Analysing reasons as to why Minerva Plc took the decision to re-instate the Chairman and overriding shareholders decision. Comparing the principal and agent relationship with relevant theories and studying if the decision was taken to avoid the takeover by KiFin Ltd. or was there divergence and clash of interests between the Shareholders and the management.
The context of company (Profile of Minerva Plc)
Minerva Plc is a company that deals with the investments and the developments of properties around United Kingdom. The primary occupation of Minerva Plc is financial management.
It is a company with sub-groups of real estate developers, property investments, and managements, which are located in Greater London area. The ownership of Minerva plc includes offices in the city of London, residents in high-ends, and mixed-use projects.
In center of London there are many developments of Minerva Plc, such as, the Walbrook Office, the St. Botolphs office and the Lancaster Gate, which is a high-end tenementary that has a view on Hyde Park of London.
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The activities of Minerva plc areJus investment and development, two relevant activities for an established company, due to the know-how that they gained basically through their project.
It is considered to be one of the leading companies in United Kingdom that are specialized in the field of property investment and development.
Minerva Plc was faced with takeover bid in the last quarter of the previous year by KiFin Ltd. which controls a major portion of the shares of the company. The company's rejected the bid as it was opportunistic and was not welcomed by the company.
Issue of the company over riding the shareholders and re-instating Chairman:
Oliver Whitehead has been associated with the company since 2006 and after the rejection of the take over bid in November, 2009, Kifin Ltd and the associates who own a major chunk of shares in Minerva Plc proposed that the Chairman of the company step down. The board of Minerva Plc decided to re-instate Mr. Oliver Whitehead as the Chairman and also added that this decision was taken to protect the interest of the shareholders of the company. KiFin Ltd. being a major shareholder in response to this decision called for a poll. A total of 77million votes were casted out of which 29m were in favor of the re-instatement and 48m were against. However Minerva decided not to remove the Chairman as 99.3% of independent shareholders- excluding KiFin and associates were in favor of re-instatement of Mr. Whitehead.
Justification of the Study
While dividend policy is one from the main decisions of company's board of directors, is not very well know how dividends are set outside of the UK. Various arguments have been advanced in favour of agency theory but firstly the most important is to understand basis of the theory. Jensen and Meckling (1976) define the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf. But not all the time this relationship is working according to this scheme. Sometimes in these relationships problems are occur which we called as an agency problems. Agency problems are increasingly native for today's business oriented age. The case of Minerva Plc overriding its shareholders and re-instating Chairman is an example of what agency problems arise through the course of businesses. However, there is a flip side to this case as the decision might not have been taken to override shareholders but to prevent an opportunistic takeover bid. Factors such as separation of ownership, control responsibilities, growing business diversification and segmentation across industries and business lines affect the investor's emphasis on future conduct and return outcomes. As with any other costs, agency problems will be captured by financial markets and reflected in a company's share price. Agency costs can assign on different forms under these circumstances, excessive consumption of finance, divergence of ownership and control, the goals of management are different to those of shareholders and there is an asymmetry of information inside in the company.
These problems may likely adverse implications which influence not only shareholders wealth but easily can have wider affect on other corporate stakeholders, such as debt providers-banks, customers and employees. By making consequences that coming from incidence of agency problems to stress is being placed on the competitive markets for corporate control and monitoring degree of agency divergence. Only institutional shareholders and codes of corporate governance increase directors and managerial oversight of company and create suitable structure within companies. However, according to Kole (1995) and Himmelberg et al. (1999) agency conflicts and problems are heterogeneous across different companies in different industries, and most probably different cultures what only reminding Jensen and Macklin's (1976) original agency theory, that no two firms will have the same "nexus of contracts".
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The Uk market is evidently interesting environment to judge this issue because of a number of companies in which occur agency problems. The regulations provided by Cadbury (1992) and its Code of Best Practice, and the Greenbury (1995) reports in the UK have major impact upon the structure of corporate governance and exposure of executive compensation.
Big conversation is hold of corporate governance in terms of managers' failure that acts for shareholders' in widely held firms in the UK include Minerva plc. This problem is caused by managers who have bigger responsibilities and access to all important information than stakeholders and owners of company. As well managers own larger equity blocks in companies and they are not willing to take actions that reduce the value of their shares. The Minerva's main problem according to agency theory rests in variance of unsolicited offer of company's share by its shareholders. Therefore, according to Smith's view firms should to think regarding corporate governance that gives better knowledge about corporate governance while Jensen and Meckling (1976), Shleifer and Vishny (1997), and others argue that concentrated corporate ownership leads to better corporate governance. But in our opinion, this statement is incomplete as regards the large business groups such as Sony group, Hudson's Bay Company, DaimlerChrysler etc. which dominate many economies.
