Last week the IE hosted a Research Workshop on Corporate Governance attended by top scholars on the field of finance. Among the topics discussed, presentations dealt with the classical agency problems that exist in the boardrooms/shareholders relationship and the relationship between activism and performance.
This latter issue has attracted much attention recently. Can institutional investors with a large shareholder stake within a company display a monitoring activism that improves corporate performance? Some empirical studies for the US have shown both that there has been little activism and that there are weak links between activism and performance. Several explanations have been offered, but the following two are the most appealing. First, there are important free riding problems whereby improvements in performance by activism is shared by all shareholders but only those active bear the cost. Second, US regulation do not offer the tools needed for an effective activism. In this respect the regulation differs in the UK where an extraordinary general meeting can be called by just 10% of shareholders and a cumulative majority voting process is needed for general directors (each director has to be elected by a majority of yes, excluding abstentions).
The UK seems a more appropriate field to test for the relationship between performance and activism. This has been addressed in a recent paper by Marco Becht, Julian Franks, Colin Mayer and Stefano Rossi presented at the IE Workshop. The paper, entitled Returns to Shareholder Activism. Evidence from a Clinical Study of the Hermes UK Focus Fund, focuses on the Hermes Fund owned by the British Telecom Pension Scheme. The main results show that Hermes’ engagement in management (whether collaborative or confrontational with the board) pays off, and corporate performance is improved with activism. Moreover, the free riding problem is partially taken care of as Hermes shares the costs of activism with other institutional investors.
It is worthwhile the effort!