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| Does Concerted Action by Minority Shareholders Improve the Corporate Governance? |
| ZHENG Zhigang, LI Miao, YONG Hongyan, HUANG Jicheng
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School of Finance, Renmin University of China;
School of Accounting, Capital University of Economics and Business |
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Abstract Two or more natural persons, legal persons or other organizations take concerted action when they express the same intention when exercising their voting rights through agreements, cooperation and related-party relations. Concerted action is thus the centralized allocation of voting rights. According to listed companies' annual reports, at least 773 listed companies experienced some form of concerted action by minority shareholders from 2008 to 2018. This implies that concerted action has become a means by which minority shareholders can participate in corporate governance and safeguard their own equity interests in the era of equity decentralization.
This study empirically investigates how minority shareholders actively participate in corporate governance by exhibiting concerted action under existing laws and articles of association. The study first examines the ultimate economic consequences of concerted action by minority shareholders. The results show that concerted action helps minority shareholders concentrate their voting rights, check and balance the activities of major shareholders and managers, and ultimately improve corporate performance. The mechanistic analysis shows that concerted action improves performance in two distinct ways. First, concerted action strengthens the influence of minority shareholders in general meetings of shareholders and on boards of directors. This is reflected in the improved effectiveness of minority shareholders' proposals and influence on the appointment of directors when these shareholders act in a concerted fashion, compared to when they do not. Second, concerted action strengthens minority shareholders' role as a check and balance on controlling shareholders and managers. This is reflected in concerted action by minority shareholders leading to a reduction in “tunnel excavation” behavior by controlling shareholders and an increase in CEO turnover, relative to when there is no concerted action by minority shareholders.
Based on a study of the economic consequences and mechanisms of concerted action, this study examines the heterogeneity of its effects in improving corporate performance. It is found that the positive effect of concerted action on performance is affected by the shareholding ratio of persons acting in concert, the motivation for the concerted action, the company voting system and the type of persons acting in concert. Specifically, the ability of concerted action by minority shareholders to improve corporate performance is strengthened if the following three conditions exist: the total shareholding ratio of persons acting in concert is moderate, participating in governance rather than competing for control is what motivates the persons acting in concert, and companies adopt a cumulative voting system.
This study provides empirical evidence on the effect of concerted action on corporate governance, including the mechanism and heterogeneity of concerted action. In contrast to previous literature focusing on minority shareholders' online voting, this study examines how minority shareholders protect their own rights by concerted action, thereby extending our understanding of the protection of investors' rights and interests. Additionally, whereas previous studies mostly focus on the concerted action of entrepreneurial teams, this study is conducted from the perspective of minority shareholders. The results show that concerted action acts as a check and balance on the actions of controlling shareholders and managers, and thereby improve company performance. Therefore, this study provides theoretical and practical insights that contribute to a comprehensive understanding of the governance role of persons acting in concert.
This study has specific policy implications for the protection of the interests of minority shareholders in corporate governance practice. First, minority shareholders can use concerted action as a tool to check and balance the actions of controlling shareholders and thus safeguard their own interests. Second, regulators should encourage investors to make innovative use of existing corporate governance mechanisms, such as voting rights, to actively participate in the governance of listed companies. Third, listed companies should adopt systems that are conducive to the exercise of rights by minority shareholders, such as cumulative voting, to give full play to the positive effect of such shareholders' concerted action. Finally, investors should identify the motivations of shareholders' concerted action, as this may prevent such action being taken too frequently and thus obscuring control rights competition and governance inefficiency.
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Received: 18 February 2021
Published: 01 June 2022
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