Shareholder Activism

Background Literature Review

IMD: 35+ YEARS OF BOARD

E D U C AT I O N E X P E R I E N C E

Prof. Dr. Didier Cossin

& Dr. Jose Caballero
July 2013 IMD, All
Rights Reserved

Table of Contents
Background........................................................................................................................5
The Landscape................................................................................................................5

Activists......................................................................................................................5
Motivations.................................................................................................................5
Demands....................................................................................................................6
Strategy......................................................................................................................6
Firm Responses........................................................................................................6
Impact........................................................................................................................7
Lessons......................................................................................................................7
Frequency, Objectives, Strategies and Success Rates of Activism..................................8
Activist Performance and Target-Firms Performance.................................................. 10
Appendix 1: References................................................................................................... 12
Appendix 2: Selected Abstracts..................................................................................... 14

SHAREHOLDER ACTIVISM
I. Background
Shareholder activism refers to the active influence on firm policy and practices through the use of ownership
position (Sjstrm, 2008). It enables shareholders to exercise and enforce their rights to enhance shareholder
value in the long-term (Low, 2004). Activism can be conducted via direct dialogue with corporate management
or the board, during open sessions in corporate general meetings, writing open letters or by filing formal
shareholder proposals (Sjstrm, 2008).
Activism can be defensive or offensive (Armour and Cheffins, 2012). Defensive activism takes place when
investors holding a stake in a company (e.g., pension funds and mutual funds) become dissatisfied with
corporate performance or corporate governance practices and thus react by lobbying for relevant changes.
This can be done behind the scenes or publicly challenging management; for example, activists can propose
the election of directors they support. This type is defensive in the sense that activist seek to protect preexisting investments. In offensive activism investors lacking a substantial stake in a company, build up their
holdings offensively on the assumption that organizational changes will overcome failures and, thus, maximize
shareholder returns. Investors will agitate for change if management does not react and take the initiative.
Shareholder activism follows evolutionary patterns (Graves et al., 2001). Issues can follow different paths over
time; some can arise and decline abruptly, others can remain substantially important without resolution or
disappearing over relatively long time. This pattern may depend on the shifting regulatory environment or on
factors that are internal to the company.

II. The landscape

Activists
Activism can be a single minority investor or a block holder, or they can be institutional investors with
majority stakes in the organization (Judge et al., 2010). Among the latter are pension funds, mutual funds and
hedge funds (Armour and Cheffins, 2012). In addition, labor unions and labor affiliated organizations can act
as shareholder activists (Prevost et al., 2012). Sovereign wealth funds act also as activists (Ghahramani, 2013).
In a wider environment, observers identify an activist shareholder community (Logsdon and Van Buren III,
2008). This is primarily composed of non-profit, nongovernmental organizations. This community advocates
for social issues, broadly defined, and it includes religious, environmental, labor organizations, and interest
groups. The aim of the community is to influence corporate behaviour.

Motivations
The motivation behind shareholder activism can be financially driven or socially driven (Judge et al., 2010). This
type of activism focuses on the financial performance of companies and seeks to pressure management for
an improved portfolio performance.

Financially motivated activists can be entrepreneurial (as elaborated by Klein and Zur, 2009). These activists
include asset management groups, hedge funds, private equity funds, and venture capital funds that are
differentiated by their investment strategies. Individual investors are also included among entrepreneurial
activists. Entrepreneurial activists are independent from corporate and financial power structures. Thus
they experience lower levels of risks in terms of economic or political reprisals. They are able to operate
through small entities, such as investment partnerships, which also limit their levels of risks and provide
them with significant control over the investment strategies they adopt. Entrepreneurial activists are relatively
undiversified and can risk a relatively large proportion of [their] wealth on individual ventures ... are wholly
unrestricted in how they can invest in terms of diversification, illiquid assets, short-selling, and leverage.
Moreover, they do not need to have the necessary capital to cover redemptions and they are able to restrict
investors if the latter attempt to exit their funds. Finally, entrepreneurial activists are exempt from disclosing
their investment strategies, short-selling positions, or leverage ratios. As a result, entrepreneurial activists
have employed the stock-lending or derivative markets to acquire voting rights without owning a long
position in the companys underlying stock. This allows them to acquire voting rights in a target company to
support a threat of an imminent proxy fight.
Socially driven activism focuses on economic equity issues and seeks more justice in society; particularly, when
the latter aligns with the financial interests of the activist (Judge et al., 2010). CalPERS activism, for example,
advances in parallel a financial and a social agenda. Socially motivated activist may include the shareholder
community or non-profit nongovernmental groups including religious, environmental, labor organizations, and
interest groups that pursue social issues for principle-based purposes (Chung & Talaulicar, 2010).

Demands
Activists demands can be related to the companys strategic direction and its alternatives. For example, the
sale of the company to a third parties, the firms operational inefficiency, and restructuring. Demands can also
be made about the companys capital structure; for example, about dividend, debt restructuring, or the firms
recapitalization. Activists could also advocate opposition to proposed mergers. Antitakeover-related demands
could include a vote on golden parachutes. Demands can also focus on corporate governance matters such as
CEO dismissal, the separation of the CEO/Chairmans roles, increase board independence, excessive executive
compensation and additional disclosure (see Gantchev, 2013; and Prevost et al., 2012).

Strategy
Some of the most influential activities are lobbying activities, and media and judicial activities (Girard, 2011).
For example, activists may seek media coverage of the issues that they advocate; judicially, activists can file
civil law suits or class actions.

Firm responses
Organization can react proactively and engage in a direct dialogue with activist groups. Companies can assume
an accommodative position in which the activists resolution is withdrawn because of the firms acquiesce to
demands for corporate policy or behavior changes. Others react defensively and allow the resolution go to a
vote by all shareholders. Finally, company can be reactive by requesting the omission of the resolution to the
relevant authority (e.g., the SEC) (see Logsdon and Buren, 2009; and Rehbein et al., 2013).