At present, we do not know which set of agency problems have bigger or smaller impact for companies (include Minerva plc.) because in this area request of additional research is necessary. According to all known and successful theory's approaches we will try to provide useful framework of agency theory and agency problems of Minerva plc. And try to come up with meaningful findings.
Important of this analysis
Since the problem of the Minerva plc is company's board overrides the major shareholder's opinion by reinstating its chairman. Based on the case, KiFin the largest shareholder, who control the 29.9 percent of the company's share, called a poll for the voting of Minerva's chairman re-election, the result shows that 48m votes against for the re-appointment of Mr. Whitehead. Eventually, company still re-appointed Mr. Whitehead as the chairman. The application of agency theory to the company setting is for arguing the standard principal-agent framework. "It is used to develop an approach toward organizational control that elaborates upon the construct underlying strategic human resource management. Additionally, firm risk is examined as a moderator to determine how control orientation affects firm performance" (http://resources.bnet.com/topic/agency+theory.html?tag=content;col1) furthermore, it also offers a unique insight into company's information system, outcome uncertainty, incentives and risk. In terms of agency theory, it is concerning the relationship between shareholder and company's manager, shareholders (principal) are the owner of the company who appoint manager (agent) to manage the company on behalf of them, the objective is that manager should make decision of maximize shareholder's wealth. However, in the reality, the agency problem is the divergence of ownership and control, managers and shareholders have different goals, managers intend to maximize the size of company, increasing managerial powers, creating job security or increasing managerial pay and rewards rather than that of shareholders. Therefore, the decisions which are made by company's managers are not consistent with the objective of shareholder. Using the agent theory analysis, which can interpret how to best organize the relationship between the shareholder and agent; also it can provide possible and feasible solutions to principle and agent problem.
Some Financial Indicators:
The takeover bid made by KiFin Ltd. offered only 50p per share, which according to Minerva was very low for its portfolio was worth much more. Given below is a chart showing the movements in share prices from November 17, when KiFin Ltd. announced its plan for a takeover till January . Also on January 8th the takeover bid lapsed as KiFin Ltd. only got support from 0.08% of the shareholders. We see a sharp rise in the prices 37.00 pence to 53.00 pence in November during which the takeover bid was announced and the share prices with slight variations kept on rising till December 18th when it was the highest at 77.00 pence. After that on January 8th when the bid lapsed the share prices fell 9.9% in two hours. (Source: lse.co.uk)
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The Net Asset Value of Minerva Plc as estimated by a leading global real estate firm CB Richard Ellis as on 2nd December, 2009 was 95 pence per share, which clearly showed that the takeover bid of KiFin Ltd. definitely was under valued. The valuation provided by CBRE which is an independent company valued Minerva Plc showed a surplus of £93 Million in net revaluation which depicted an increase of 10% over a small period of 5 months. (Source: Minervaplc.co.uk). The evaluation conducted by CBRE clearly shows that the takeover bid of 50pence per share is undervalued by 89% of the company's current NAV which as on 30th November, 2009 is 95 pence.
The graph shows the volume of shares traded during the previous month. The maximum volumes of shares were traded on 8th January when the takeover bid lapsed.
The graph above is to analyse the trend of share price movements after the lapse of the takeover bid on 8th January. There has been a decline in the share prices of Minerva Plc since the takeover bid expired.
Incase of Minerva Plc the board reinstated the Chairman by over riding the shareholders. However it is evident in the poll conducted that only excluding Kifin Ltd. and its associated 99.3% of the independent shareholders were in favor of the reinstatement of the Chairman. In a way this showed that the board did act in the favor of independent shareholders.
Source: Bebchuk,L,R. and Hart, O. (2002)
The above figure has been adopted from a study conducted by Bebchuk,L,R. and Hart, O. (2002). In case of Minerva Plc, we have an incumbent manager owning a small majority of the stake in the company and such a manager holds enough shares to provide him with control enough to have a decisive say in the matters of corporate voting. The five stage model has been designed and fits apt for Minerva Plc with dispersed ownership is faced by a rival having a major portion of shareholding. In the following stages a contest will be launched which in this case was voting and in the final stage based on the voting decision made by shareholders keeping in mind either the capability of the rival or influence of the current market price and the one being offered by the rival, a decision will be reached. Since in case of Minerva Plc the 50pence share price offering was not appropriate the decision was not in the favors of the rival which was KiFin Ltd.
