Shareholder Activism

European Corporate Governance Alisa Tyagunova, Olga Tsilowa

Agenda
1. Definition

2. Shareholder Activists
3. Subjects of Shareholder Activism 4. Methods of Shareholder Activism

5. Effects of Shareholder Activism

6. Case Study 7. Conclusion

Definition
Shareholder activism refers to shareholders who claim their power as company owners in order to influence corporations behaviour
http://www.ecgi.org/activism/

A continuum of responses to corporate performance

Sikavica K, Hillman A.

Hint: Actions initiated by minority shareholders dissatisfied with the performance

3

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Main types of shareholder activists

Institutional investors
Hedge Funds Public and private Pension Funds Unions Social investment Funds (religious organizations or public policy groups) Financial institutions Insurance companies Equity Funds Other institutional investors

Individual investors
Corporate gadflies Other individual investors

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Determinants
When does the potential for shareholder optimism arise?
Managers make decisions in their own interests

Agency problems due to separation of ownership and control

Board doesnt fulfill its responsibility

Dissatisfaction of shareholders

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Agency Theory
Potential conflict of interests: Managers acting in their interests even at the expense of shareholders Asymmetry of knowledge Example: Executive compensation and privileges at the costs of shareholders Main concern of shareholders: to increase their value to achieve maximum investment returns According to the theory rational shareholder will become active only if the

expected benefits of activism exceed the expected costs of activism

In the practice, however, shareholder are sometimes pursue other goals than beneficial for the target firms, like social or that of corporate governance. Example: Limiting the control of managers causes costs (reduction of profits)
Strand, T. (2012)
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Options for dissatisfied shareholder

Exit Voice

Sell shares

Legal intervention mechanisms

Active Shareholder

Loyalty
Definition
Shareholder activists

No activities

Thomsen, S. & Conyon, M.; (2012);

Motivation

Methods

Effects

Case study

Conclusion

Where is shareholder activism focused?

o Companies that have experienced poor stock performance relative to their competitors o Companies with larger market capitalizations o Companies with a heavy concentration of institutional shareholders o Large firms that appear a lot in media o Companies with a high percentage of independent directors

Copland, James R., Feyman, Y. and OKeefe, M. (2012) 8

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

In which industries is shareholder activism focused?

http://proxymonitor.org/forms/pmr_02.aspx

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

The subject of shareholder activism ( 1 st motive)

Value maximizers Major group Primarily target the poorly performing firms in their portfolio Initiate necessary measures to put pressure on the management of such firms to improve performance

enhance shareholder value

achieve maximum investment returns Types of activists: Hedge funds, and other value-drivers looking to get the most out of their investments
(Pozen,2003) 10

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

The subject of shareholder activism ( 2 nd motive)

Social Policy Affects matters related to social responsibility and responsible corporate behavior Wish to comply with external normative pressures, such as: culture, law, politics, informal codes of conduct, and societal expectations

gain legitimacy as business actors Types of activists: Pension funds, Social investment Funds Where: e.g. Energy sector- environmental issues
Meyer and Rowan (1977); DiMaggio and Powell (1983)
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

The subject of shareholder activism ( 3 rd motive)

Corporate Governance Watchdogs Process-based: change the allocation of power among boards, management, and shareholders Examine how independent a board is and how executives are compensated Example: Modification of rules for electing directors; separating the positions of chairman and chief executive officer

Types of activists: Proxy advisory firms, even media organization could be added who report on the company
Carleton (1998) Norden, L. L. and Strand, T. (August 2011) Copland, James R., Feyman, Y. and OKeefe, M. (2012)
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Methods
File proxy proposals and vote at Annual General Meeting Engage in private negotiations with management

Target the company via public media

Sikavica K, Hillman A.

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Definition

Shareholder

Motivation

Methods

Effects

Case study

Conclusion

Proxy proposals and voting at Annual General Meeting

AGM is a central battleground for shareholder activists

Shareholder Proposals

Voting on Management and Shareholder Proposals

Strand, T. (2012), Sanberg, J. (2011)

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Definition

Shareholder

Motivation

Methods

Effects

Case study

Conclusion

Shareholder Proposals
Shareholder proposals formal communication channel between shareholders and management document recommendation

governance and social proposal

strict restrictions and regulations for submitting company can submit a No-Action request and exclude a proposal

Boards of Directors comment on the proposal in the proxy materials

are usually very costly vast majority are non-binding
Levit, D.and Malenko, N., Van der Elst, C, Sandberg
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Voting on Management and Shareholder Proposals

