SMG FE 101 Chapter Notes - Chapter 7: Dividend Discount Model, Dividend Yield, Cumulative Voting

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emeraldgoose991

4 Jan 2017

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Common stock: a share of ownership in the corporation, which confers rights to any common dividends as well as rights to vote on election of directors, mergers, and other major events. Ticker symbol: unique abbreviation assigned to a publicly traded company. Straight voting: each shareholder has as many votes for each director as shares held. For each director donna will have 600 votes and john 400, john will lose every vote and have no representation on the board. Cumulative voting: voting for directors where each shareholder is allocated votes equal to the number of open spots multiplied by his or her number of shares. Classes: different types of common stock for the same company, often carrying different voting rights. Each year companies hold an annual meeting: held once per year, shareholders vote on directors and other proposals as well as ask managers questions.

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Investors generally can make one vote for each share of stock they hold. TIAA-CREF is the largest institutional shareholder in the United States; therefore, it holds many shares and has more votes than any other organization. Traditionally, this fund has acted as a passive investor, just going along with management. However, in 1993, it mailed a notice to all 1,500 companies whose stocks it held that henceforth it planned to actively intervene if, in its opinion, management was not performing well. Its goal was to improve corporate boards to appoint a majority of independent (outside) directors; and it stated that it would vote against any directors of firms that " don't have an effective, independent board that can challenge the CEO."

In the past, TIAA-CREF responded to poor performance by "voting with its feet," which means selling stocks that were not doing well. However, by 1993, that position had become difficult to maintain for two reasons. First, the fund invested a large part of its assets in "index funds," which hold stocks in accordance with their percentage value in the broad stock market. Furthermore, TIAA-CREF owns such large blocks of stocks in many companies that if it tried to sell out, doing so would severely depress the prices of those stocks. Thus, TIAA-CREF is locked in to a large extent, which led to its decision to become a more active investor.

a. Is TIAA-CREF an ordinary shareholder? Explain.

b. Due to its asset size, TIAA-CREF owns many shares in a number of companies. The fund's management plans to vote those shares. However, TIAA-CREF is owned by many thousands of investors. Should the fund's managers vote its shares, or should it pass those votes, on a pro rata basis, back to its own shareholders? Explain.

SMG FE 101 Chapter Notes - Chapter 7: Dividend Discount Model, Dividend Yield, Cumulative Voting

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