During the course of the takeover bid it was seen that the share price went straight up and then declined once the takeover bid had lapsed and the decision of the board to re-instate the chairman was with a view to reject the takeover bid and not to over ride shareholders since according to the report provided by 'Financial Times' 99.3% of independent shareholders were not in favor of the chairman stepping down.
Academic studies supporting the article
The relationship between principal and agent of the principal is called agency theory in finance world. Investopedia explains agency theory as it involves the costs of resolving conflicts between the principals and agents and aligning interests of the two groups (http://www.investopedia.com/terms/agencytheory.asp).
Conceptually and one of the first introduced this theory in the literature of information economics provides Eisenhardt K.M in his researchers and findings. The author said that the agency theory argues "under conditions of incomplete information and uncertainty, which characterize most business settings, two agency problems arise: moral hazard and adverse selection". Moral hazard appears when shareholder has doubt that company's manager puts his maximal efforts. Adverse selection is the condition under which the shareholder cannot find out if the company's manager is right for his position and responsibilities his is obtained (Eisenhardt, 1989).
The problems of adverse selection and moral hazards might not be solved by fixed wage; it might create reason for agent to leave his work place as the compensation will be the same in spite his quality and skills put into achieve good results (Eisenhardt, 1985). If the agents are not satisfied with their wages and are willing to leave, the researches Alchian and Demsetz, 1972, discovered that it will be efficient to change fixed wage with compensations into the profits of the firm.
The main of agency theory is to looks for understanding and explaining organizational behaviour. It can be done by focusing on relationship between managers and stockholders. The magnificent development of the theoretical viewpoint in analysing executive behaviour of company's managers in large and public firms has done scholars from economics (Coase, 1984), finance (Jensen & Meckling, 1976), accounting (Baiman, 1990) and law (Gilson & Roe, 1992). Agency theory focuses on people and minimizing appearance of any conflicts which might be provoked by behaviour of the people. From the economical point of view, agency theory hypothesizes that the managers in the company are "utility maximizers" striving to get what is the best for individuals and in the same time it might not be best interest for the organisation (Mesut & Ross,2005). According to Barnard's (1938) work on cooperation in the organisation, agency theory concentrates its attention on the conflict itself. This conflict might appear due to misunderstanding between goals which may become evident because workers do their jobs inside organisations for getting the best for themselves.
With intellectual heritage linking to (Mesut & Ross, 2005), "organisations are recursive systems comprise complex inter-relationships between the elements which make up the system". Organisation development (OD) has been used and put in practise by organisations across industries. It helps for improving and brings change in the organisations. According to Backhard (1969), OD is a "planned, organisation - wide and managed from the top" attempt to increase effectiveness and ability to work in healthy working environment based on behavioural and scientific methodology. By applying behaviour science and using educational strategy, it can change the beliefs, values, thoughts and structure of the organisations.
All relationship in the work environment has some form of the principal-agent relationship. From Organisation Development perception, principal gives the tasks to agents for delegating them from their behalf. Agency theory assumes that relationship between employer and employee might cause the problem in the organisation because of the abilities, responsibilities of job position and amount of risk that each employee takes in a given position. Therefore, agency theory highlights the importance of monitoring and supervising employee's work efforts.
Conclusions/ what has been learnt:
While analyzing the existing problem in Minerva PLC, we tried to understand and find the right recommendation for avoid problems like this in the future. For being accurate in our study followed suggestions we read a lot of literature according agency theory and hostile takeover bids. So to get to the bottom of the reasons behind the so called clash between shareholders and management of Minerva PLC during the course of our study we analyzed the aspects of the principals - agent relationship and came to the conclusion in the case of the focused company the agents (management) were acting in the clash of principal (independent shareholders) which as discussed in the theory above is the bases of agency theory and principal agent relationship. Since the decision of voting down the chairman was supported by 48 million votes in favor and only 29 million votes against, it looked as if the principal-agent relationship between the management and shareholders was not kept in mind. However, on the thorough analysis and in dept study of various news dailies and independent reviews it is was discovered that 48 millions words in favor of the chairman to step down came from the rival take over company and its associates. This does not represent independent shareholders. So it can be said that the management by overriding shareholders actually acting in shareholders' interests. We rarely get to see such examples of takeover bids, mixed with agency theory.