Voting on Proposals primarily tool for activists to affect corporate decision-making protest voting can lead to significant changes in corporate governance and strategy general pattern: management proposals always pass, shareholder proposal always fail proxy battles are one of the most powerful instruments of activism voting on management proposals is binding, voting on shareholder proposals non-binding question and answer period (Q&A) is a critical part of AGM
Levit, D.and Malenko, N., Van der Elst, C, Sandberg J.
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Definition

Shareholder

Motivation

Methods

Effects

Case study

Conclusion

Effects of Shareholder Activism

Shareholder activism is controversial

Companies with active and engaged shareholders are more likely to be successful Active shareholders can improve corporate performance by better monitoring

Disruptive, opportunistic, misguided action by active shareholders who lack the skills and the experience and follow their own benefits and agenda Take the money and run
Karpoff, J. (2001)
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Definition

Shareholder

Motivation

Methods

Effects

Case study

Conclusion

Effects of Shareholder Activism

Shareholder Activism is very difficut to measure o problem to determine the outcome and attribute directly o problem to observe activism behind the scenes
Voting outcome on shareholder proposals
Changes in governance structure Stock market performance

Positive changes in operating performance

Changes in management

Changes in investment decision

Gillan and Starks, 1998

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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Effects of Shareholder Activism

Empirical evidence is mixed Strong empirical evidences that activism is not positively correlated with organizational performance

Mostly short-run effects

Little evidence of improvement in long-term stock market performance or operating performance Governance proposals generally receiving higher level of support compared to social proposals Especially takeover related proposals receive greater support
Gillan and Starks (1998) and (2000), Karpoff, J.(2001)
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Effects of Shareholder Activism

Pros
Active shareholders o identify undervalued companies
o help to ameliorate the incentive and control problems o play a role of fire alarm and attract attention to critical issues

o build pressure on management to make organizational changes

o are reasonably successful in getting governance structure changes adopted

o increase firm value by prompting specific actions (e.g. CalPERS

effect)
Gillan and Starks (1998) and (2000), Smith, Michael P. (1996), Karpoff, J. (2001)
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Effects of Shareholder Activism

Cons
Active Shareholder. o may not correctly perceive the situation of the company
o may neither have the skills nor the experience o can advocate value-decreasing policies o can pursue goals other than share value maximization o can be interpreted negatively by the market

o are often driven by self promotion

o consume firm resources o are ineffective and have negligible impact on policies, operations

and values
Definition
Shareholder activists

Gillan and Starks (1998) and (2000), Smith, Michael P. (1996), Karpoff, J. (2001)

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Motivation

Methods

Effects

Case study

Conclusion

Case Study

TCI: - London-based Hedge Fund founded by Chris Hohn in 2003

- Pioneer in Shareholder Activism in Europe

TCI , as a small activist shareholder, thwarted a takeover bid by Deutsche Boerse for the London exchange and forced the

resignation of two of its highest profile board members

Huszar, Markus L.; (2007) 22

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

What happend?
After the takeover plan became known, TCI increased their shareholdings step by step As TCI became owner of 5% of the share capital, it called for an extraordinary general meeting and for the election of new supervisory board

TCI started a huge riot against the takover deal and called other shareholder for its boycott
TCI, Atticus, Lone Pine and others accumulated a stake in the company of up to 30% They demanded to stop the takeover as it would not create shareholder value for the investors of Deutsche Brse Instead they called for the share buy-back program and the paying of a special dividend

The CEO and the president of the supervisory board had to leave the company Deutsche Brse initiated a large special dividend and share buyback program

In 2004 Deutsche Brse planned a takeover of the LSE

Abandonment of LSE acquisition

Huszar, Markus L.; (2007) 23

Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

How was it possible?

Aggressive strategy
Nonconsideration of shareholders requirements and underestimati on of their power

Systematic increase of stake

Mobilization of other shareholders and acting in concert

Skilful ussage of media

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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

What was their motivation?

Hedge Funds as profiteers from rising share price of Frankfurter Brse or falling share price of LSE The active Hedge Funds had big stakes in the main competitor Euronext Symbolic signal for the power of shareholder in order to achieve more approval in future

