"Active Ownership" Dimson, Elroy, Oğuzhan Karakaş, and Xi Li Flashcards
What is the main idea?
Introducing and examining the impact of shareholder activism on environmental and social questions
What is the methodology used?
Each component of ESG is divided into different themes and issues.
Due to lack of research on ES engagements, the authors focus on ES engagements and use the CG engagements for comparison.
Data about active engagements with public US companies.
What is a “universal owner”?
Major institutional investors, who have diversified and ultra-long-term holdings with large ownerships.
They have multiple roles: as shareholders or creditors, and long-term fiduciary responsibilities to their customers, beneficiaries, and the wider community.
Which firms do active owners engage with?
Firms are more likely to be engaged if they are:
1. In the late stage of business maturity
2. Have a suboptimal performance
3. The asset manager and other socially conscious institutional investors (such as pension activists) have high shareholdings in the firm
4. Have poor governance
5. Have reputational concerns
How are these engagements executed?
Two major categories are selected based on those involved:
*Hard collaborations – include the partnership of the asset manager with activist investors, such as SRI funds, pension funds, asset managers…
*Soft collaborations – refer to asset managers who benefit from external ESG initiatives and principles made by investment bodies, nonprofit organisations, or the firm’s industry
Cooperation with hard collaborators is more successful, as the hard are activist investors, whereas the soft are passive principals (this exists for ES engagements and not CG).
Do active owners compete or collaborate with other shareholders, and with what effect?
The asset manager’s ownership matters more for CG engagements vs to ES engagements.
The likelihood of engagement with an ES proposal is higher if company has reputational concerns.
These findings indicate the importance of potential collaborations with other stakeholders and of customer opinion and loyalty (stronger in customer-facing industries)
What determines the success of these engagements?
Successful engagement – If the changes suggested by asset manager are implemented
Success is more likely if:
1. The target firm has reputational concerns, a capacity to implement change, economies of scale, and headroom for improvement.
2. There has been successful prior engagement experience with the same target firm
3. Asset manager, other active investors and/or stakeholders collaborate (especially for ES, ES requires more convincing and efforts to change than CG)
4. Higher capacity to implement change
5. Larger headroom for improvement
6. Focused CG engagements and collaborative ES engagements more likely to be successful
Many engagements are triggered by public events (46.6% of the cases analyzed in this research are preceded by public news)
How does the market react to engagements?
ESG engagements create an abnormal return of +2.3% over the year following the engagement.
The abnormal returns are higher for successful engagements (+7.1%), but they gradually flatten out after a year. (Biggest effect for CG and climate change themes)
No market reaction to unsuccessful engagements.
ESG activism increases stakeholder value when engagements are successful and does not destroy firm value even when unsuccessful.
Not much difference between CG and ES engagements.
This suggests that there is a threshold for success to be pursued and achieved for both types of engagements.
How do ESG activities affect firm performance?
- Enhanced customer and employee loyalty (more with ES) – ROA and the sales per employee improve significantly one year after successful ES engagements
- Clientele effect among shareholders (ES) – Increase in shareholdings by the asset manager, pension activists, and SRI funds one
year after successful ES engagements (near to no effects for the CG subsample)
(Clientele effect – change in share price due to corporate decision-making that triggers investors’ reactions) - Improved governance quality (ESG) – Improvements in the corporate governance structure of targeted firms, (measured
by the entrenchment index), two years after successful engagements on all ESG issues - Improved operating performance
- Profitability
- Efficiency
- Greater employee satisfaction
Why might firms not voluntarily pursue ESG engagements?
- Serious agency issues, high probability of not maximizing shareholder value
- Firms by themselves (without asset managers) may not have the ability to notice and act on the ESG opportunities
Why might a good performance of successfully engaged firms be an illusion?
Performance improvements could result from filtering by engaged companies, which accept value enhancing proposals and reject value-destructive proposals
What are the differences between CG and ES results?
CG results: larger and longer established firms more successful, the success neither requires heavy spending nor relies on the reputational concerns of the companies
ES results: larger firms can afford more changes, reputational concerns matter, improvements are costly, need a scope for improvement and greater financial slack for success
What are the 4 channels of value enhancement from ESG activism?
- Socially conscious consumers have greater loyalty
- Employee satisfaction outperforms market
- Virtuous companies attract broader range of investors
- Successful investor interventions signal future governance improvements
