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Pension Fund Activism: The Double‐Edged Sword

Brad M. Barber

in The Future of Public Employee Retirement Systems

Many public pension funds engage in activism by using their pooled ownership of stock to affect changes in the corporations they own. The merits of activism depend on (1) the conflicts of interest ... More

Many public pension funds engage in activism by using their pooled ownership of stock to affect changes in the corporations they own. The merits of activism depend on (1) the conflicts of interest between corporate managers and shareholders, and (2) the conflicts of interest between portfolio managers and investors. These conflicts lead to two types of activism: shareholder activism and social activism. Portfolio managers can use their position to monitor conflicts that might arise between managers and shareholders (shareholder activism), but they can also abuse their position by pursuing actions that advance their own moral values or political interests at the expense of investors (social activism).Less

Foreign Investors and Corporate Governance in Japan *

Sanford M. Jacoby

in Corporate Governance and Managerial Reform in Japan

US institutional investors are a key actor helping to diffuse shareholder‐primacy precepts overseas, including Japan. This study focuses on CalPERS, the public pension fund that is one of Japan's ... More

US institutional investors are a key actor helping to diffuse shareholder‐primacy precepts overseas, including Japan. This study focuses on CalPERS, the public pension fund that is one of Japan's largest foreign equity investors. Using original sources, the article shows how CalPERS transferred to Japan the activist tactics and governance principles it developed in the United States. CalPERS had modest success in changing corporate governance law and practice in Japan. It faced opposition from big business and other groups skeptical that the CalPERS principles would improve corporate performance. Given this resistance as well as barriers to institutional and legal change, CalPERS turned to relational investing as a way of extracting greater value from its Japan investments. Although CalPERS seeks to create long‐term value, it is also concerned with the distribution of value among corporate stakeholders. The article considers the distributional effects of governance change and urges continuing attention to this issue.Less

Epilogue: Challenges to the UK System of Ownership and Control

Brian R. Cheffins

in Corporate Ownership and Control: British Business Transformed

After 1990, activism by traditionally dominant institutional shareholders increased and ‘offensive’ shareholder activism (primarily by hedge funds) and ‘public-to-private’ buyouts carried out by ... More

After 1990, activism by traditionally dominant institutional shareholders increased and ‘offensive’ shareholder activism (primarily by hedge funds) and ‘public-to-private’ buyouts carried out by private equity firms became part of UK corporate governance. While activism implies a ‘hands on’ approach to the running of public companies and private equity buyouts involve the removal of companies from the stock market, these trends do not pose a threat to outsider/arm's-length corporate governance. Instead, the institutional investors that have traditionally dominated share ownership (pension funds and insurance companies) have been exiting the UK stock market, the scepticism of neutral investors imposes significant limits on the viability of offensive activism, and private equity deal flow is modest in relation to the population of publicly traded companies. Moreover, since shareholder activism and private equity buyouts help to keep agency costs in check, they may even fortify current arrangements going forward.Less

Sokaiya

Curtis J. Milhaupt and Mark D. West

in Economic Organizations and Corporate Governance in Japan

Chapters 5 and 6 examine the dark side of Japanese economic institutions. Discusses the unusual and problematic form that shareholder activism has traditionally taken in Japan—professional disturbers ... More

Chapters 5 and 6 examine the dark side of Japanese economic institutions. Discusses the unusual and problematic form that shareholder activism has traditionally taken in Japan—professional disturbers of shareholders meetings, or ‘sokaiya’. Again we see the impact of institutions on behaviour, as the workings of the sokaiya are directly linked to the quality of corporate information disclosure in Japan, a function of the institutional environment in which Japanese firms operate.Less

Shareholder Democracy and Shareholder Activism

Anita Indira Anand

in Shareholder-driven Corporate Governance

This chapter examines shareholder-driven corporate governance (SCG) through the twin concepts of shareholder democracy and shareholder activism. Taken together, these concepts are the vehicle through ... More

This chapter examines shareholder-driven corporate governance (SCG) through the twin concepts of shareholder democracy and shareholder activism. Taken together, these concepts are the vehicle through which SCG takes effect in practice. The term activist investor describes an institutional investor that seeks value-enhancing changes in the leadership, governance, capital structure, or strategy and operations of a corporation in which it is invested. There are two basic types of activism: offensive activism, in which a hedge fund takes over a poorly performing firm and then reforms it to enhance its performance; and defensive activism, in which the activist institution takes on an advocacy role when it is unhappy with a corporation of which it already holds a significant block. Meanwhile, shareholder democracy refers to the ability of shareholders to influence the corporation through their votes. It is an important concept in corporate law, one that underpins the legitimacy of shareholder activism.Less

