Empower supervisory boards, say top economists
NETHERLANDS - Supervisory boards should be given more power to deal with activist shareholders and private equity players, in order to avoid negative effects on a company's long-term value, Dutch economists have claimed.
A board's focus on control and risk management suggests they are too distant from a company's strategy, and this opens the door to lagging performance and irresponsible takeovers, professors Arnoud Boot and Kees Cools argued in an advisory note to the government on private equity and shareholder activism.
"The aggressive climate around listed companies requires active involvement of the supervisory board with a company's strategy, while staying independent from the management," they pointed out.
"However, this requires a drastic rejuvenation and increased diversity of the members of the supervisory board."
According to Boot and Cools, shareholders activist cause a management to lose its credibility in financial markets, and places the management with its back to the wall. But strengthening the role of the supervisory board would allow a better grip on the management, they suggest.
A more stable shareholder structure would also create the conditions for an improved dialogue and a more stable strategy, the scientists stressed.
"More stability among shareholders can be achieved by attracting minority shareholders," according to Boot and Cools.
"The large funds available for private equity could be transferred into minority stakes through a new-style participation company, a kind of ‘bank' for its own assets."
"In general, we consider shareholder activism as a healthy development that can encourage companies into a better dialogue with shareholders and other stakeholders," the scientists say.
"Although it creates focus and discipline, private equity is a temporary concept for repair, but there is no structural alternative."
ABN Amro bank was recently forced to break up its company by activist shareholder activists and the industrial conglomerate Stork is now under pressure to act similarly.
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