Impact
Some observers are optimistic about the effectiveness of activism. Hedge fund activism, for example, has been
found to result in increased dividend pay-outs, and improve firm financial performance (Brav et al., 2008).
Other observers are inclined towards a sceptical position (Sjstrm, 2008). Arguably, the effectiveness of the
impact of shareholder activism depends on the targeted companys culture, the power and influence of the
activist group and the political climate in which the resolution is filed (Hoffman, 1996).

Lessons
On the one hand, companies may take two lessons from engaging activists in a direct dialogue (Logsdon &
Buren, 2009). First, engaging activists show that firms take seriously the concerns of their critics; and second,
mutual understanding and expertise can positively converge by participating in such dialogues. On the other
hand, activists assuming a conciliatory position may gain much because such stance allows them to focus on
the relevant corporate policies and behaviors while, at the same time, enables them to seek allies within the
targeted companies.

III. Frequency, objectives, strategies and success rates of activism

Cziraki et al. (2010) compare the frequency of shareholder proposal submissions (1996 and 2005) in the UK,
Continental Europe and the USA. They find that the number of proposals is 3-4 times as high in the USA per
publicly listed firm, and approximately twice as high per traded stock value and market capitalization
(see Table 1).
Table 1: Shareholder proposals by geographic location and stock market size

Proposals per year

Region

Number
of
proposals

Year

Proposal
per year

Per
listed
company

Per USD
trillion
of traded
stock
value

Per USD
trillion of
market
captitalisation

UK

19982008

362

32.9

0.0140

8.39

11.40

Continental
Europe

20052008

358

89.5

0.0117

5.80

7.19

US

19962005

2,792

279.2

0.0407

14.56

20.31

Source: Cziraki et al. (2010).

Judge et al. (2010), employing shareholder activism as keyword to conduct a search in the Dow Jones Factiva
database, trace the frequency of activism in ten major economies up to December 2008 (see Table 2).
Table 2: Shareholder activism reports in ten major economies
Country
USA
UK
Australia
Japan
Canada
Germany
Netherlands
South Korea
France
India
Total:

GDP
(in millions USD)
$
$
$
$
$
$
$
$
$
$
$

13,811,200
2,727,806
821,716
4,376,705
1,326,376
3,297,233
754,203
969,795
2,562,288
1,170,968
31,818,290

Frequency of
activism incidents

Percentage of
activism incidents

4,752
2,326
476
452
320
205
197
179
147
128
9,182

51.8%
25.3%
5.2%
4.9%
3.5%
2.2%
2.1%
1.9%
1.6%
1.4%
100.0%

Source: Judge et al. (2010).

Brav et al. (2009) present the activist hedge funds stated objectives and the rate of success of those interventions
for the period 2001-2007 (see Table 3). Partial success refers to situation in which the stated goal of hedge
funds is partially met. Similarly, Gantchev (2013) presents the rate of activisms success by demands for the
period 2000-2007 (see Table 4). Brav et al. (2009) also present the tactics that hedge funds employ in these
interventions (see Table 5).

Table 3: Summary of activism by hedge funds stated objective

Objective categories
1. General undervaluation/
maximize shareholder value
2. Capital structure
3. Business strategy
4. Sale of target company
5. Governance
Sum of Categories (2)(5)

Num
of
events
(1)
561

All events
% of
%
Sample Success
(2)
(3)

204
270
235
284
611

47.9%

%
Partial
success
(4)

17.4%
23.0%
20.1%
24.2%
52.1%

26.5%
30.7%
29.8%
29.2%
31.3%

25.5%
22.2%
20.4%
28.9%
21.1%

Num of
Hostile
events
(5)

102
136
142
187
310

Hostile events
%
%
Success
Partial
(6)
success
(7)

18.6%
23.5%
27.5%
26.7%
26.5%

Non-hostile events
%
%
Success
Partial
(8)
success
(9)

43.1%
39.0%
27.5%
37.4%
34.2%

34.3%
38.1%
33.3%
34.0%
36.2%

7.8%
5.2%
9.7%
12.4%
7.6%

Source: Brav et al. (2009)

Table 4: Success rate of activism (by demand)

Primary activist demands

Number of
campaigns

% of
Sample

Successful
campaigns

% Success
rate

1. Strategic direction & alternatives

Sale of company to a third party
Operational inefciency; restructuring
Activist bid to take target private

280
159
69
52

55.56
31.55
13.69
10.52

96
51
24
21

34.29
32.08
34.78
40.38

2. Capital structure
Dividends/repurchases/excess cash
Recapitalization/debt restructuring

100
78
22

19.84
15.48
4.37

20
13
7

20.00
16.67
31.82

3. Opposition to a proposed merger

63

12.50

18

28.57

4. Corporate governance
Remove CEO; separate CEO/Chairman

61
27

12.10
5.36

13
5

21.31
18.52

Excessive executive compensation

Additional disclosure; possible fraud

20
14

3.97
2.78

3
5

15.00
35.71

Overall success rate

504

100

173

29.17

Source: Gantchev (2013)

Table 5: Summary of hedge funds tactics

Tactic categories

% Of all events

1. The hedge fund intends to communicate with the board/management on a regular basis with the goal of
enhancing shareholder value

51.20%

2. The hedge fund seeks board representation without a proxy contest or confrontation with the existing
management/board

11.90%

3. The hedge fund makes formal shareholder proposals, or publicly criticizes the company and demands change

35.10%

4. The hedge fund threatens to wage a proxy ght in order to gain board representation, or to sue the company
for breach of duciary duty, etc.

7.30%

5. The hedge fund launches a proxy contest in order to replace the board

13.10%

6. The hedge fund sues the company

4.70%

7. The hedge fund intends to take control of the company, for example, with a takeover bid

4.60%

Source: Brav et al. (2009).

