What is shareholder activism and how can business best handle. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Karpoffs 2001 survey of 20 empirical studies on shareholder activism both. Judging from prior writings, many researchers and practitioners think shareholder initiated corporate governance proposals promote valuemaximizing policies.
The complexity of these combinations helps to understand how difficult it is for directors to operate in shareholders interest. We find that when the house passed the sayonpay bill, the market reaction was significantly positive for firms with high abnormal chief executive officer ceo compensation, with low payforperformance sensitivity, and responsive to shareholder pressure. Barber gallagher professor of finance graduate school. Second, shareholder activism has become more value increasing over time.
Congress and activists recently proposed giving shareholders a say vote on executive pay. Previous studies debate over whether activists use proxy proposals to discipline firms or to simply advance their selfserving agendas, and whether proxy proposals are effective at all in addressing governance concerns. Researchers emphasizing changes in target firms governance structures tend to characterize shareholder activism as a successful tool to improve firm performance. The rights of shareholders to choose members of the board of directors, approve mergers and acquisitions, authorize new equity issues, and amend the firms articles of organization give them ultimate power over important corporate decisions. Journal of ancial economics elsevier journal of financial economics 42 1996 365 395 corporate governance and shareholder initiatives. Pdf investor activism, managerial responsiveness, and. Shareholder voting lies at the foundation of a wide range of corporate governance protections. In particular as the ability of an independent audit committee to curb earnings management may constrain the relation between monitoring by the largest institutional investor and earnings management on one hand, and the relation between shareholder activism and earnings management, on the other. The research achieves this by exploring the perspectives of company directors as they relate to the. In closedend funds, a managed distribution policy mdp is a dividend commitment potentially requiring the liquidation of assets.
In fact, karpoff 2001 considers the question of what motivates shareholder activism as the number one in a long list of unresolved and underinvestigated issues in shareholder activism. New evidence from the splitshare structure reform in china li liao meijuan shi hao wang november 24, 2008 abstract we examine shareholder activism in the recent splitshare structure reform in china. The shareholder involved continued his campaign even after the board adopted a poisonpill approach that would have diluted shareholders in the event of a hostile takeover bid. Shareholder activism survey report 2016 3 key takeaways 84% of directors believe most activist shareholders do not represent the interests of all of a companys shareholders, with 85% saying they are simply too focused on shortterm performance. Using a sample of shareholder proposals from 1993 to 20 and a handcollected data set of the political variables of public pension funds, we document evidence consistent with the political attention hypothesis. Shareholderinitiated proxy proposals on corporate governance issues became popular in. Karpoff university of washington 2066854954 email protected for presentation at the corporate governance i praksis. At the heart of shareholder activism is the quest for value, yet the empirical evidence suggests that effects of such activism. We argue that mdps lower managerial claims on fund assets and, when the fund is at a discount, increase shareholder value. Pdf shareholder activism and the new role of investor. Active shareholder engagement safeguards the interests and the rights of the minority shareholders from the effect of agency relationships and from the consequences of the unique atmosphere of shareholder activism in malaysia. Academic studies in the united states started in the late 1990s and initially produced less encouraging results.
Karpoff j 1998 impact of shareholder activism on target companies a survey of from economics 220. Essays on corporate governance and shareholder activism. In that article, bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Can strong corporate governance selectively mitigate the. The purpose of this research is to provide a better understanding of shareholder activism in south africa. We view shareholder activism as a stochastic process that captures observable variability of shareholder demands received by targeted firms and the propensity for private, unobservable shareholder. No exit the logic of defensive shareholder activism andreas jansson abstract this paper examines the issue of what motivates shareholder activism.
Bebchuk 2005 advocates shareholder participation in corporate governance, and argues that shareholder initiated proxy proposals are a useful and relevant means of countering managerial agency problems. We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more. Activistimpelled divestitures and shareholder value. In some cases, organised labour is said to use shareholder activism tactics as a tool to affect corporate policies. A recent study by fti consulting shows that 76% of institutional investors had favorable views of shareholder activism, and 84% of them believed that activism did add value to a target company. Pdf institutional investors, shareholder activism, and earnings. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with increased share values and operating performance. Shareholder activism and engagement the phrase shareholder activism refers to shareholders using their power to improve company policy and practice. Karpoff 2001 and romano 2001 conclude that institutional investor activism as a whole has little impact on firm performance.
Internasjonalt seminar, 10 september 2001 this paper was initiated while i was the john m. Hence, there is a dire need for minority shareholders to be more active and responsive in their dealings with corporations. We conclude that shareholder activism in which the activist does not own a substantial block of shares is most often ineffectual, whereas activists that invest substantially in the target firm tend to have positive impacts on firm value and performance. Karpoff, malatesta, and walkling 1996 find little evidence that operating performance or share price improves for companies that are the targets of a shareholder proposal. Maug 1996, found that a liquid stock market is beneficial because it makes investor activism a more effective. The phrase is used in a number of different ways, which can be confusing.
We revisit the question of the motivation and impact of pension fund activism by studying the shareholder proposals of the largest and most active funds from 1987 through 1993. A fairly small stake less than 10% of outstanding shares may be enough to launch a successful campaign. Request pdf the impact of shareholder activism on target. Shareholder activism and engagement your faith your finance. May 20, 2015 second, shareholder activism has become more value increasing over time. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with. Shareholder activism through the proxy process by luc. Activist shareholders purchase shares in a public company with the express purpose of effecting direct change on governance or strategy. A survey of empirical research article in journal of corporate finance 44 march 2016 with 158 reads how we measure reads. An activist shareholder is a shareholder that uses an equity stake in a corporation to put pressure on its management. We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary. A conceptual discussion on shareholder activism has led to a.
