Uses private letters from TIAA-CREF to show that most shareholder activism occurs “behind the scenes” through private negotiations rather than proxy voting
The effect of activism depends on the issue. Board diversity targeting reduces the stock price; restrictions on blank-check stock issues increase it
Regardless of the issue, profitability doesn’t change after activism
Hedge fund activism improves plant-level productivity, which stems from higher labour productivity
Higher labour productivity arises despite hours not rising and wages not falling
Productivity also improves in plants sold by hedge funds. Such disposals are not asset-stripping, but reallocating assets to buyers who can make better use of them
Hedge funds target firms with under-performing plants. Similar under-performing plants not targeted by hedge funds don’t recover. So the recovery isn’t simply a bounce-back that would have happened anyway
When Institutional Shareholder Services (ISS) recommend a “No” vote on say-on-pay, voting support is lower. But this doesn’t mean that the ISS caused lower voting support. It could be that poor-quality proposals lead to lower voting support (which would have happened regardless of ISS’s recommendation)
The paper uses a methodology to tease apart causality. A negative ISS recommendation causes say-on-pay support to fall by 25%
Institutional Shareholder Service (ISS) is a proxy advisor that also provides consulting services to companies, and thus may be conflicted. Glass Lewis is a proxy advisor that does not provide consulting services
When Glass Lewis entered the market, ISS became more likely to recommend “No” votes.
The effects were stronger for large firms (which are more likely to be ISS’s clients) and for complex rather than no-brainer votes (where it’s easier to be biased)
Higher index fund ownership leads to several improvements in governance (more independent directors, fewer poison pills, fewer restrictions on shareholders’ ability to call special meetings, and a lower likelihood of having dual-class shares)
It also leads to higher profitability and valuations. Likely channel is index funds’ voting power: index fund ownership reduces support for management proposals and increases support for governance-related shareholder proposals
Shows causation, not just correlation, by comparing companies at the top of the Russell 2000 (which have high index fund ownership, as they are the largest in their index) with companies at the bottom of the Russell 1000 (which have low index fund ownership)
Higher index fund ownership is uncorrelated with the frequency of activist campaigns, but is associated with more aggressive campaigns – those where the activist seeks board representation, especially in the form of proxy fights.
It also increases the likelihood of campaign success, measured by the campaign leading to a settlement with management (and the number of board seats the settlement gives to the activist), takeover defences being removed, and the firm being sold to the activist or a third party. (Prior studies showed these outcomes increase firm value)
No evidence that these campaigns increase payouts or debt.
- If companies are going to pursue goals beyond profits, investors should be allowed to weigh in. Alex and Tom propose that investors are given a "say-on-purpose" vote.
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