Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi‐Country Study

• Author: Maureen I. Muller‐Kahle,William Q. Judge,Ajai Gaur
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00797.x
• Published date: 01 July 2010
• Date: 01 July 2010

Antecedents of Shareholder Activism in Target

Firms: Evidence from a Multi-Country Studycorg_797258..273

William Q. Judge*, Ajai Gaur, and Maureen I. Muller-Kahle

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study seeks to better understand the antecedents of shareholder activism targeted at f‌irms

located in three common law countries (i.e., USA, UK, and Australia) and three civil law countries (Japan, Germany, and

South Korea) during the 2003–07 time period.

Research Findings/Insights: Our f‌indings suggest that the antecedents of shareholder activism vary by the motivation of

the activist. We demonstrate that activists target f‌irms with two motives (a) to improve the f‌inancial performance, and (b)

to improve the social performance of the f‌irm. With respect to the target f‌irm level antecedents, we f‌ind that f‌irm size is

unrelated to f‌inancial activism, but positively related to social activism; ownership concentration is negatively related to

both f‌inancial and social activism; and prior prof‌itability is negatively related to f‌inancial activism, but positively related to

social activism. Further, these relationships in the case of f‌inancial activism are generally stronger in common law legal

systems, whereas those in the case of social activism are generally stronger in environments with a greater level of income

inequality.

Theoretical/Academic Implications: Our f‌indings suggest that future research should differentiate between the motiva-

tions of the activism event. Further, we f‌ind that while agency logic works well for f‌inancial activism, institutional theory

provides stronger explanations for social activism. Overall, we demonstrate the complementary nature of these two theories

in explaining shareholder activism.

Practitioner/Policy Implications: We found that the “exposure” to shareholder activism varies by the motivation of the

activist, and the nature of the f‌irm and its national context. An understanding of these issues would help f‌irms develop

proper response strategies to activism events.

Keywords: Corporate Governance, Shareholder Activism, Agency Theory, Institutional Theory

In a review of corporate governance literature, Daily,

Dalton, and Cannella (2003) identif‌ied shareholder activ-

ism as an important factor in corporate governance that has

not received adequate attention in extant literature. Previous

research on shareholder activism has focused almost exclu-

sively on the f‌inancial effects of activist’s actions on target

f‌irms (Gillan & Starks, 2007). Furthermore, almost all of the

previous research has examined activism within the United

States (Gillan & Starks, 2003). Nonetheless, other nations,

such as those in the Europe, are attempting to allow more

shareholder activism (e.g., Croci, 2007), and foreign inves-

tors based in the United States are beginning to mount activ-

ist pressure on f‌irms based outside of the United States, such

as in Japan (e.g., Seki, 2005). Unfortunately, the literature on

the effects of shareholder activism within the United States

is equivocal, and the antecedents of target f‌irm specif‌ic

shareholder activism both within and outside of the United

States are largely unexamined (Ciccotello & Grant, 1999;

Hernandez-Lopez, 2003).

Consequently, this study seeks to better understand the

relationship between antecedents of shareholder activism

on target f‌irms from a comparative perspective. Specif‌ically,

we analyzea dataset, manually collected from news archives,

on f‌irms that have experienced shareholder activism in six

diverse developed economies. In so doing, we differentiate

between two motivations behind shareholder activism –

f‌inancially-motivated activism and socially-motivated activ-

ism. We utilize agency theory and institutional theory to

explain the f‌inancially-driven and socially-driven activism,

respectively. Wef‌ind that the antecedents of activism vary by

*Address for correspondence: 2137 Constant Hall, College of Business & Public

Administration,Old Dominion University, Norfolk, VA23529, USA. Tel: 757-683-6730;

E-mail: wjudge@odu.edu

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Corporate Governance: An International Review, 2010, 18(4): 258–273

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00797.x

the motivation of the shareholder activist across a matched

pair sample of 234 f‌irms. Furthermore, our data reveal that

both target f‌irm-level characteristics and the national insti-

tutional context inf‌luence the likelihood of shareholder

activism. To the best of our knowledge, this is the f‌irst study

to systematically investigate the antecedents of shareholder

activism in a cross-national dataset.

THEORY AND HYPOTHESES

The Nature of Shareholder Activism

Shareholder activism is def‌ined as “the use of ownership

position to actively inf‌luence company policy and practice.

Shareholder activism can be exerted through letter writing,

dialogue with corporate management or the board, asking

questions at open sessions in general meetings, and through

the f‌iling of formal shareholder proposals” (Sjöström, 2008:

142).

Shareholder activists seek active dialogue or confronta-

tion when the benef‌its of activism outweigh the costs

(Pozen, 1994). Shareholder activists can range from a single

minority investor, commonly called a “blockholder” or

more pejoratively “corporate raider” to huge, institutional

investors with majority stakes. The key issue here is that

ownership concentration can have a signif‌icant effect on the

monitoring and governance of the modern corporation, and

that shareholder activism can be a powerful force for corpo-

rate governance (Monks & Minow, 1996).

