In the blog-post titled The Hedge fund strategy of the future, I stated that the 'agency-gap' increases greatly in times of rapid technological (and political) transformation. Otherwise stated: In times of great technological (and political) progress, there is great divergence between the interests of shareholders and management of a corporation.
...Shareholder activism
Shareholders are increasingly engaging in public battles (agitating for change) with management of the corporations they own. When they engage in these 'battles', they chiefly aim to reduce the agency-gap (re-aligning the interests of management with theirs); this is known as shareholder activism.
Shareholder activism usually has a positive effect on the health corporations, through transforming a corporation's:
Shareholder activism usually has a positive effect on the health corporations, through transforming a corporation's:
- Capital Structure (Debt to Equity mix)
- Board composition
- Dividend policy
- Strategic direction
...Shareholder activism; a catalyst for social change and political stability
Note to reader: refer to the last section of this post for a diagrammatic illustration of how shareholder activism can contribute towards greater political stability
My hypothesis: I believe that shareholder activism can have a transformative effect--when it reaches its point of critical mass--on a nation as a whole (especially in infant democracies and nations evolving into open societies), and, can contribute towards greater political stability through:
Note to reader: refer to the last section of this post for a diagrammatic illustration of how shareholder activism can contribute towards greater political stability
My hypothesis: I believe that shareholder activism can have a transformative effect--when it reaches its point of critical mass--on a nation as a whole (especially in infant democracies and nations evolving into open societies), and, can contribute towards greater political stability through:
- Reducing corporate waste and inefficiency, thereby contributing towards a more efficient allocation of national resources. This reduces the likelihood of political conflicts developing.
- Stimulating debate (in general). This encourages freedom of thought and allows for diverse views to be aired; which contributes towards greater societal openness (& also increases a nation's social capital). An increase in social capital makes a nation more prosperous. How so?
Let me explain how: In his essay titled Creating Value, Michael Milken states that the level of prosperity in any society depends on the leveraging effect of financial technology on the sum of human capital, social capital and real assets.
Mathematically this can be expressed as;
Where:
Mathematically this can be expressed as;
Which reads 'Prosperity is equal to the aggregate total of all financial technologies multiplied by the total sum of; human capital, social capital, and real assets'
Where:
- 'P' stands for prosperity
- 'Ft' stands for financial technology
- 'HC' stands for human capital
- 'SC' stands for social capital
- 'RA' stands for real assets
From the equation, you can see that there is a direct positive relationship between a nation's social capital and a nation's level of prosperity. Therefore an increase in Social Capital, 'SC' in the equation (brought about by shareholder activism) would bring about an increase of a nation's level of prosperity.
...Moving on:
I believe that there is a symbiotic relationship between inefficiency in the private sector and public sector inefficiency.
Activist shareholders aim to increase private sector efficiency, and, their actions--when they reach their point of critical mass--may indirectly reduce public sector inefficiency.
When private sector inefficiencies are sufficiently eradicated, the public sector is forced to increase its efficiency.
This begs an interesting question: At what point does private-sector shareholder activism start to have an influence on public-sector efficiency? I'm not sure about the answer, but there is a little theory I have about its point of critical mass:
I believe that the point of critical mass--i.e when shareholder activism begins to have a transformative effect on a society--occurs when shareholder activism has a financial effect that sums to at least 5% of a nation's entire stock market capitalization (by 'financial effect' I mean the financial changes activism causes e.g; Stock value changes, Cost savings and Profitability changes caused by shareholder activism).
...Moving on
In this blog-post I'm going to use 'The J-Curve', an analytical tool developed by Ian Bremmer (of The Eurasia Group), to illustrate how shareholder activism can contribute towards greater political stability in infant democracies.
To explain what 'The J-Curve is:
...Moving on:
I believe that there is a symbiotic relationship between inefficiency in the private sector and public sector inefficiency.
Activist shareholders aim to increase private sector efficiency, and, their actions--when they reach their point of critical mass--may indirectly reduce public sector inefficiency.
When private sector inefficiencies are sufficiently eradicated, the public sector is forced to increase its efficiency.