IV. Activist performance and target-firms performance

Clifford (2008) argues that to trace the blockholders gains from activism, it is useful to calculate the the raw
holding period return to the hedge fund for both its activist and passivist blockholdings. He identifies 433
passive and 226 active blockholdings, and concludes that his findings as a cursory look into the returns from
activism provide evidence that blockholders earn larger returns on their activist holdings than those gained by
their passive holdings (see Table 6).

Table 6: Returns to blockholder

Filing type

Mean

Median

Panel A: holding period returns from entry date to exit date

13D

67.80%***

226

32.19%***

13G

35.82%***

433

10.44%***

Difference

31.98%***

21.75%***
10.26%***

Panel B: holding period returns using 1-year holding period

13D

21.27%***

666

13G

12.68%***

1031

3.77%***

Difference

8.59%***

6.49%***
21.02%***

Panel C: holding period returns using last trade price if no sale date given
13D

50.01%***

666

13G

28.59%***

1031

Difference

21.42%***

7.31%***
13.71%***

Source: Clifford (2008)

Variables:13D is a schedule filed with the SEC by investors with specific plans to influence the firm, or, have plans of influencing the firm
or its management in the future, these are classified as active investors; 13Gis a schedule filed with the SEC by investors, who attest that
they have purchased the shares for investment purposes only, with no intent to affect the firm or its management, these are considered
passive; N refers to the total number of filings; difference refers to the difference between means of active and passive blocks, and also
to the difference between medians of active and passive blocks. *, **, *** correspond to p-values of 10%, 5%, and 1% level, respectively.

In terms of the effect of activism on firm performance, Brav et al. (2009) indicate that hedge funds are effective
at influencing corporate policies and improving corporate governance. They conclude that hedge fund activism
has been successful in improving operating performance, increasing payouts, and reducing agency costs. It is
associated with an almost immediate increase in payout and heightened discipline of the CEO (see Table 7).

10

11

0.0335***
[99.33]
0.0195***
[3.55]
0.0178***
[3.27]
0.0038
[0.67]
0.0081
[1.29]
0.0171***
[2.30]
0.1324***
[-59.48]

In (MV)

1.87
0.2257

2.17

-0.94
-0.0007

-0.16

0.55

1.30
0.0011

63,153
17.10%
0.0022

0.0023***
[32.37]
0.0003
[0.27]
0.0020*
[1.79]
0.0039***
[3.34]
0.0042***
[2.95]
0.0031*
[1.80]
0.0121***
[25.75]

PAYLD

(3)

-0.16

2.14
-0.0022

67.550
2.79%
0.0116

0.0007***
[3.42]
0.0026
[0.75]
0.0011
[0.34]
0.0065
[1.57]
0.0127**
[2.38]
-0.0011
[-0.28]

DIVINI

(4)

0.75

0.66
0.0126

67,530
32.90%
0.00984

0.0044***
[6.79]
0.0100
[0.95]
0.0266**
[2.57]
0.0261**
[2.40]
0.0365***
[3.06]
0.0392***
[2.77]
0.0543***
[12.84]

NETLEV

(5)

0.69

0.61
0.0597

67,540
46.00%
0.0261

0.4932***
[59.05]
0.2702**
[1.98]
0.0956
[0.71]
0.0441
[0.31]
0.1217
[0.78]
0.1553
[0.84]
-1.6538***
[-29.97]

ALTMAN

(6)

3.01

4.24
0.1497

57,311
58.30%
0.1786

0.2409***
[129.21]
-0.0033
[-0.11]
0.0128
[0.41]
0.0749**
[2.31]
0.1914***
[5.39]
0.1625***
[3.86]
0.6747***
[54.38]

DtD

(7)

-0.76

2.30
-0.0225

16,060
0.80%
0.0551

-0.99

-0.85
-0.5107

16,170
36.50%
-0.4561

2.3097***
[73.32]
0.1376
[0.40]
0.3803
[1.10]
0.6864*
[1.92]
-0.0758
[-0.20]
-0.1304
[-0.30]
-11.6054***
[-43.21]

CEOPAY

0.0019
[1.23]
0.0570***
[2.80]
0.0556**
[2.60]
0.0675***
[2.63]
0.1107***
[3.30]
0.0331
[0.99

(9)

(8)
CEOTURNOVER

(10)

2.28

-0.36
0.0593

15,913
23.80%
0.0095

0.0596***
[40.16]
-0.0090
[-0.57]
0.0013
[0.08]
-0.0015
[-0.09]
0.0108
[0.56]
0.0606***
[2.69]
0.0255**
[2.03]

Pay-forPerformance

Variables: ROA is the return on assets, defined as EBITDA/lagged assets; q is define as (book value of debt + market value of equity) / (book value of debt + book value of equity); PAYYLD is defined as
(dividend +share repurchase)/(market value of equity); DIVINI is a dummy variable for an initiation of dividend payout during the year; NETLEV is defined as (debt cash)/(debt + book value of equity);
ALTMAN is Altmans (1968) Z-score which proxies for the bankruptcy risk; DtD is the distance to default, which measures the number of standard deviation decreases in firm value before the firm is in
default based on Mertons (1974) bond-pricing model; CEOTURNOVER is the rate of CEO turnover; CEOPAY is the total CEO contracted pay including options valued at granting (TDC1 from ExecuComp);
Pay-for-Performance is the percentage of CEO take-home pay (including option exercise) that comes from equity-based incentive. *, **, and *** indicate statistical significance at the 10, 5, and 1% levels.

Source: Brav et al. (2009).

