Giving shareholders more rights is good for a company to
That is not a political judgment. It appears to be an
investment truth, though discovered only recently - in a study that found that
the stock prices of companies that place the most restrictions on their
shareholders' rights have lagged behind those that had the fewest such
The restrictions take many forms. Particularly well known
is the poison-pill defense, which aims to immunize management from hostile
takeovers. Others include the staggered election of company directors - which
keeps shareholders from throwing out an entire board in any given year – and
requirements for supermajorities in voting. These changes make it difficult
for shareholders to exercise real influence or control.
But as many and varied as the restrictions can be, their
net impact on long-term performance has been negative, according to a new
study by three researchers - Paul Gompers, a professor of business
administration at Harvard Business School; Joy Ishii, a graduate student in
economics at Harvard; and Andrew Metrick, a finance professor at the Wharton
School of the University of Pennsylvania. The team studied 24 ways in which a
company may restrict shareholder rights and combined them into an overall
index. A low reading meant that a company imposed few restrictions.
Working with a database of companies representing 90
percent of the market, the team constructed 10 portfolios, according to those
companies' index values. The portfolios were reconstructed periodically. From
Sept. 1, 1990, to Dec. 31, 1999, the researchers found, the portfolio with
the lowest index values gained 9.3 percentage points a year more, on average,
than the one with the highest values. While the other eight did not always
adhere to the pattern, the performance difference between the extremes has
attempts to explain it away.
To put the researchers' findings in perspective, consider
that the performance difference is almost double the five-point margin of
victory that growth stocks had over value stocks during the same period - a
heyday for growth investing - according to the Standard & Poor's
But how could a difference of such magnitude have escaped
notice? For one thing, researchers couldn't have detected it until recently.
Widespread shareholder restrictions are relatively new; most companies did
not impose them until the mid- to late 1980's.
Furthermore, to the extent that shareholder restrictions
could have been studied, previous researchers tended to focus on the
immediate market impact. But over the short term, that impact is ambiguous.
For example, even though a poison-pill defense turns out to be a long-term
negative, the market may react to it positively over the short term because
it may signal that a hostile takeover attempt is imminent.
Why would companies that restrict shareholder rights be
such poor performers? The authors of the new study are careful to stress that
the jury is still out. Maybe the restrictions lead to a deterioration in a
company's culture - away from shareholder responsiveness and toward immunity
from competitive pressures - and eventually to poorer fundamentals and
inferior stock performance. Or maybe the restrictions on shareholder rights
are just symptoms of a deterioration caused by something else.
I find it safe to say, however, that investors should
begin to pay more attention to a company's culture. Assuming that
restrictions on shareholder rights are either a cause or a symptom of
cultural deterioration, an investor should be less inclined to buy, and more
inclined to sell, a company that chooses to impose them.
That also means that investors should consider a company
more favorably if it relaxes previously imposed restrictions. Companies that
imposed heavy restrictions were so beaten down by the market over the last
decade that changes in their corporate cultures could unleash enormous
Mark Hulbert is editor of The Hulbert Financial Digest, a
newsletter based in Annandale, Va. His column on investment strategies
appears every other week. E-mail: firstname.lastname@example.org