This begs an interesting question: At what point does private-sector shareholder activism start to have an influence on public-sector efficiency? I'm not sure about the answer, but there is a little theory I have about its point of critical mass:
I believe that the point of critical mass--i.e when shareholder activism begins to have a transformative effect on a society--occurs when shareholder activism has a financial effect that sums to at least 5% of a nation's entire stock market capitalization (by 'financial effect' I mean the financial changes activism causes e.g; Stock value changes, Cost savings and Profitability changes caused by shareholder activism).
...Moving on
In this blog-post I'm going to use 'The J-Curve', an analytical tool developed by Ian Bremmer (of The Eurasia Group), to illustrate how shareholder activism can contribute towards greater political stability in infant democracies.
To explain what 'The J-Curve is:
Explanation taken from The J-Curve Book press release:
"If you take a cross section of nations and measure each one’s stability in relation to its political and economic openness to the outside world, and then plot the resulting data points on a graph, the result is a curve shaped like a J. Nations to the left of the dip in the J are less open; nations to the right are more open. Nations higher on the graph are more stable; those that are lower are less stable. Movement from left to right along the J curve demonstrates that a country that is stable because it is closed must go through a period of instability as it opens to the outside world."
...Explanation of the diagram above:
Please note: The diagram above generally assumes that shareholder activism increases political stability.
In the diagram above, the normal trajectory a nation would follow as its openness increases--i.e without shareholder activism--is represented by the navy blue J-curve. The yellow J-curve represents the trajectory a nation would follow in the presence of shareholder activism (which has a financial effect that sums to at least 5% of a nation's entire stock market capitalization). The section of the navy blue J-curve between point c and point a illustrates that the nation initially becomes unstable, as it 'opens-up'--economically) and socially--to the outside world. The nation reaches its lowest level of stability at point a on the navy blue J-curve.
At point a shareholder activism gains critical mass, when the nation's level of openness is O1. The nation then takes the yellow trajectory (on the yellow J-curve) between points a and b (instead of the navy blue trajectory--on the navy blue J-curve--between points a and b). The gradient of the yellow trajectory between point a and point b is steeper; illustrating that the nation gets more stability per input unit of openness (when there is critical mass shareholder activism). This illustrates the positive transformative effect shareholder activism can have on a nation's level political stability.
To measure the effect one would have to:
"If you take a cross section of nations and measure each one’s stability in relation to its political and economic openness to the outside world, and then plot the resulting data points on a graph, the result is a curve shaped like a J. Nations to the left of the dip in the J are less open; nations to the right are more open. Nations higher on the graph are more stable; those that are lower are less stable. Movement from left to right along the J curve demonstrates that a country that is stable because it is closed must go through a period of instability as it opens to the outside world."
...Explanation of the diagram above:
Please note: The diagram above generally assumes that shareholder activism increases political stability.
In the diagram above, the normal trajectory a nation would follow as its openness increases--i.e without shareholder activism--is represented by the navy blue J-curve. The yellow J-curve represents the trajectory a nation would follow in the presence of shareholder activism (which has a financial effect that sums to at least 5% of a nation's entire stock market capitalization). The section of the navy blue J-curve between point c and point a illustrates that the nation initially becomes unstable, as it 'opens-up'--economically) and socially--to the outside world. The nation reaches its lowest level of stability at point a on the navy blue J-curve.
At point a shareholder activism gains critical mass, when the nation's level of openness is O1. The nation then takes the yellow trajectory (on the yellow J-curve) between points a and b (instead of the navy blue trajectory--on the navy blue J-curve--between points a and b). The gradient of the yellow trajectory between point a and point b is steeper; illustrating that the nation gets more stability per input unit of openness (when there is critical mass shareholder activism). This illustrates the positive transformative effect shareholder activism can have on a nation's level political stability.
To measure the effect one would have to:
- Measure the gradient between points a and b on the navy blue J-curve;
- Measure the gradient between points a and b on the yellow J-curve;
- Find the difference between the two gradients and express it as a percentage of the gradient of the navy-blue trajectory between points a and b.
The greater the percentage change, the greater the tansformative effect of shareholder activism!
