Does Coordinated Institutional Shareholder Activism Work

The Council of Institutional Investors is a group of public and private pension funds which collectively own over $800 billion in financial assets within the United States. The Council has provided a forum for these funds to coordinate and communicate with each other on a variety of matters including activism programs aimed at facilitating solution of problems in underperforming portfolio firms. The Council has issued a focus list of poorly performing firms for each of the last five years to its members who have the discretion to pursue activism programs. These lists have included well-publicized underperformers such as IBM, Kodak and Sears along with a variety of less known cases. This study documents the performance of 96 firms which appeared on the Council's focus lists in 1991, 1992 and 1993 relative to several control groups. Firms on Council focus lists experience poor share price performance in the year before being included on a focus list. In the year after being listed, these firms experienced an average share price increase of 11.6% above the Samp;P 500. Given that the mean equity market value of Council listed firms was $3.42 billion we estimate a total abnormal dollar gain of these firms of $39.7 billion. This increase is broadly consistent with the view that coordinated institutional activism creates shareholder wealth.

The past two decades has witnessed unprecedented changes in the corporate governance landscape in Europe, the US and Asia. Across many countries, activist investors have pursued engagements with management of target companies. More recently, the role of the hostile activist shareholder has been taken up by a set of hedge funds. Hedge fund activism is characterized by mergers and corporate restructuring, replacement of management and board members, proxy voting, and lobbying of management. These investors target and research companies, take large positions in their stock, criticize their business plans and governance practices, and confront their managers, demanding action enhancing shareholder value. This book analyses the impact of activists on the companies that they invest, the effects on shareholders and on activists funds themselves. Chapters examine such topic as investors' strategic approaches, the financial returns they produce, and the regulatory frameworks within which they operate. The chapters also provide historical context, both of activist investment and institutional shareholder passivity. The volume facilitates a comparison between the US and the EU, juxtaposing not only regulatory patterns but investment styles.

First Published in 2000. Routledge is an imprint of Taylor & Francis, an informa company.

This report reflects long-term, in-depth discussion and debate by participants in the Latin American Roundtable on Corporate Governance.

Hedge Fund Activism begins with a brief outline of the research literature and describes datasets on hedge fund activism.

Institutional shareholder participation has long been considered as vital to good corporate governance yet its potential does not seem to have been realized. The recent banking crisis exposed the passivity of some institutional shareholders, many of whom appear to have chosen to sell their stakes in the banks rather than intervene or challenge the board when they realized the strategies followed by the banks were excessively risky. Institutional shareholders’ role to scrutinize and monitor the decisions of boards and executive management in the banking sector in the UK is considered by many to be a failure, resulting in the phenomenon of ‘ownerless corporations’, as described by Lord Myners. In China, despite the fast rising of institutional investment in the securities market, institutional shareholders have not yet played a contributory role in monitoring corporate managers in listed companies. Drawing on empirical evidence this book seeks to systematically analyses institutional shareholders’ incentives to activism to explain when and why shareholder activism will occur. The book puts forward a model which explains the factors that determine institutional shareholders’ propensity for activism. The model both elaborates the collective benefits of activism as a means of achieving managerial accountability asks whether and when shareholder activism is rational for any individual shareholder. The book then goes to on to apply these finding to both the UK and China in order to explain the varying levels of shareholder activism in each jurisdiction. The book is the first to take an in-depth look at institutional share-holder activism in China providing prescriptions to promote greater shareholder engagement and exploring the potential it holds for improving corporate governance in the region.

The Foundations and Anatomy of Shareholder Activism examines the landscape of contemporary shareholder activism in the UK. The book focuses on minority shareholder activism in publicly listed companies. It argues that contemporary shareholder activism in the UK is dominated by two groups; one, the institutional shareholders whose shareholder activism is largely seen as a driving force for good corporate governance, and two, the hedge funds whose shareholder activism is based on value extraction and exit. The book provides a detailed examination of both types of shareholder activism, and discusses critically the nature of, motivations for and consequences following both types of shareholder activism. The book then locates both types of shareholder activism in the theory of the company and the fabric of company law, and argues that institutional shareholder activism based on exercising a voice at general meetings is well supported in theory and law. The call for institutions to engage in more informal forms of activism in the name of 'stewardship' may bring about challenges to the current patterns of activism that institutions engage in. The book argues, however, that a more cautious view of hedge fund activism and the pattern of value extraction and exit should be taken. More empirical evidence is likely to be necessary, however, to weigh up the long terms benefits and costs of hedge fund activism.