66,951
24.20%

65399
0.316
-0.0097

Observations
R2
Test of H0:
(t + 1) (t - 1):
t-statistic
Test of H0:
(t + 2) (t - 1):
t-statistic

Industry fixed
effect

0.2625***
[65.85]
0.3494***
[-5.38]
0.4243***
[-6.57]
0.3651***
[-5.40]
0.2513***
[-3.39]
-0.1986**
[-2.26]
1.2195***
[46.33]

(2)

Year fixed
effect

Constant

Event year +2

Event year +1

Event year

Event year-1

Event year-2

ROA

Variable

(1)

Table 7: Target firm performance before and after hedge fund activism

Appendix 1: References
Armour, J., & Cheffins, B. (2012). The Rise and Fall (?) of Shareholder Activism by Hedge Funds. Journal of
Alternative Investments, 14(3), 17-27.
Brav, A., Jiang, W., & Kim, H. (2009). Hedge Fund Activism: A Review. Foundations and Trends in Finance, 4(3),
185246.
Brav, A., Jiang, W., Partnoy, F., & Thomas, R. (2008). Hedge Fund Activism, Corporate Governance, and Firm
Performance. Journal of Finance, 63(4), 1729-1775.
Cai, J., & Walkling, R. A. (2011). Shareholders Say on Pay: Does It Create Value? Journal of Financial &
Quantitative Analysis, 46(2), 299-339.
Chung, H., & Talaulicar, T. (2010). Forms and Effects of Shareholder Activism. Corporate Governance: An
International Review, 253257.
Clifford, C. P. (2008). Value creation or destruction? Hedge funds as shareholder activists. Journal of Corporate
Finance, 14(4), 323336.
Cohn, J. B., & Rajan, U. (2013). Optimal Corporate Governance in the Presence of an Activist Investor. Review
of Financial Studies, 26(4), 985-1020.
Cziraki, P., Renneboog, L., & Szilagyi, P. G. (2010). Shareholder Activism through Proxy Proposals: The European
Perspective. European Financial Management, 16(5), 738777.
de Bakker, F. G., & den Hond, F. (2008). Introducing the Politics of Stakeholder Influence: A Review Essay.
Business & Society, 47(1), 8-20.
Gantchev, N. (2013). The costs of shareholder activism: Evidence from a sequential decision model. Journal of
Financial Economics, 107(3), 610631.
Ghahramani, S. (2013). Sovereign wealth funds and shareholder activism: applying the Ryan-Schneider
antecedents to determine policy implications. Corporate Governance: The International Journal of Effective
Board Performance, 13(1), 58-69.
Gillan, S. L., & Starks, L. T. (2007). The Evolution of Shareholder Activism in the United States. Journal of
Applied Corporate Finance, 19(1), 55-73.
Girard, C. (2011). Success of Shareholder Activism: The French Case. Bankers, Markets & Investors, 115, 2636.
Graves, S. B., Rehbein, K., & Waddock, S. (2001). Title: Fad and Fashion in Shareholder Activism: The Landscape
of Shareholder Resolutions, 19881998. Business & Society Review, 106(4), 293-314.
Helwege, J., Intintoli, V. J., & Zhang, A. (2012). Voting with their feet or activism? Institutional investors impact
on CEO turnover. Journal of Corporate Finance, 18, 22-37.
Hoffman, A. (1996). A strategic response to investor activism. Sloan Management Review, 37(2), 51-64.
Judge, W. Q., Gaur, A., & Muller-Kahle, M. (2010). Antecedents of Shareholder Activism in Target Firms:
Evidence from a Multi-Country Study. Corporate Governance: An International Review, 18(4), 258-273.

12

Klein, A., & Zur, E. (2009). Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.
Journal of Finance, 64(1), 187-229.
Logsdon, J. M., & Van Buren III, H. J. (2008). Justice and Large Corporations: What Do Activist Shareholders
Want? Business & Society, 47(4), 523 -548.
Logsdon, J., & Buren, H. (2009). Beyond the Proxy Vote: Dialogues Between Shareholder Activists and
Corporations. Journal of Business Ethics, 87, 353-365.
Low, C. K. (2004). A Road Map for Corporate Governance in East Asia. Northwestern Journal of International
Business Law, 25, 165-203.
Martin, R., & Nisar, T. M. (2007). Activist investment: institutional investor monitoring of portfolio companies.
Management Decision, 45(5), 827-840.
ORourke, A. (2003). A new politics of engagement: shareholder activism for corporate social responsibility.
Business Strategy and the Environment, 12(4), 227.
Parrino, R., Sias, R. W., & Starks, L. T. (2003). Voting with their feet: institutional ownership changes around
forced CEO turnover. Journal of Financial Economics, 68(1), 346.
Prevost, A. K., Rao, R. P., & Williams, M. A. (2012). Labor Unions as Shareholder Activists: Champions or
Detractors? Financial Review, 47(2), 327-349.
Rehbein, K., Logsdon, J., & Buren, H. (2013). Corporate Responses to Shareholder Activists: Considering the
Dialogue Alternative. Journal of Business Ethics, 112(1), 137-154.
Schaefer, H., & Hertrich, C. (2013). Shareholder Activism in Germany: An Empirical Study. IUP Journal of
Corporate Governance, 12(2), 28-39.
Schneider, M., & Ryan, L. (2011). A review of hedge funds and their investor activism: do they help or hurt other
equity investors? Journal of Management & Governance, 15(3), 349-374.
Sjstrm, E. (2008). Shareholder activism for corporate social responsibility: what do we know? Sustainable
Development, 16(3), 141-154.
Waldron, T. L., Navis, C., & Fisher, G. (2013). Explaining Differences in Firms Responses to Activism. Academy
of Management Review, 38(3), 397-417.
Wu, Y. (2004). The impact of public opinion on board structure changes, director career progression, and CEO
turnover: Evidence from CalPERS corporate governance program. Journal of Corporate Finance, 10(1),
199227.

13

Appendix 2: Selected abstracts

Source

Business Strategy and the Environment12.4 (Jul/Aug 2003): 227

Article

A new politics of engagement: shareholder activism for corporate social responsibility

Authors

ORourke, Anastasia

Abstract

Shareholder groups are increasingly going beyond the decision to invest, not to invest, or
to divest by proposing and voting on company specific corporate social responsibility (CSR)
issues at annual shareholder meetings. This activity is joined by an increasingly sophisticated
strategy of engagement by both shareholders and companies. In the process, a model of
investor capitalism based on responsible ownership is being forged that addresses social
and environmental issues previously outside the domain of most shareholders. This paper
traces a historical perspective on the growth and spread of shareholder activism, describes
the key actors currently involved in this activity, illustrates the CSR issues being raised,
explains the process of preparing resolutions and entering into dialogue, assesses some of
the results gained so far and lays a conceptual foundation to help analyse the effectiveness
of shareholder activism and assess the viability of models of shareholder democracy.