Shareholder activism gillan and stark 2007 and karpoff 2001 and more broadly, large investors monitoring of corporate managers shleifer and vishny. Institutional investors, shareholder activism, and. To a large extent, activism is a debate about capital deployment, risk tolerance, and performancetopics that are typically part of managements and the boards agenda in the normal course of business. The impact of shareholder activism on financial reporting and compensation. This paper studies the political incentive of public pension funds in shareholder activism. A large number of studies have examined the factors leading to shareholder activism related events, the different forms such activism can takeand its impact on firm practices. The evolution of shareholder activism in the united states. Shareholder activism through the proxy process has been subject to intense academic debate in recent years. Hedge fund activism, corporate governance, and firm performance alon brav, wei jiang, frank partnoy, and randall thomas abstract using a large handcollected data set from 2001 to 2006, we find that activist hedge funds in the. Shareholder activism and corporate governance in the united states. Bebchuk 2005 advocates shareholder participation in corporate governance, and argues that shareholder initiated proxy proposals are a useful and relevant means of. The disagreement persists despite numerous empirical studies on the topic. The importance of shareholder activism corporate outcomes has attracted great attention for from both the public and academia.
Shareholder activism cases shareholder activism has become increasingly prominent in the investment world and a powerful force in corporate decision making in recent years1. Shareholder activism has become a dominant force in corporate activities today, and is a contentious topic in many corporate boardrooms. When shareholder activism goes too far the new yorker. Director primacy and shareholder disempowerment by stephen. Shareholder activism is an exercise of power, sometime benign, sometimes threatening to the interests of corporate management, boards and other shareholders. Activism that is not associated with the formation of ownership blocks is associated with insignificant or very small changes in target firm value. The standard explanation portrays shareholder activism as a response to poor corporate performance, but the empirical literature provides inconclusive support, indicating the need for alternative or. Starksrelationship investing and shareholder activism by institutional investors. Apr 07, 2015 the purpose of this post is to provide an overview of activism along this spectrum. Managed distribution policies in closedend funds and. In case after case, activists are increasingly trying to gain board inuence by nominating their own directors, a practice that has been bolstered legislatively by the passage of proxy access.
Fisher college of business, ohio state universio, columbus, oh 43210, usa received. This paper provides evidence on the corporate governance role of shareholder initiated proxy proposals. Walklingb school of business administration, university of washington, seattle, wa 98195, usa b max m. Wealth effects of the secs proposal to facilitate director nominations volume 47 issue 5 ali c. A survey of empirical findings abstract researchers and investors disagree over the extent to which shareholder activism facilitates improvements in target firms values, earnings, operations, and governance structures. Most of those emphasizing changes in share values, earnings, or operations, in contrast, characterize shareholder activism as having negligible effects on target companies. Indeed, most investors stress monitoring and activism in relation to measures of performance, as opposed to governance in isolation.
In the second essay, consequences to directors of shareholder activism, coauthored. One of the keys to being prepared for activists is to understand what theyre doing and why. Most evidence indicates that shareholder activism can prompt small changes in target firms governance structures, but has negligible impact on share values and earnings karpoff 2001 a small number of american institutional investors spend a trivial amount of money on overt activism efforts institutions. Hedge fund activism, corporate governance, and firm performance. In comparison, a full takeover bid is a much more costly and difficult undertaking. A shareholder activist is a person who attempts to use his or her rights as a shareholder of a publiclytraded corporation to bring about change within or for the corporation. Pdf we study relationships between shareholder proposal activism, managerial response, and corporate social performance csp. Our third contribution is to document how shareholder activism recently has become. The practice consists of buying a minimum stake of a companys stock often only % and fully asserting ownership rights, in particular the right to vote on. Karpoff j 1998 impact of shareholder activism on target. The impact of shareholder activism on target companies.
Firms that have inadequate csp are more likely to be targeted for activism rehbein et al. The shareholder activism in india can be tracked down in the year of early 2010 when there was a mandatory requirement done by sebi related to the disclosing of voting policies related to domestic mutual funds as well as voting actions on an annual basis. In particular, during the mid1980s, the involvement of large institutional shareholders increased dramatically with the advent of public pension fund activism. Karpoff, 1999 and after litigation fich and shivdasani, 2007. The case of employee stock options expensing abstract we examine the economic consequences of more than 150 shareholder proposals to expense employee stock options eso submitted during the proxy seasons of 2003 and 2004, the first. Shareholder activism improves firm valuation denes, karpoff, and mcwilliams 2016 a few notable caveats. Most of the aforementioned studies find that hedge fund activism is associated with significantly positive abnormal stock returns around the announcement, as well as operational. Aug 14, 20 shareholder activism on the part of hedge funds has, over the past decade, played an increasingly important, and highprofile, role in the market, with money managers like ackman, daniel loeb, of. Preparing for bigger, bolder shareholder activists mckinsey. First of all, shareholder activism is nothing new its existed ever since shareholders have had voting rights in the companies where they hold shares. Specifically, four implications for investor relations can be derived from the rise of shareholder activism.
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