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The Year For Shareholder Activism

By: Jim Helik

he long awaited rise of institutional shareholder activism, first predicted by Peter Drucker in the 1960s, may finally be upon us. The boards of directors of such diverse companies from Disney to Hollinger are being shaken up, as major shareholders are demanding changes, all in the name of corporate governance.

This is, generally speaking, a good thing. Any action that seeks to align the interests of the managers of a business (the agents) with those of the equity owners of that same business (the shareholders), can lead to greater accountability, transparency, and proper incentives. All of these are the principles of good governance and should result in a higher stock price for the firm.

Or do they?

Stock Price Reactions

The academic literature is divided as to whether shareholder proposals, as one part of a corporate governance program, add value. A 1996 study found no significant stock price reaction to shareholder proxy proposals and no operating performance improvement over the one to three years following the shareholder proposal. A1999 study found both positive and negative stock price reactions. There was a negative stock price movement when shareholder proposals were submitted to management, but a positive price movement when the proposal was successful. Finally, a 2000 study found that shareholder proposals sponsored by institutional investors receive much support from other institutional investors and have a small negative impact on stock price.

However, when it comes to the thousand pound elephant in the institutional investment world, the California Public Employees’ Retirement System (CalPERS) results are consistently positive. One study noted that companies contacted by CalPERS regarding CalPERS-sponsored shareholder proposals experienced positive long-term stock price movement, in excess of the S&P 500. A later study found that in the companies that CalPERS had targeted, significant positive stock returns were found around the proxy mailing dates for shareholder proposals. Another study the same year showed that CalPERS was successful in changing the corporate governance structure in threequarters of the companies studied and that the following stock price movement was positive.

The most recent study was conducted by Anson, White and Ho in the Spring 2003 issue of the Journal of Applied Corporate Finance. They examined the effects of CalPERS’ Focus List, a program first begun in 1992 to publicly identify large companies that were deemed by CalPERS to be poor performers.

The process is now much more involved. From an initial list of 1,200 companies across all industries and levels of market capitalization, CalPERS reduces the universe to a preliminary list of about 15 companies that have shown poor financial performance as well as poor corporate governance principles. Over the next four to six months, CalPERS meets with management and directors of the companies on the list. In some cases, changes (such as share buyback programs or other internal controls) are made by companies in response to CalPERS’ concerns. The final Focus List is published in February or March of the year following initial contact and typically contains six to 12 companies.

Positive Excess Return

Anson, White and Ho wished to see whether the Focus List had a beneficial impact on shareholder value. They found that inclusion on the list is associated with a positive excess return to shareholders, which remains positive for a full year after publication. The results where as strong when the list was first compiled in 1992, as it is today. The wealth-enhancing effect was greatest, however, for large cap stocks with extensive analyst coverage and diverse shareholder bases.

So all of this means that major public campaigns on behalf of institutional investors can, and will, impact other institutional investors and can have a positive effect on large companies that, presumably, care about negative opinions being held by shareholders and analysts.

Shareholder activism can work, but it needs public, co-ordinated work from institutional investors. Who here is willing to take up this challenge in Canada?

Jim Helik is co-author of ‘Energy Markets Risk Management,’a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto.

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