Source

Journal of Finance. Feb2009, Vol. 64 Issue 1, p187-229

Article

Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.

Authors

Klein, April; Zur, Emanuel

Abstract

We examine recent confrontational activism campaigns by hedge funds and other private
investors. The main parallels between the groups are a significantly positive market reaction
for the target firm around the initial Schedule 13D filing date, significantly positive returns over
the subsequent year, and the activists high success rate in achieving its original objective.
Further, both activists frequently gain board representation through real or threatened proxy
solicitations. Two major differences are that hedge funds target more profitable firms than
other activists, and hedge funds address cash flow agency costs whereas other private
investors change the targets investment strategies.

14

Source

Corporate Governance: An International Review. Jul2010, Vol. 18 Issue 4, p258-273

Article

Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi-Country Study

Authors

Judge, William Q.; Gaur, Ajai; Muller-Kahle, Maureen

Abstract

Manuscript Type: Empirical Research Question/Issue: This study seeks to better understand
the antecedents of 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 200307 time period. Research Findings/Insights: Our findings
suggest that the antecedents of shareholder activism vary by the motivation of the activist.
We demonstrate that activists target firms with two motives (a) to improve the financial
performance, and (b) to improve the social performance of the firm. With respect to the
target firm level antecedents, we find that 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. Further, 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. Theoretical/Academic Implications: Our findings suggest that future research
should differentiate between the motivations of the activism event. Further, we find that
while agency logic works well for financial activism, institutional theory provides stronger
explanations for social activism. Overall, we demonstrate the complementary nature of
these two theories in explaining shareholder activism. Practitioner/Policy Implications: We
found that the exposure to shareholder activism varies by the motivation of the activist, and
the nature of the firm and its national context. An understanding of these issues would help
firms develop proper response strategies to activism events

Source

Business & Society 2008 47 (4) 523 -548

Article

Justice and Large Corporations: What Do Activist Shareholders Want?

Authors

Logsdon, Jeanne M.; Van Buren III, Harry J.

Abstract

Shareholder resolutions filed by socially concerned investors are a rich and underused source
of data for research in social issues in the business and society field. This article examines
how shareholder activists use the resolution process to advocate for issues related to social
justice and corporate activities. After briefly reviewing the justice and shareholder activism
literatures, the authors report the results of a study of 1,719 shareholder resolutions filed
during the 19992005 period by members and affiliates of the Interfaith Center on Corporate
Responsibility, a coalition of approximately 275 religious organizations and other partners
that seeks to use their investments to achieve social change. Among the findings is that the
majority of justice-related resolutions dealt with employment and economic development
issues. The authors conclude with a discussion of implications for corporate managers,
shareholder activists, and management researchers.

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Financial Review. May2012, Vol. 47 Issue 2, p327-349

Article

Labor Unions as Shareholder Activists: Champions or Detractors?

Authors

Prevost, Andrew K.; Rao, Ramesh P.; Williams, Melissa A.

Abstract

We examine the impact of labor union shareholder activism through the submission of
shareholder proposals during the period 1988-2002. We examine the effect of labor unionsponsored shareholder proposals on announcement period returns; on the corporate
governance environment of the firm including shareholder rights, board composition, and
CEO compensation; on changes in unionization rates and labor expense; and on longrun shareholder wealth. We do not find any observable patterns for the overall sample of
proposals. However, subsets of proposals associated with union presence at the target
firm and shareholder voting support for the proposal are associated with significant effects
surrounding and subsequent to targeting

Source

Management Decision, 2007, Vol. 45 Iss: 5 pp. 827 - 840

Article

Activist investment: institutional investor monitoring of portfolio companies

Authors

Martin, Roderick; Nisar, Tahir M.

Abstract

Purpose The purpose of the paper is to show what Asset managers undertake to operate
in accordance with the Statement of Institutional Shareholders Committee (ISC) whenever
they engage with portfolio companies on behalf of their institutional investor clients. The
Statement (2002) states that institutional shareholders have a responsibility to make
considered use of their votes, and to enter into a dialogue with companies based on the
mutual understanding of objectives.

Design/methodology/approach A survey study of Asset managers was conducted to

evaluate their adherence to the ISC Principles. Findings The findings in the paper show
that fund managers routinely analyse information concerning those companies in which they
invest, and have meetings with company managers. Managers are also involved in activities
to promote standards of corporate governance and corporate accountability. It is also found
that managers experience in managing deal flows, funds specialization and engagement
specialists are the key drivers of adherence to the ISC Principles.

Originality/value The paper highlights the importance of specific fund capabilities for
monitoring and controlling portfolio companies.

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Business & Society, Volume 47 Number 1, March 2008, 8-20

Article

Introducing the Politics of Stakeholder Influence: A Review Essay

Authors

de Bakker, Frank G. A.; den Hond, Frank

Abstract

If stakeholder theory is to become a full theory of businesssociety relationships, it will

have to develop a better understanding of processes by which stakeholders may gain and
hold influence over firms. A better understanding of the political processes involved is
required. This paperas well as the papers in this special issuetakes a political view
to addressing the issue, and thereby extends the currently dominant demographic and
structural approaches. It suggests that the influence of stakeholders over firms is the
temporary outcome of processes of action, reaction, and interaction among various parties.
Consequently, the further advancement of stakeholder theory would benefit from the
adoption of process-research methods and thinking.