Value maximizers + Corporate Governance Watchdogs

Huszar, Markus L.; (2007)
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Case assessment
The case of Frankfurter Brse and LSE was the first significant
phenomenon of shareholder activism in Germany Important symbolic meaning for the power of shareholder Still very controversial due to . very aggressive strategy of activists

doubtful motives of the activists

uncertainty about the advantageousness of the outcome Public discussion about legal regulations for institutional investors
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Conclusion
Shareholder Activism remains a controversial topic High costs, requirements and regulations limit the chances to become an active shareholder Only large shareholder will obtain return that offsets the associated costs Shareholder proposals often fail due to their non-binding character Empirical evidence show a small impact of activism on the performance of the companies Information asymmetry may lead to lack of understanding and thereby to harmful activism Shareholder often dont have the needed knowledge or experience The most activists follow their own interest, and not the interest of the company 27 (short-term horizon)
Definition
Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Conclusion
HOWEVER, Shareholder activism helps to raise the awareness for critical topics Shareholder activism can be a useful control instrument

The pure presence of activists can lead to better acceptance of

shareholder needs by management
Governmental Regulations Incentive scheme to attract shareholder to hold the shares longer Open communication in order to build trust between shareholder and management Private negotiations and proxy actions over public naming and shaming Informed shareholder
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Thank you for you attention!

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References
Books:

1. Huszar, Markus L.; (2007); Rebellion der Kapitalanleger: Der Investorenaktivismus in Theorie und praktischer Anwendung; Hamburg, Diplomica Verlag GmbH 2. Thomsen, S. & Conyon, M.; (2012); Corporate Governance: Mechanisms and Systems ; London : McGraw Hill.
Internet sources: 1. http://www.academia.edu/1426552/Changing_the_world_through_shareholder_activis m 2. http://www.ecgi.org/ 3. http://www.goingpublic.de/transparenz-fordert-aktionarsaktivismus/ 4. http://theshareholderactivist.com/tools-for-shareholder-activists/what-is-a-shareholderactivist-2 5. http://www.osler.com/newsresources/Details.aspx?id=3650 6. http://www.ehow.co.uk/about_6729036_agency-theory-corporate-governance.html

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Papers: 1. Strand, T. (2012) The Owners and the Power:Insights from Annual General Meetings; PhD Thesis. Centre for Corporate Governance, Department of International Economics and Management, Copenhagen Business School. 2. Yale, R.R.; Less is More: Making Shareholder Activism a Valuable Mechanism of Corporate Governance; CeRP Working Paper Series N 12/01; Law School and National Bureau of Economic Research 3. Smith, Michael P. (1996) Shareholder Activism by Institutional Investors: Evidence from CalPERS; The Journal of Finance, Vol. 51, No. 1 , pp. 227-252. 4. Gillan, Stuart L. & Starks, Laura T. (2000) "Corporate governance proposals and shareholder activism: the role of institutional investors; Journal of Financial Economics, Vol. 57, pp. 275-305 5. Karpoff, Jonathan M. (10/09/ 2001) The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings; For presentation at the Corporate Governance and Praxis: International Seminar 6. Van der Elst, C. (July 2011) Revisiting Shareholder Activism at AGMs: Voting Determinants of Large and Small Shareholders; European Corporate Governance Institute (ECGI) Finance Working Paper No. 311/2011 and Tilburg Law School Legal Studies Research Paper No. 019/2011 7. Levit, D.and Malenko, N. (October 2011) Nonbinding Voting for Shareholder Proposals ; Journal of Finance, October 2011; Rock Center for Corporate Governance Working Paper No. 37. 8. Gillan, Stuart L. and Starks, Laura T. (1998) A Survey of Shareholder Activism: Motivation and Empirical Evidence 9. Hendry, J., Sanderson,P., Barker, R., Roberts, J. (December 2004) Respoonsible ownership, shareholder value and the new shareholder activism; ESRC Centre for Business Research, University of Cambridge Working Paper No. 297, 10. Copland, James R., Feyman, Y. and OKeefe, M. (2012) PROXY MONITOR. A Report on Corporate Governance and Shareholder Activism; Centre for legal policy at the Manhattan Institute 11. Renneboog, L., Szilagyi, Peter G. (March 2010) Shareholder Activism through the Proxy Process; ECGI Finance Working Paper N. 275/2010 12. Yafeh, Y. and Hamdani, A. (October 10, 2011). Institutional Investors as Minority Shareholders 13. Van der Elst, C. (March 7, 2012) Shareholder Rights and Shareholder Activism: The Role of the General Meeting of Shareholders; ECGI - Law Working Paper No. 188/2012. 14. Norden, Lars L. and Strand, Therese (August 2011) Shareholder Activism among Portfolio Managers: Rational Decisions or 15 Minutes of Fame? , Journal of Management & Governance; Volume 15, Issue 3, pp. 375-391 31 15.Sikavica, K., Hillman, A. (2008) Towards a Behavioral Theory of Corporate Ownership and Shareholder Activism; Academy of Management Annual Meeting Proceedings

References