When Stock Ownership Is Quite Dispersed, the Best Hope for Good Governance Is the Presence of One or More Large Block Holders.

Pros:

Block holders usually own a large amount of company’s stock and might have voting rights to

influence the company. In general, the presence of large block holders sitting on the board can

monitor the management and maintain a counter balance, thus improve the corporate governance.

Because controlling block holders hold a large proportion of ownership shares, they are likely to

be elected as board member. They are representatives of common share holders and will speak for

the benefit of shareholders when making important corporate decisions. Block holders on board is

a very important force to protect shareholder’s rights and prevent management from misusing

their rights.

For example, in the most recent acquisition agreement between Charles River Labs and Wuxi

Pharma Tech, large stakeholders like JANA Partner, Neuberger Berman, Relational Investors and

other Charles River’s large shareholders voted against the proposed deal. The block holders

believe the acquisition deal cannot generate value for its shareholders due to lack of synergies,

inadequate returns and poor capital allocation. The two parties finally ended their merger

agreement because of the opposition from large shareholders and proxy advisory firms. This is a

great example of good corporate governance. Although the management believed the transaction

would result in long term benefits for the business, they have to take shareholder’s opinion into

consideration. HP’s acquisition of Compaq is an example of bad corporate governance without

the presence or voting rights from large block holders. Should Hewlett and Packard on the board,

they would not allow the deal going through. In summary, the presence of one or more block

holders on board can improve the corporate governance.

Cons:

The presence of large block holders can also hurt small investors’ interests and benefits,...