Source

Journal of Financial Economics, Volume 107, Issue 3, March 2013, Pages 610631

Article

The costs of shareholder activism: Evidence from a sequential decision model

Authors

Gantchev, Nickolay

Abstract

This paper provides benchmarks for monitoring costs and evaluates the net returns
to shareholder activism. I model activism as a sequential decision process consisting of
demand negotiations, board representation, and proxy contest and estimate the costs of
each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million.
I find that the estimated monitoring costs reduce activist returns by more than two-thirds.
The mean net activist return is close to zero but the top quartile of activists earns higher
returns on their activist holdings than on their non-activist investments. The large-sample
evidence presented in this paper aids in understanding the nature and evolution of activist
engagements.

Source

Academy of Management Review. Jul2013, Vol. 38 Issue 3, p397-417

Article

Explaining Differences in Firms Responses to Activism

Authors

Waldron, Theodore L.; Navis, Chad; Fisher, Greg

Abstract

Activist campaigns describe efforts to modify socially or environmentally detrimental industry

practices by contesting prominent industry members versions of those practices (i.e., target
firms). We adopt a socio-cognitive perspective to account for variance in when and how the
managers of target and non-target firms attend to, interpret, and respond to pressure from
activists. Overall, we enhance theory by explaining why firms in an industry differ in their
reactions to activism, even when they are subject to common campaigns and strategies.

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IUP Journal of Corporate Governance. Apr2013, Vol. 12 Issue 2, p28-39

Article

Shareholder Activism in Germany: An Empirical Study

Authors

Schaefer, Henry; Hertrich, Christian

Abstract

Germany is the largest economy in Europe and yet there has been very little research in
the area of shareholder activism. The main objective of this research paper is to discuss
shareholder activism for DAX 30 companies. The paper provides the most recent empirical
evidence that formal activism in Germany remains a relatively ineffective instrument for
shareholder engagement, in contrast to research findings for the US and UK financial
markets. The study has used all publicly available information from various sources and
represents as of today one of the most extensive research analyses for shareholder activism
in Germany.

Source

Journal of Business Ethics. Jan2013, Vol. 112 Issue 1, p137-154

Article

Corporate Responses to Shareholder Activists: Considering the Dialogue Alternative

Authors

Rehbein, Kathleen; Logsdon, Jeanne ; Buren, Harry

Abstract

This empirical study examines corporate responses to activist shareholder groups filing
social-policy shareholder resolutions. Using resource dependency theory as our conceptual
framing, we identify some of the drivers of corporate responses to shareholder activists.
This study departs from previous studies by including a fourth possible corporate response,
engaging in dialogue. Dialogue, an alternative to shareholder resolutions filed by activists, is
a process in which corporations and activist shareholder groups mutually agree to engage
in ongoing negotiations to deal with social issues. Based on a unique dataset of resolutions
filed by member organizations of the Interfaith Center on Corporate Responsibility from 2002
to 2005 and the outcomes of these resolutions, our analysis finds that corporate managers
are more likely to engage in dialogue with shareholder activists when the firm is larger, is
more responsive to stakeholders, the CEO is the board chair, and the firm has a relatively
lower percentage of institutional investors

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Corporate Governance: The International Journal of Effective Board Performance. 2013, Vol.
13 Issue 1, p58-69

Article

Sovereign wealth funds and shareholder activism: applying the Ryan-Schneider antecedents
to determine policy implications

Authors

Ghahramani, Salar

Abstract

Purpose The purpose of this paper is to examine the propensity of sovereign wealth funds
(SWFs) for shareholder activism and their potential impact on corporate governance.
Design/methodology/approach The study highlights the relationships between SWFs and
corporate governance and also applies eight antecedents/determinants of institutional
activism to analyze whether SWFs have a predisposition for shareholder activism.

Findings The study only finds two instances of SWF activism. Additionally, it finds that
despite their mostly passive investments, SWFs possess a natural tendency toward
shareholder activism. Some are more likely to engage in activism than others, however.
SWFs with a higher proportion of their assets invested in equities, those with portfolios fully
or partially constructed to emulate the broader financial markets through indexing, and
those that depend less on external fund managers are the likeliest candidates for activism.
The study also finds that the regulatory environment can curb the natural SWF inclination
for activist behavior.

Research limitations/implications Due to the lack of transparency within the SWF universe,
this study largely depends on the limited data available for sovereign wealth funds.
Practical implications Given the growing importance of SWFs, managers, directors, and
policymakers must assess SWF activism, its influence on corporate governance, and its
implications for public policy deliberations.

Originality/value This project, to the best of the authors knowledge, is the first study that
applies tested financial models to SWFs in order to determine if they have inherent activist
tendencies.

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Journal of Alternative Investments. Winter2012, Vol. 14 Issue 3, p17-27

Article

The Rise and Fall (?) of Shareholder Activism by Hedge Funds

Authors

Armour, John; Cheffins, Brian

Abstract

Shareholder activism by hedge funds became a major corporate governance phenomenon

in the United States in the 2000s. This article puts the trend into context by introducing a
heuristic device referred to as the market for corporate influence to distinguish the exante-oriented offensive brand of activism hedge funds engage in from the ex-post-oriented
defensive activism carried out by mutual funds and pension funds. This article traces the
rise of hedge fund activism and anticipates future developments, arguing in so doing that
despite the blow the 2008 financial crisis dealt to hedge funds, their interventions will remain
an important element of U.S. corporate governance going forward.

Source

Journal of Financial & Quantitative Analysis. Apr2011, Vol. 46 Issue 2, p299-339

Article

Shareholders Say on Pay: Does It Create Value?

Authors

Cai, Jie; Walkling, Ralph A.

Abstract

Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We
find that when the House passed the Say-on-Pay Bill, the market reaction was significantly
positive for firms with high abnormal chief executive officer (CEO) compensation, with low
pay-for-performance sensitivity, and responsive to shareholder pressure. However, activistsponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor
governance, or poor performance. The market reacts negatively to labor-sponsored proposal
announcements and positively when these proposals are defeated. Our findings suggest that
say-on-pay creates value for companies with inefficient compensation but can destroy value
for others.

