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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.
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.
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.
Using both qualitative and quantitative methods, this book examines whether qualified foreign institutional investors (QFIIs), through their shareholder activism, have a meaningful positive impact on the corporate governance of firms listed on the mainland Chinese stock market. Capital flows into and out of China are still subject to tight controls, and the QFII scheme is one important avenue through which QFIIs can become invested in the Chinese stock market. This book is an invaluable resource for anyone interested in learning about ways to invest in one of the world’s largest economies. Wang discusses in depth what specific opportunities, challenges and restrictions to expect in the process, and how investing in China differs from investing in countries with a more open capital account.
Michael Jensen of the Harvard Business School, recently quoted in The Wall Street Journal, noted that "institutional activism is never going to amount to anything." A sharply contrasting view is evident from Fortune which held that the power of such groups "will be one of the most important business forces of the nineties." This apparent difference of opinion would appear to matter: Institutional investors, primarily private and public pension funds, currently control more than 50 percent of corporate equity. Certain activist institutions have been successful in changing some aspect of target corporations. Examples would include insisting on boards of directors with more outside, independent directors, the elimination of some anti-takeover provisions, separation of the role of CEO from that of the chairperson of the board, and elements of executive compensation. While many of these changes were sought and attained by some activist institutions, the issue had remained unsettled whether such strategies result in bottom line financial performance of the institutions' equity holdings. In this study of 200 Fortune 500 companies, a total of 975 separate institutional investors were listed as holding stock in these 200 firms. The thirty-six firms representing pension funds for city, state, and federal employees were classified as public. This is an important distinction as it is these public pension funds which have been the most activist of the institutional investors. Moreover, 13 institutional investors that sponsored or co-sponsored one or more shareholder proposals or proxy fights from 1986 to 1994 were identified, including California Public Employees Retirement System (CalPERS) fund, College Retirement Equities Fund (CREF), and New York State Common Retirement Fund. This, too, is an indication of institutional activism. The results of this study, relying on both accounting and market financial returns over a four-year period, indicate that, on average, firms with higher proportions of their equity held by institutional investors do not enjoy higher performance. Moreover, these is no evidence that the firms targeted by the activist funds through shareholder proposals or proxy fights were characterized by higher financial performance.
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.
This is a draft chapter for a forthcoming volume, The Research Handbook on Shareholder Power, edited by Randall Thomas and Jennifer Hill (Cheltenham:Edward Elgar). This chapter describes the experience with activist institutional investors in an apparently unfavorable corporate environment (Italy), commonly depicted as one of concentrated ownership, notoriously inadequate legal protection for minority shareholders and an apparent disregard for their interests by controlling shareholders. We document a non-negligible volume of “core” active institutional investment, together with some idiosyncratic forms of activism (the appointment of “minority” directors on the boards of Italian listed companies). We attempt to evaluate whether what we see is genuine shareholder-value oriented activism or a strategy to engage in a privileged relationship with controlling shareholders, in order to share in private benefits of control extraction. We find no sufficient evidence to support a “dark side” view of shareholder activism, at least as a general explanation. Instead, we provide recent anecdotal evidence of initiatives effectively aimed to curb the extraction of private benefits by dominant shareholders.
Should companies be run for profit or purpose? This book shows how they can deliver both-based on rigorous evidence and an actionable framework. This edition, updated to include the pandemic and latest research, explains how managers, investors and citizens can put purpose into practice-and overcome the difficult trade-offs that hold them back.