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Corporate Governance - Shareholder's duty of care.

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Introduction

Paper, Corporate Governance UvA 2003 (Prof. dr Arnoud Boot & Prof. mr Jaap Glasz). Shareholder's Duty of Care Martijn Brinkhuis Lodewijk Derkman Tobias van der Hoeven Sjoerd Arlman Preface It was concluded in the NBER's 1998 working paper "Corporate Ownership Around the World" that large corporations are widely held only in economies with good shareholder protection. In the U.S., among the largest firms there is only modest concentration of ownership, while amongst the largest firms in Germany, Italy and Japan a more significant concentration of ownership was found1. In the latter countries especially banks own large blocks of shares. The Netherlands is somewhere in between, banks do not hold large blocks of shares as they do in Germany, Italy and Japan, however shares are not as widely held as in the U.S2. In countries with (semi-) widely held shares, a shareholder with a relatively small stake (e.g. 10%) will not be a controlling shareholder per se, but may be a controlling shareholder de facto. Large shareholders are in principal able to appoint board members representing their interests. Furthermore, large shareholders can also exercise power by blocking ratification of unfavourable decisions, or possibly by initiating decisions3. In other words, when they are large enough, i.e. when there are no other 'large' shareholders in the corporation, the largest shareholder may in fact be 'controlling' the company4. ...read more.

Middle

less attractive to them and they are increasingly inclined actively to engage in internal control within the corporation14. Therefore, a way to overcome the problems mentioned earlier is active and continuous monitoring by a large shareholder15, who could be a wealthy investor or an institutional investor, such as a bank, a holding company or a pension fund. Advantages of this -insider- model are that the corporation holds a more stable shareholder base, that although the large shareholder does not control management, it does have the power to adjust managements' policy. Furthermore, it reduces the disparity of information and the 'free-rider' problem16. Duty of Care A potential difficulty with this approach is, who monitors the monitor and the risk of collusion between management (the agent) and the delegated monitor (large shareholder). If dispersed shareholders have no incentive to supervise management and take an active interest in the management of the corporation, why should fund managers have better incentives to oversee management? Even if they are required to vote at the annual shareholders meeting, why should they spend the resources to make informed decisions when the main beneficiaries of those decisions are their own principals, the dispersed investors in the fund?17 Furthermore, there are concerns about the potential for conflicts of interests of those who manage the investment (on behalf of their beneficiaries), both in terms of their relationship with the corporations they invest in and in terms of their internal reward schemes18. ...read more.

Conclusion

Because they have the power to affect the interest of minority shareholders, U.S. corporate law generally provides that large and/or controlling shareholders owe the corporation and its minority shareholders a fiduciary duty of loyalty whenever they exercise any aspect of their control. All shareholders, however, have the right to vote their shares in their best interest. Thus there is some tension between a controlling shareholder's exercise of voting rights, which can arguably be exercised in her own self-interest, and her exercise of "control" over the corporation. It is this exercise of control that gives rise to an obligation of fairness to other shareholders2627. The Dutch corporate law structure is quite different from the systems used in the United States and in Europe in general. Particularly the Dutch 'structural regime' is a real difference28. The 'structural regime' takes away the right of the shareholder to elect the board of directors, and which thus lessens the ability to influence corporate decisions29. Perhaps minority shareholders in the Netherlands are already sufficiently protected against 'unfair' behaviour by large shareholders (under the 'structure regime'). In any instance we believe that shareholders should gain more control in the corporation, in which case the protection of minority of shareholders should automatically become more of an issue in the Netherlands. ...read more.

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