Source

Journal of Management & Governance. Aug2011, Vol. 15 Issue 3, p349-374

Article

A review of hedge funds and their investor activism: do they help or hurt other equity
investors?

Authors

Schneider, Marguerite; Ryan, Lori

Abstract

Hedge funds tend to be highly activist investors who exercise their principal power over their
portfolio firms. We observe that, compared to other investor types, hedge funds appear to be
even more activist than is predicted by a comprehensive Investor Activism Model, due to the
unexpectedly large role of several antecedent variables. This conclusion suggests that the
relatively lightly regulated environment of hedge funds affects the weighting of conventional
activism-antecedent variables. We explore how their access to several investing and trading
strategies is allowing hedge funds to redefine investor activism. In the process, we find that,
while hedge funds and their activism tend to benefit fellow investors, the potential exists for
some specific hedge fund types to expropriate value from minority shareholders, creating
principal-principal conflict. The potentially detrimental impact of hedge fund activism on
other equity investors is demonstrated, illuminating several current policy concerns

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Review of Financial Studies. Apr2013, Vol. 26 Issue 4, p985-1020

Article

Optimal Corporate Governance in the Presence of an Activist Investor

Authors

Cohn, Jonathan B.; Rajan, Uday

Abstract

We provide a model of governance in which a board arbitrates between an activist investor

and a manager facing reputational concerns. The optimal level of internal board governance
depends on both the severity of the agency conflict and the strength of external governance.
Internal governance creates a certification effect, so greater intervention by the board
can lead to worse managerial behavior. Internal and external governance are substitutes
when external governance is weak (the board commits to an interventionist policy to induce
participation from the activist) and complements when external governance is strong (the
board relies to a greater extent on the activists information).

Source

Bankers, Markets & Investors. nov/dec2011, Issue 115, p26-36

Article

Success of Shareholder Activism: The French Case

Authors

Girard, Carine

Abstract

This aim of this study is to distinguish which features of shareholder activism lead to a
successful outcome in the French context. Shareholder activism is considered herein as a
process consisting of a series of influential activities. We examine cases of confrontational
activity from the point at which the conflict first becomes the object of media attention. Using
data collected in the French financial press from January 1989 to June 2008, we look at
the cases of 203 French corporations which have been the target of criticism on the part
of activist shareholders. To gain an accurate measure of success in French shareholder
activism processes we examine to what extent shareholders have been able to achieve their
objectives, and what degree of influential activity has been involved. Our results reveal,
throughout the period studied, a striking correlation between successful outcomes and the
most confrontational influential degree: the law suit. We also observe that, since the changes
in the French activist landscape brought about by a legal enforcement of minority rights in
2001, the involvement both of activist institutional investors and proxy professionals has also
been significant factor of success.

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Business & Society Review, Winter2001, Vol. 106 Issue 4, p293

Article

Fad and Fashion in Shareholder Activism: The Landscape of Shareholder Resolutions, 1988
1998

Authors

Graves, Samuel B.; Rehbein, Kathleen; Waddock, Sandra

Abstract

Examines the changes in corporate ethics and shareholder resolutions. Ethical implications
of shareholder resolutions on corporate governance; Relationship of activism to governance
and social performance; identification of trends in social policy

Source

Journal of Business Ethics, Jul2009 Supplement 1, Vol. 87, p353-365

Article

Beyond the Proxy Vote: Dialogues Between Shareholder Activists and Corporations

Authors

Logsdon, Jeanne; Buren, Harry

Abstract

The popular view of shareholder activism focuses on shareholder resolutions and the
shareholder vote via proxy statements at the annual meeting, which is treated as a David
vs. Goliath showdown between the small group of socially responsible investors and the
powerful corporation. This article goes beyond the popular view to examine where the
real action typically occurs in the Dialogue process where corporations and shareholder
activist groups mutually agree to ongoing communications to deal with a serious social
issue. Use of the capitalized word Dialogue is intended to distinguish this formal process
between corporations and shareholders from all the other forms of dialogue or two-way
communication exchanged between a corporation and its stakeholders. The phenomenon
of Dialogue between a corporation and dissident shareholders has not been analyzed in
the academic literature or in the popular press because it occurs behind the scenes and
out of sight from media scrutiny. Yet this is where a great deal of social change initiated by
shareholder activists is negotiated. This article contributes both theoretically and empirically
to the study of Dialogues between shareholder activists and corporations. We explain how
Dialogues occur in the context of the shareholder resolution process and examine two
Dialogues that focus on international labor issues in two industries. Then data on Dialogues
during the period, 19992005, from the Interfaith Center on Corporate Responsibility are
analyzed. This research contributes to knowledge about the Dialogue process and the
emerging literature on corporationstakeholder engagement.

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Northwestern Journal of International Business Law, 25 (2004), pp. 165-203

Article

A Road Map for Corporate Governance in East Asia

Authors

Low, C.K

Abstract

Much has transpired since the inadequacies of corporate governance practices in East Asia
were glaringly exposed by the Asian financial crisis. The crisis brought to the foreground
numerous deficiencies, which had common roots in excessive over-leverage as well as
the lack of transparency, disclosure and accountability. These issues have been explicitly
recognized with the release of the White Paper on Corporate Governance in Asia by the Asian
Roundtable on Corporate Governance in June 2003.
By responding in part to the White Paper, this article sets out a roadmap whose ultimate
objective is the enhancement of the practice of corporate governance in three jurisdictions,
namely Hong Kong, Malaysia and Singapore. These countries are selected as proxies for the
region with the choice premised upon their common legal framework, which emphasizes the
rule of law, the liquidity of their capital markets and the high mobility of capital without the
imposition of any controls. By setting up a roadmap couched in broad principles as regards
the roles and duties of directors, shareholders and regulators, this paper seeks to provide
some ideas that have the distinct advantage of adaptability across jurisdictions thereby
transcending the cultural divide of the East Asian region.

