B. U.K.: Formidable Institutional Investors and Unfading
institutional investors had grown wildly – the average shareholding of institutional investors were rocketing from 1950 untill the early 2000s. 330
Despite the fact that the institutional investors were the mainstream in the U.K. capital market, those stockholders were famous for passive and indifferent to the management and development of the Company.331 They never interfere with the corporate issues, and once the performance of the company was not good, they “vote with their feet”. The U.K. government always had the intention to encourage institutional investors to take part in corporate governance, but they refused to do so because of the “free rider” problem.332 In fact, in order to maintain sustainable growth, most institutional investors held only a very small portion of shares of each company they invested – the overall performance of the portfolios were the fund managers’ primary concern, not each individual companies’ income status. Moreover, the cost of cooperation was so huge that, only in extreme situations would the shareholders united together to overturn the incumbent management. Rebellions of the institutional investor shareholders were very rare in the U.K. history.333
This does not mean that the hands of the institutional investors were completely tight in front of the board and managers of the company. To ensure their supremacy in the companies, the institutional investors exert every influences they have on legislations directly. In other words, they strongly preferred the laws at their favor to unnecessary participation in corporate governance. The preemptive rights, the ban on non-voting shares, the
330 See Dong, Min, and Aydin Ozkan. "Institutional investors and director pay: An empirical study of U.K. companies." Journal of Multinational Financial Management 18.1 (2008): 16-29. See also Khan, Tehmina. "Company dividends and ownership structure: Evidence from U.K. panel data." The Economic Journal 116.510 (2006).
331 See Goergen, Marc, and Luc Renneboog. "Strong managers and passive institutional investors in the U.K.." Available at SSRN 137068 (1998).
332 Id.
333 Id.
prohibition of taking takeover defenses without the approval from the shareholders, the approval rights of major corporate issues and the limitations on board structures and directors remunerations were all optimal rules for the institutional investors in the U.K. In conclusion, the institutional investor shareholders put their energy on things that they were good at – lobbying and persuasion, and avoided being forced to take part in things they were not familiar with. Although the free rider problem still exited in lobbying, but it was much more efficient and cost saving than having to involve deeply in corporate governance. Moreover, frequently withdrawing investment from companies with poor performance and reinvesting the money into potentially better ones were extremely costly, too; cultivating a shareholder-oriented law was the most convenient solution that could once for all let the investors rest easy. After all, the agency cost was the source of the problems.
Over the past decades, the institutional investors actively participated in the formation of the self-regulatory laws, and the labor unions, directors associations were excluded out of this process.334 By effectively lobbying the politicians and legislators, the glorious tradition of self-discipline was retained almost integrally. For example, in the 1950s, the institutional investors, industry elites, associations and unions were united together by the Bank of England, and they managed to adopt a self-discipline rule - the Notes on Amalgamation of British Businesses just before the official revision of the Companies Act. 335 The institutional investors even managed to retain the independence and authority of the City Code after Britain joined the E.U. The
“political proximity” between the Bank of England and the British government offered convenience for the institutional investors, fund controllers and financers’ demands and appeals to be noticed by the prime minister and his cabinet. After all, the forefathers of
334 See Cheffins, Brian R. "Does law matter? The separation of ownership and control in the United Kingdom." The Journal of Legal Studies 30.2 (2001): 459-484.
335 Armour, John, and David A. Skeel Jr. "Who writes the rules for hostile takeovers, and why-the peculiar divergence of US and U.K. takeover regulation." Geo. LJ 95 (2006): 1760-1770.
these true owners of the listed companies originally all lived in a square mile London city and they shared the same anxiety when modern enterprises had to separate ownership and control for economics of scale.336
When Charles Clore successfully took control of the Shoe Retailer J. Sears, the industry was shocked, referring Charles Clore to as an “asset striper”.
Nevertheless, the shareholders actually benefited a lot from this takeover. In the takeover disputes between Harold Samuel and the Savoy Hotel Group, shareholders were outraged not because of Harold Samuel's “hostility”, but because of the board's ultra vires, which was the same situation in the takeover battles of the British Aluminum. The Bank of England conveniently took advantage of these momentums, and formed a draft committee for the Notes on Amalgamation of British Businesses; the Institute of Directors and Association of British Chambers of Commerce were not invited at all. In 1968, when the Bank of England invited the elites and representatives to draft the City Code, this time, they cannot exclude the Confederation of British Industry, who represented the interests of the management of the large corporations. 337 However, the doctrine of “Active shareholders, passive directors” of the previous Queensberry Rule was so deeply engrained that it was impossible for anyone to shake its status. 338
In summary, a shareholder-supreme self-regulatory takeover law was formed as a result of: 1. mighty institutional investors constantly lobbying the legislators; 2. Bank of England’s proximity with the British Government; and 3.
weak labor unions and directors associations being unable to change the distaste for ultra vires behaviors and etc. Hence, the self-regulatory tradition first
336 See Jenkins, Rhys, and Nations Unies. "Corporate codes of conduct: Self-regulation in a global economy." (2001).
337 Armour, John, and David A. Skeel Jr. "Who writes the rules for hostile takeovers, and why-the peculiar divergence of US and U.K. takeover regulation." Geo. LJ 95 (2006): 1775
338 See Deakin, Simon, et al. Implicit contracts, takeovers and corporate governance: in the shadow of the City Code. University of Cambridge, 2002.
became a fashion and ultimately became a consensus foundation for the hostile takeover law in the U.K.