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The Limited Power of Proxies and Shareholder Resolutions

From the Harvard Corporate Governance Blog:

On October 15, Lance E. Lindblom, President and CEO of The Nathan Cummings Foundation, gave a presentation at Harvard Law School on shareholder activism. Based in New York City, The Nathan Cummings Foundation is a grant-making body committed to democratic values, social justice, and building a socially and economically just society. With an endowment of over $500 million, the Foundation uses its shareholder status to vote proxies and file shareholder resolutions in a manner consistent with achieving its mission and discharging its fiduciary obligations. In his presentation, Mr. Lindblom explained why the Foundation has adopted an activist role as shareholder, drawing links between social justice and long-term shareholder value. ... A webcast of Mr. Lindblom’s talk can be viewed here.

Count me a skeptic that Lindblom’s experience is typical. A recent literature review analyzed empirical studies measuring “short-term stock market reactions to announcement of shareholder initiatives, longer-term stock market and operating performance, outcomes of votes on shareholder proposals, and changes in corporate strategy and investment decisions in response to activism.” Event studies of shareholder proposals and announcements of other forms of shareholder activism generally found no statistically significant abnormal returns to shareholders, although some studies of various subsamples found significant returns.  Results of long-term performance studies have been “mixed,” but virtually all find no statistically significant changes in operating performance. Stuart L. Gillian & Laura T. Starks, The Evolution of Shareholder Activism in the United States (undated), available at http://ssrn.com/abstract=959670.

Today, although conventional wisdom is to the contrary, institutional investor activism remains rare. It is principally the province of union and state and local public employee pension funds. But while these investors’ activities generate considerable press attention, they can hardly be said to have reunited ownership and control. Indeed, the extent to which public pension funds engage in shareholder activism varies widely. Much public pension fund activism, moreover, takes the form of securities fraud litigation rather than corporate governance activities. Most funds have demonstrated little interest in such core governance activities as nominating directors or making shareholder proposals. Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance (2007), available at http://ssrn.com/abstract=1010330.

To be sure, activism by hedge and private equity funds often is identified as an important exception to the general rule of shareholder apathy.  A recent study by Robin Greenwood confirms the growing impact of activism by such funds:

[B]etween 1994 and 2006, the number of public firms targeted for poor performance by hedge funds grew more than 10-fold.

More importantly, hedge funds may be up to the task of monitoring management—a number of recent academic papers have found that hedge funds generate returns of over 5 percent on announcement of their involvement, suggesting that investors believe these funds will increase the value of the firms they target.

But do these funds generate value by effecting governance or operational change? Greenwood argues that hedge fund managers generally are poorly suited to making operational business decisions and, with their short-term focus, are unlikely “to devote time and energy to a task delivering long-term value. After all, there are no guarantees that the effort will pay off, or that other shareholders would recognize the increase in value by paying a higher price per share.”

Instead, hedge funds profit mainly through corporate control—rather than corporate governance—activism. He argues that “hedge funds are better at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover.” This hypothesis was confirmed by his study of over 1000 cases of hedge fund activism, which found that “targets of investor activism earn high returns only for the subset of events in which the activist successfully persuades the target to merge or get acquired.” Robin Greenwood, The Hedge Fund as Activist, HBR Working Knowledge, Aug. 22, 2007.