Labor’s Shares

Sanford M. Jacoby

in Labor in the Age of Finance: Pensions, Politics, and Corporations from Deindustrialization to Dodd-Frank

This chapter examines the evolution of labor's financial turn, wherein union funds relied on the cookbook to find common ground with other investors and to raise returns on their holdings. In several ... More

This chapter examines the evolution of labor's financial turn, wherein union funds relied on the cookbook to find common ground with other investors and to raise returns on their holdings. In several industries — including hospitals, hotels, and building services — unions drew on experiences to mount corporate campaigns that incorporated shareholder activism and other financial strategies. The chapter explores the collective bargaining agreement, which is a type of governance model that gives workers greater standing than under shareholder primacy. It explains how labor tweaked the cookbook to make it more compatible with a pro-worker approach to investing. The principles of transparency and accountability were invoked to press mutual funds to report their proxy votes and companies to reveal their political donations.Less

Activism, Wolf Packs, and SCG

Anita Indira Anand

in Shareholder-driven Corporate Governance

This chapter explores shareholder activism carried out by “wolf packs.” Just as a blockholder with a sizable percentage of the corporation’s equity can significantly influence a firm’s governance, a ... More

This chapter explores shareholder activism carried out by “wolf packs.” Just as a blockholder with a sizable percentage of the corporation’s equity can significantly influence a firm’s governance, a wolf pack is a group of investors that attacks a target corporation in tandem under the leadership of a single, sophisticated activist, collectively acquiring enough equity to form a de facto block. The chapter then looks at the formation of wolf packs and conflicting theories that attempt to explain their behavior. It also focuses on their ability to acquire considerable power in a corporation, considering the challenges that presents to legal regimes, particularly in proxy contests and other change-of-control transactions. Changes of control, especially in cases of hostile takeovers, are controversial because they often necessitate a consideration of strategic objectives different from those of the target company’s board prior to the takeover.Less

The 2000s: The Decade from Hell

Brian R. Cheffins

in The Public Company Transformed

This chapter analyzes the 2000s, which for public companies and the executives who ran them was akin to “the decade from hell.” The stock market performed poorly, the number of public companies ... More

This chapter analyzes the 2000s, which for public companies and the executives who ran them was akin to “the decade from hell.” The stock market performed poorly, the number of public companies declined substantially, and scandals in the early 2000s and the financial crisis of 2008 greatly eroded confidence in big business. A deregulatory trend that began in the late 1970s was reversed, epitomized by the enactment of the Sarbanes Oxley Act of 2002. A casualty of the bad news for public companies was the imperial-style CEO who featured prominently as the 1990s drew to a close. Those running banks nevertheless enjoyed a corporate governance “free pass” in the mid-2000s that arguably contributed to the onset of the financial crisis.Less

Governing State Capitalism: The Case of Brazil

Mariana Pargendler

in Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism

Brazil is a main exemplar of contemporary pursuit of state capitalism by a Western economy. Major SOEs have survived the prior wave of privatizations, but they are by no means the only avenue for ... More

Brazil is a main exemplar of contemporary pursuit of state capitalism by a Western economy. Major SOEs have survived the prior wave of privatizations, but they are by no means the only avenue for state influence over corporate governance in Brazil. The state increasingly acts as a minority, rather than majority, investor in Brazil as elsewhere. The particular variety of state capitalism prevailing in Brazil today reflects a combination of governmental control of traditional SOEs with the conspicuous exercise of shareholder activism by SCIIs. This chapter provides a picture of the various instruments for state influence in Brazilian corporate governance, and examines the role of law in enabling and constraining this evolving variety of state capitalism. The chapter’s analytical framework posits that state capitalism entails a significant degree of governmental discretion in guiding economic activity. Consequently, the governance of state capitalism calls for a particularly intricate balance.Less

The Short-Term Problem Perceived

Mark J. Roe

in Missing the Target: Why Stock-Market Short-Termism Is Not the Problem

Chapter 1 presents the wide public, political, and media attack on stock market short-termism. It outlines the channels through which stock market short-termism is seen as seriously damaging the ... More

Chapter 1 presents the wide public, political, and media attack on stock market short-termism. It outlines the channels through which stock market short-termism is seen as seriously damaging the economy and hurting the average worker: slashed investment, cash-burning buybacks, R&D cutbacks, environmental degradation, global warming, and sidelined employees. It describes the views of senators, presidential candidates, and presidents on the issue.Less

Two Cheers for CSR

Peter Rosenblum

in Corporate Social Responsibility?: Human Rights in the New Global Economy

This chapter provides an overview of corporate social responsibility (CSR) strategies employed by industry as well as activist networks and draws out aspects of the apparel and extractive sector's ... More