Source

Sustainable Development. May/Jun2008, Vol. 16 Issue 3, p141-154

Article

Shareholder activism for corporate social responsibility: what do we know?

Authors

Sjstrm, Emma

Abstract

There is a growing body of research on shareholder activism for corporate social and
environmental responsibility. This paper maps and synthesizes research on this topic during
19832007. Five key themes emerge. (1) Several studies address shareholder proposals in
the US, including proposal topics, voting results, and typical targets for such activism. (2)
Other studies focus on the effects of shareholder activism on corporate policy and practice.
Further, studies have been conducted on shareholder activism by (3) NGOs, (4) unions and
(5) pension funds respectively. Based on this review, missing perspectives are identified and
suggestions are made for future research directions.

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Journal of Finance. Aug2008, Vol. 63 Issue 4, p1729-1775

Article

Hedge Fund Activism, Corporate Governance, and Firm Performance

Authors

Brav, Alon; Jiang, Wei; Partnoy, Frank; Thomas, Randall

Abstract

Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in
the United States propose strategic, operational, and financial remedies and attain success
or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most
cases are nonconfrontational. The abnormal return around the announcement of activism
is approximately 7%, with no reversal during the subsequent year. Target firms experience
increases in payout, operating performance, and higher CEO turnover after activism. Our
analysis provides important new evidence on the mechanisms and effects of informed
shareholder monitoring.

Source

Sloan Management Review, 1996, 37(2), 51-64.

Article

A strategic response to investor activism

Authors

Hoffman, Andrew

Abstract

How can a corporate executive balance social and economic pressures when social activists
and corporate investors are tile same people? This is the quandary Amoco Corporation faced
when investors repeatedly filed proxy resolutions requesting adoption of the Valdez Principles,
ten environmental principles developed by the Coalition for Environmentally Responsible
Economies (CERES). The author describes the evolution of the relationship between CERES
and Amoco. He shows how Amoco responded strategically to investor activism with corporate
activism. He also discusses the three factors determining a companys response to investor
activism: the firms culture, the power and influence of the group filing the resolution, and the
political climate in which the resolution is filed. Ultimately, responding to investor activism
becomes an important aspect of integrating political strategy into competitive strategy.

Source

Journal of Applied Corporate Finance. Winter2007, Vol. 19 Issue 1, p55-73

Article

The Evolution of Shareholder Activism in the United States

Authors

Gillan, Stuart L.; Starks, Laura T.

Abstract

The authors present a history of shareholders activism in the United States. They reveal that
investor activism in the form of shareholder proposals has been the domain of individual
shareholders and religious groups. They state that the potential to enhance the value of
their investments has been the main motive for investors activism in the monitoring of
corporations.

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Journal of Corporate Finance, Volume 10, Issue 1, January 2004, Pages 199227

Article

The impact of public opinion on board structure changes, director career progression, and
CEO turnover: evidence from CalPERS corporate governance program

Authors

Wu, Yilin

Abstract

Extant research investigates the effects of legal mechanisms and shareholder activism
on corporate governance. Zingales [Journal of Finance 55 (2000) 1623] calls for research
concerning the effects of public opinion on corporate governance. The California Public
Employees Retirement System (CalPERS) influences public opinion by publicly naming the
companies having poor corporate governance. This study hypothesizes that public naming
by CalPERS damages the reputations of management and directors at these companies,
and these companies respond by improving their corporate governance. This hypothesis
is supported by three findings. First, companies are more likely to decrease the number
of inside directors after being named publicly by CalPERS. A large proportion of departing
inside directors remains full-time employees in the named companies. Second, departing
inside directors are less likely to take up future directorships after their companies are
named publicly by CalPERS. Finally, the likelihood of CEO dismissal increases and the
relation between performance and CEO dismissal becomes stronger after companies are
named publicly by CalPERS. These three findings are consistent with the hypothesis that
CalPERS influences public opinion and that reputation concerns are effective in compelling
companies to improve their corporate governance system.

Source

Journal of Financial Economics, Volume 68, Issue 1, April 2003, Pages 346

Article

Voting with their feet: institutional ownership changes around forced CEO turnover

Authors

Robert Parrino; Richard W. Sias; Laura T. Starks

Abstract

We investigate whether institutional investors vote with their feet when dissatisfied
with a firms management by examining changes in equity ownership around forced CEO
turnover. We find that aggregate institutional ownership and the number of institutional
investors decline in the year prior to forced CEO turnover. However, selling by institutions
is far from universal. Overall, there is an increase in shareholdings of individual investors
and a decrease in holdings of institutional investors who are more concerned with holding
prudent securities, are better informed, or are engaged in momentum trading. Measures
of institutional ownership changes are negatively related to the likelihoods of forced CEO
turnover and that an executive from outside the firm is appointed CEO.

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Journal of Corporate Finance, 18 (2012) 2237

Article

Voting with their feet or activism? Institutional investors impact on CEO turnover

Authors

: Jean Helwege; Vincent J. Intintoli; Andrew Zhang

Abstract

We examine the relation between institutional investors and management discipline over
the last several decades to better understand how CEO turnover has increased. Using a
sample of forced and voluntary turnovers, we investigate the changing roles of activism and
exit among institutional investors between 19821994 and 19952006.We find evidence of
activist investors throughout the sample period and their impact is consistently significant
in multivariate analysis. In contrast, voting with their feet has declined to the point where it
no longer affects turnover outcomes. Nonetheless, activism is fairly uncommon and does
not explain the higher turnover observed over time. Block holdings of known activists have
increased and are linked to improving target firms. However, other blocks merely reflect
the increasing size of institutional money managers. Going forward, the increasing size of
institutional investors seems likely to inhibit voting with their feet while activism remains an
important vehicle for change.

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Shareholder Activism
Prof. Dr. Didier Cossin & Dr. Jose Caballero
July 2013 IMD, All Rights Reserved
Visit our website: www.imd.org/boardcenter