Guiding Seminar IV Flashcards
ACTIVE OWNERSHIP
Main findings: Successful participation in CSR has positive returns, while no engagement or unsuccessful engagements has zero abnormal returns.
ESG activism focuses on issues related to the interests of a broader range of stakeholders.
Firms are more likely to be engaged if they are in the late stage of business maturity and have a suboptimal performance.
Hard collaborations include the partnership of the asset manager with activist investors, such as SRI funds, pension funds
Soft collaborations refer to asset managers who benefit from the ESG principles and initiatives established by investment bodies, nonprofit organizations, or the industry
Research concludes that cooperation with hard collaborators, compared with soft collaborators leads to a higher success rate.
Success is more likely if: 1. firm has reputational concerns, a capacity to implement change. 2. There has been successful prior engagement. 3. Collaborations among the asset manager and other active investors and/or stakeholders
Firm value enhancement through 4 esg activism channels: 1. Greater customer loyalty. 2. High employee satisfaction. 3. Broader clientele. 4. Future governance improvement signaling.
ESG activities attract socially conscious customers and investors, and the authors find that, after successful engagements, particularly for those on ES issues, engaged companies experience improvements in their operating performance, profitability, efficiency, shareholding, and governance.
DO INSTITUTIONAL INVESTORS DRIVE CORPORATE SOCIAL RESPONSIBILITY? INTERNATIONAL EVIDENCE
Main idea: An assessment of whether shareholders drive the environmental and social (E&S) performance of firms around the globe
Pension plans consistently influence firms to strengthen E&S performance no matter the country they’re in.
Two settings in which institutional owners could have a greater impact on firms’ E&S performance within the sample: 1. Investor becomes a signatory to the UN principles for Responsible Investment. 2. Firm has low initial E&S performance.
Mechanisms used for demanding change: 1. Exit and selection (does not account for broad, large-scale changes). 2. Voice (not the dominant mechanism, as shareholder proposals are rather scarce and the shareholder proposals are rarely voted on).
Only European institutional investors were shown to impact firms’ E&S performance, as European countries occupy the top 17 positions in E&S rankings of countries.
Investors from countries that rank high on measures of E&S social norms affect firms’ E&S performance, and investors from countries that are relatively unsupportive toward E&S issues do not drive firms’ E&S performance.
ON THE FOUNDATIONS OF CORPORATE SOCIAL RESPONSIBILITY
Common law: private market outcomes, profit maximization as factors leading to the action in the best interests of all stakeholders. Less regulation, more freedom for firm discretion.
Civil law: acknowledges private market failures leading to inefficiencies. The state plays a crucial role in coordinating private markets by stricter stakeholder protection laws.
CSR adoption in common law countries = voluntary decision, while CSR adoption in civil law countries = determined by rules.
Marginal effect theory: Civil law firms outperform because they are more responsive to the shocks changing the demand for CSR actions.
Two channels of firm responsiveness: 1. Consumer channel: shocks trigger changes in consumer demand affecting the market value which forces firms to adjust their CSR. 2. Legal channel: firms in more stakeholder-orientated legal environments tend to be more responsive to shocks.
Consumer channel does not differ between firms in civil and common law countries, which leaves the legal channel accountable for differences in responsiveness across legal regimes.
BEHIND THE SCENES: THE CORPORATE GOVERNANCE PREFERENCES OF INSTITUTIONAL INVESTORS
What encourages shareholder activism: long-run strategic issues (fraud, bad corp governance, excessive compensation).
What discourages shareholder activism: Free-rider problem, inadequate legal rules, weak disclosure requirements.
Only when private discussions and negotiations fail to achieve the goal, investors tend to take public measures.
Paper findings suggest that Voice and Exit shareholder activism strategies are complements, not substitutes
When are exit threats effective? Multiple informed shareholders, their trading incorporates more information on firm’s fundamentals = more threat to firm’s value in case of the exit. If managers own equity in the company, exit threat is even more convincing
How to help with agency: Proxy advisory firms provide institutional investors with research, data, and recommendations on management and shareholder proxy proposals. It reduces the costs of being informed by monitoring, collecting information and using professional judgment in recommendations. However investors should still stay actively informed as proxy advisors can have conflict of interest.