This chapter provides an overview of corporate social responsibility (CSR) strategies employed by industry as well as activist networks and draws out aspects of the apparel and extractive sector's CSR struggles. Because of their centrality to the evolution of CSR and for what they suggest about strengths and weaknesses in systems of redress, these industries require critical examination. This chapter argues that standards do not function in isolation, despite all the effort to create systems of monitoring, policing and enforcing them. When standards do work, it is because of external forces like local law enforcement or the continuing efforts of journalists and NGOs that act outside the agreed structures. The chapter concludes with a recent case study that accentuates the limitations of CSR. It describes the case of an extraordinary CSR-driven investment project and how owners and investors managed to avoid fulfilling any of its commitments until it was confronted.Less

Socially Responsible Investing and Purchasing

Steve Lydenberg and Katie Grace

in New Frontiers of Philanthropy: A Guide to the New Tools and New Actors that Are Reshaping Global Philanthropy and Social Investing

Responsible investing and purchasing use market pressures to achieve social and environmental benefits by altering the behavior of firms. Strategies such as screening or standard-setting in ... More

Responsible investing and purchasing use market pressures to achieve social and environmental benefits by altering the behavior of firms. Strategies such as screening or standard-setting in investing, or ethical decision-making in purchasing, can impact firms’ bottom line or reputation. These market-based activities communicate environmental, social, and governance goals to corporations and use market pressures to change corporate behavior. The chapter examines the mechanics of these two tools and analyzes both the strengths and the limitations they possess and the level of success they have achieved.Less

Concept and Evidence against Stock-Market-Driven Short-Termism

Mark J. Roe

in Missing the Target: Why Stock-Market Short-Termism Is Not the Problem

Chapter 6 examines the best evidence pointing to stock market short-termism being only a minor issue, or not a problem at all, and notes research that rebuts some evidence from Chapter 5.

Concept and Evidence for Stock-Market-Driven Short-Termism

Mark J. Roe

in Missing the Target: Why Stock-Market Short-Termism Is Not the Problem

Chapter 5 brings forward the best evidence for stock-market short-termism being a serious problem.

Introduction: How Big Is the Problem of Stock-Market-Driven Short-Termism?

Mark J. Roe

in Missing the Target: Why Stock-Market Short-Termism Is Not the Problem

The Introduction begins by recounting the popular view that stock-market-driven short-termism severely damages the US economy. Firms forgo the R&D they need, cut capital spending, and starve ... More

The Introduction begins by recounting the popular view that stock-market-driven short-termism severely damages the US economy. Firms forgo the R&D they need, cut capital spending, and starve themselves of cash by excessively buying back stock to satisfy Wall Street. Stock market pressure means directors and managers cannot manage for the long-term when their shareholders furiously trade their companies’ stocks, they cannot invest enough when stockholders demand rising quarterly profits, they must slash R&D when investors demand that precious cash be used to buy back stock, and they cannot even strategize about the long-term when shareholder activists demand immediate results. If that weren’t bad enough, the stock market’s short-termism is also blamed for environmental degradation, for contributing to global warming, and for employee mistreatment. Due to short-termism, corporations are less socially responsible, in a widely-held view. The Introduction exemplifies these perceptions with statements from national political leaders. However, the Introduction then states, the case for deeply pernicious results from stock market short-termism is weaker on the evidence and on the logic of how markets work than the view popular among pundits and lawmakers. Those lawmakers and pundits who aim at stock-market-driven short-termism can readily miss more likely targets for attacking the ills often attributed to stock market short-termism. For example, stock market short-termism is said to severely damage corporate R&D spending and thereby hold the economy back. But a look at the numbers points to other causes and more propitious targets for improving American R&D. And the environmental, climate, and social responsibility failures emanate from selfishness—externalities in the technical vocabulary—more than from truncated time horizons. The Introduction closes with suggestions that the prominent perception of pernicious short-termism is explained largely by political and social currents: first, targeted interests benefit when stock markets are blamed and, second, a wide but diffuse public dissatisfaction with economic arrangements overall, including discomfort with increasing uncertainty and instability in the workplace, and a generalized disorientation from the rapidity of technological change, which often looks like short-termism but is not.Less

Conclusion

Mark J. Roe

in Missing the Target: Why Stock-Market Short-Termism Is Not the Problem

This conclusion recapitulates how and why the evidence does not support the popular and political understanding that stock market short-termism is severely damaging the economy. Some of the public ... More

This conclusion recapitulates how and why the evidence does not support the popular and political understanding that stock market short-termism is severely damaging the economy. Some of the public impetus against stock market short-termism derives from unease over current economic arrangements. Some of it derives from a mistaken belief that short-termism is a major impetus degrading corporate purpose, corporate social responsibility, and corporate effort to head off climate catastrophe. And corporate interests can at times benefit from this popular understanding.Less