

Finance professors possess specialized knowledge and expertise in the field of finance. They bring a deep understanding of financial concepts, markets, and instruments to the boardroom. Their expertise can enhance the board’s ability to make informed decisions regarding financial strategies, investments, risk management, and capital allocation.

Research and Data Analysis:

Finance professors are well-versed in conducting rigorous research and analyzing complex data. They can provide valuable insights based on empirical evidence and help the board in assessing the financial implications of various strategic choices. Their analytical skills enable them to identify trends, risks, and opportunities, guiding the board’s decision-making process.

Teaching and Communication Skills: As educators, finance professors possess strong teaching and communication skills. They can effectively articulate financial concepts, principles, and strategies to fellow board members who may not have a finance background. Their ability to simplify complex financial information can foster better understanding and facilitate more meaningful discussions among board members.

Objective and Independent Thinking: Finance professors often maintain a degree of independence and objectivity in their research and analysis. This mindset can be valuable in the boardroom, where unbiased thinking is crucial. They can challenge prevailing assumptions, ask critical questions, and provide alternative perspectives, contributing to more robust board deliberations and decision-making.

Academic Network and Industry Insights: Finance professors typically maintain extensive networks within academia and the industry. They have access to the latest research, trends, and best practices in finance. This network can provide valuable insights and connections that can benefit the board in staying updated on emerging financial issues, regulatory changes, and industry developments.

Institutional Knowledge and Governance Expertise:

Finance professors often have a deep understanding of corporate governance practices and frameworks. They can bring this knowledge to the board, helping to enhance governance processes and ensure compliance with regulatory requirements.

Their familiarity with governance principles can contribute to improving board effectiveness, transparency, and accountability.

Bridge between Academia and Practice:

Hiring finance professors to cooperate boards creates a bridge between academia and the corporate world. They can facilitate the transfer of knowledge, research findings, and best practices from the academic realm to practical applications in the boardroom. This integration can foster innovation, informed decision-making, and the adoption of evidence-based strategies.

In summary, hiring finance professors from universities to cooperate boards offers the advantages of financial expertise, research and data analysis skills, teaching and communication abilities, independent thinking, academic and industry networks, governance expertise, and bridging the gap between academia and practice.

These benefits can strengthen board performance, contribute to sound financial decision-making, and enhance overall governance practices within organizations.

Another paper discussed on The growing demand for (environmental. Social and governance) ESG-related corporate information spurs the adoption of mandatory ESG disclosure regulations worldwide. We document that firms respond to these mandates by strategically adjusting productive assets through acquisitions and divestitures to enhance their ESG profiles. In particular, firms acquire more assets with strong ESG performance but divest those with weak ESG records, particularly in the wake of negative ESG incidents. Moreover, firms facing ESG disclosure mandates pay higher premiums for acquiring good-ESG assets and accept lower premiums for divesting poor-ESG assets. Acquisitions are more effective than divestitures for improving ESG performance and enhancing firm value.

Another paper points out that Researchers often study the relationship between CSR and firm value and the linkage between ownership and firm value separately. Only a few papers in the existing literature combine both the study branches, that is answering how ownership can affect the CSR-firm value relation. In this paper, we intend to fill this gap by investigating how state ownership can affect the mentioned relationship. Using a sample of Vietnamese listed firms, we figure out an interesting feature in the Vietnamese financial market. When the state is the sole large shareholder in a firm, it negatively affects the CSR-firm value relation. However, when there are foreign institutions concurrently appearing as other large shareholders, the state ownership then positively affects the mentioned relation. We interpret the phenomenon by using the overinvestment hypothesis. That is due to the agency problem, when the state presents as the only large shareholder, it uses the firm’s financial resources to overinvest in CSR activities to improve the state’s reputation in the public eye. However, doing that comes at the cost of other shareholders, specifically a decrease in firm value. Nevertheless, when foreign institutions come in, they can help monitor and alleviate the issue, therefore, the firm value increases. In this case, foreign institutional investors might play an effective role in mitigating the mentioned issue.

Another study from Korea argues that, the effects of corporate social responsibility (CSR) on firms’ stock performance were examined in the context of a corporate scandal closely tied to environmental and social (ES) issues, namely the humidifier disinfectant scandal in Korea. The researchers found that firms with higher ES ratings, particularly those with stronger social ratings, experienced significantly better stock performance during the product safety scandal. The findings highlight the influential role of CSR in shaping a company’s stock performance, especially when investors demonstrate significant attention to ES issues. This suggests that firms’ investments in CSR can effectively mitigate nonfinancial risks and contribute to their overall financial performance.

(The author, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for.)