Global Research on Shareowner Activism

Corporate Governance: An International Review has been one of our “stakeholders” from the beginning. The July issue, which I just got around to reading, provides excellent articles around the general theme of research on shareholder action.

Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi-Country Study, by William Q. Judge, Ajai Gaur, and Maureen I. Muller-Kahle, looked at shareholder activism targeted at firms located in three common law countries (i.e., USA, UK, and Australia) and three civil law countries (Japan, Germany, and South Korea) during the 2003–07 time period.

Findings: Activists target firms with two motives (a) to improve the financial performance, and (b) to improve the social performance of the firm. Firm size is unrelated to financial activism, but positively related to social activism; ownership concentration is negatively related to both financial and social activism; and prior profitability is negatively related to financial activism, but positively related to social activism. These relationships in the case of financial activism are generally stronger in common law legal systems, whereas those in the case of social activism are generally stronger in environments with a greater level of income inequality.

Takeaway: Boards need to understand the motivations of shareowners and open two-way lines of communication. Expect social activism to rise with growing income inequality.

Is (Institutional) Shareholder Activism New? Evidence from UK Shareholder Coalitions in the Pre-Cadbury Era by Rafel Crespi and Luc Renneboog investigated whether or not shareholder voting coalitions disciplined managers in the pre-Cadbury era. They found that voting power held by financial institutions (mainly, the insurance companies) are positively related to executive director turnover. Coalitions of industrial and commercial companies with strong relative voting power penalize poorly performing managers. In contrast, coalitions of executive directors are able to resist board restructuring. They also found a strong relation between top management substitution and high debt levels, especially in companies in need of refinancing.

Takeaway: Coalitions of shareowners and pacts can bring about change at poorly performing companies.

Shareholder Voting and Directors’ Remuneration Report Legislation: Say on Pay in the UK
by Martin Conyon and Graham Sadler found that less than 10 per cent of shareholders abstain or vote against the mandated Directors’ Remuneration Report (DRR) resolution. The percentage is falling over time. Second, investors are more likely to vote against DRR resolutions compared to non-pay resolutions. Third, shareholders are more likely to vote against general executive pay resolutions, such as stock options, long-term incentive plans, and bonus resolutions compared to non-pay resolutions. Fourth, firms with higher CEO pay attract greater voting dissent. Fifth, there is little evidence that CEO pay is lower in firms that previously experienced high levels of shareholder dissent. In addition, there is little evidence that the fraction of CEO equity pay, representing owner-manager alignment, is greater in such firms. They find limited evidence that, on average, “say on pay” materially alters the subsequent level and design of CEO compensation.

Takeaway: Shareholder voting appears to have limited effects on curbing excess CEO pay. Boards and compensation committees may want to communicate better policies on executive compensation to avert shareholder dissent but in general “say on pay” is much to do about nothing. Keep pay reasonably in line and boards won’t have a problem.

Shareholder Activism and Middle Management Equity Incentives by Janet H. Marler and Christophe Faugère researched a sample of 124 US technology firms over the period 1997–2001 and find evidence indicating that “voice activist” shareholders, using communication pressure, are associated with the greater use of equity incentives, and higher total compensation at middle managerial levels, relative to “exit activists,” who exert more direct economic pressure. As the presence of institutional ownership siding with management (banks and insurance companies) increases relative to voice activists, the use of equity incentives at middle managerial levels declines. Voice activists face a higher cost of monitoring managers as compared to exit activists, and thus they will advocate for the heavier use of equity incentive compensation at the middle managerial level.

Takeaway: Voice activists, like CalPERS, like to a more equal distribution of pay at managerial levels to aid in monitoring. As we learned from the first paper in this issue, this also tends to reduce the perceived need for social activism. For boards, shareowner type should be considered in your responses to questions raise.

Voting Power and Shareholder Activism: A Study of Swedish Shareholder Meetings by Thomas Poulsen, Therese Strand, and Steen Thomsen finds that firms’ amenability to small shareholder influence leads to more proposals by the shareowner nomination committee, but fewer proposals by other shareholders and fewer proposals voted against. Shareholder elected nomination committees effectively channel shareholder concerns and preempt other kinds of activism. In addition, they find more shareholder activity in large firms and less activity in leveraged firms.

Takeaway: Companies that provide mechanisms for greater shareowner influence through the director nomination process transparency, contacts with shareowner associations and other vehicles for collective action are likely to face fewer proxy issues, since concerns can be addressed year around, instead of just at the AGM.

The Rising Tension between Shareholder and Director Power in the Common Law World by Jennifer G. Hill examines the rising tension between shareholder and director power in the common law world and finds that US shareholders have traditionally had unusually restricted rights compared to their counterparts in common law jurisdictions, such as the UK and Australia. The article identifies an important tension between legal rules designed to enhance shareholder power and commercial practices designed to subvert it. It also shows how the dynamic nature of regulation, and the strategic response of regulated parties, can affect the operation of legal rules.

Takeaway: The global financial crisis has highlighted some of the dangers of untramelled managerial power and under-regulation. Comparative corporate governance can provide important regulatory insights to policy makers concerning the appropriate balance of power between shareowners and boards.

Tilting at Windmills or Contested Norms? Dissident Proxy Initiatives in Canada by Kimberly Bates and Dean Hennessy finds that firms with lower legitimacy are more likely to receive governance- and performance-oriented Dissident proxy initiatives. Firms with higher legitimacy were more likely to settle proxy initiatives of all types, and avoid publishing activist shareholders’ concerns to all shareholders, but this relationship did not hold for governance-oriented proposals. Firms that received more governance- and performance-oriented proposals subsequently had lower legitimacy.

Takeaway: Boards should consider whether adoption of initiatives are wise in the long term. Today’s simple challenge could end up being a multi-year campaign. Negotiation could increase future influence and send a signal of competency, particularly to institutional investors. Shareowner activists should consider reframing initiatives as legitimation contests and should assess whether boards are genuine in adopting or negotiating policies demanded or simply trying to provide cover.