The primary emphasis of activist shareholders has been to

focus on poorly performing f‌irms in their portfolio, and to

pressure the management of such f‌irms for improved per-

formance (Gillan & Starks, 2000). The most common perfor-

mance issue by activist shareholders is f‌inancial in nature.

For example, hedge fund activism has been shown to lead to

increases in dividend payouts, and improve f‌inancial oper-

ating performance (Brav, Jiang, Partnoy, & Thomas, 2008).

Similarly, Del Guercio and Hawkins (1999) demonstrated

that the primary motivation of pension fund activism is to

improve the f‌inancial performance of the f‌irm.

However, there is an increasing awareness and attention

to the social performance of the f‌irm as well, and share-

holder activists have arisen to address performance gaps on

this end as well, especially when it aligns with the activist’s

f‌inancial interests (Sullivan & Mackenzie, 2008). Social activ-

ism seeks more justice in society and most social activism is

aimed at economic equity concerns. Most, but not all, social

activists are non-governmental organizations (Logsdon &

Van Buren, 2008). Perhaps the most famous shareholder

activist organization, CalPERS, has both a f‌inancial and a

social agenda behind its activism.

Of course, this rising force of socially motivated share-

holder activism is not without controversy. For example,

Woidtke (2002) argues that “good” shareholder activism is

f‌inancially driven, while “poor” shareholder activism is

socially driven with the assumption that all social issues and

market failures are the sole responsibility of the government.

Nonetheless, many observers note that f‌inancial and social

activism is converging (Cespa & Cestone, 2007); and that

shareholder activism affects private and social prof‌itability

(Frantz & Instefjord, 2007).

As mentioned previously, shareholder activism has tradi-

tionally been a corporate governance mechanism used in the

United States, with its widely dispersed ownership patterns

and relatively open market for corporate control. However,

this is no longer the case, as the following excerpt explains:

In many countries, institutional investors became the signif‌i-

cant, if not majority component of the equity markets during

the latter half of the twentieth century. For example, in the

United States, institutional investment grew from 6.1% of

aggregate ownership of equities in 1950 to over 50% by 2002.

Assets held by institutional investors have also grown in other

markets. For example, total f‌inancial assets held by institutions

in the European Union grew more than 150% between 1992

and 1999. Although institutional investors have not played as

prominent a role in emerging markets, pension reform and

privatization initiatives have started to inf‌luence the f‌inancial

holdings of institutions, and thus the capital markets in these

economies as well (Gillan & Starks, 2003: 5).

The vast majority of the shareholder activism literature

has focused on the f‌inancial outcomes of activist initiatives

(e.g., Bethel, Liebeskind, & Opler, 1998; Bratton, 2007; Clif-

ford, 2008; Woidtke, 2002). However, recent research has

begun to explore the non-f‌inancial motivations of some

shareholder activists (den Hond & de Bakker, 2007); as well

as the potentially detrimental social effects of f‌inancially-

driven shareholder activism (Sjöström, 2008). For example,

Campbell, Gillan, and Niden (1999) reported that there were

90 proxy contests that addressed non-f‌inancially-oriented

“social” issues, and 286 proxy contests that addressed f‌inan-

cial issues in the 1997 proxy season in the USA. These

broader “stakeholder” impacts surrounding shareholder

activism have been of particular interest to environmental

groups (Monks, Miller, & Cook, 2004; O’Rourke, 2003),

employee unions (Marens, 2004), and European observers

(Croci, 2007). Thus, recent research suggests that both the

f‌inancial and moral legitimacy of corporations are now

being challenged by shareholder activists (den Hond & de

Bakker, 2007).

In sum, there appears to be two types of motivations

behind shareholder activism. The f‌irst motive is f‌inancially-

driven where shareholders, disappointed by what they per-

ceive to be mismanagement by the f‌irm, pressure the

managers and/or directors to do such things as spin off a

losing portion of the business, compensate executives less

generously, or pay out more dividends to the owners. For

simplicity sake, we will call this “f‌inancial activism.” In con-

trast, there are other activists who have more socially-

motivated reasons, which we refer to as “social activism.”

The classic example for these cases involves shareholder

concerns for the natural environment and/or employee

welfare. In this study, we will seek to determine what the

antecedents of activism are, and explore whether those ante-

cedents vary according to the motivation of the activists. A

particularly unique aspect of the study is that we will

explore shareholder activism in a cross-national context.

Agency Predictions of Financial Activism

Agency theory has been widely used within the corporate

governance literature in general, and the shareholder activ-

ANTECEDENTS OF SHAREHOLDER ACTIVISM 259

Volume 18 Number 4 July 2010© 2010 Blackwell Publishing Ltd