Forms and Effects of Shareholder Activism

• Date: 01 July 2010
• Published date: 01 July 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00806.x
• Author: Till Talaulicar,Huimin Chung

Guest Editorial

Forms and Effects of Shareholder Activism

Huimin Chung and Till Talaulicar

Special Issue Guest Editors

INTRODUCTION

Shareholder activism is a broad phenomenon and corre-

sponds to the variousactions undertaken by investors to

influence corporate management and boards in order to

make corporations change in corporate social responsibility

(CSR) or improve their financial outcomes. In public corpo-

rations, shareholder proposals are often employed by

activist investors such as social groups, individuals, and

institutional investors to direct attention, raise awareness,

and challenge managers to enhance their firms’ social or

financial performance. Shareholder activism research can be

categorized into two main streams of research–financially-

driven and socially-driven activisms.corg_806253..257

Gillan and Starks (2007) provide an overview on the evo-

lution of shareholder activism in the US, mainly focusing on

financial and related governance issues (financial activism),

while Sjöström (2008) and Tkac (2006) review the recent

development of shareholder activism for corporate social

and environmental responsibility (social activism). While

the vast majority of the shareholder activism literature has

focused on the financial outcome of activist initiates,

Sjöström (2008) indicates that there is a growing body of

research on shareholder activism for corporate social and

environmental responsibility (e.g., David, Bloom, &

Hillman, 2007; Logsdon & Van Buren, 2008; Neubaum &

Zahra, 2006). However, extant research on shareholder

activism mainly focuses on only one single category of activ-

ism, i.e., social or financial activism. In general, socially-

driven activist investors pursue such matter for principle-

based reasons, while financially-driven activist investors

tend to be motivated by economic incentives.

The actions of activist investors can be furthermore clas-

sified into voice and walk activisms. Dissatisfied sharehold-

ers could, on the one hand, simply discipline corporate

management through selling their shares (i.e., walk activ-

ism). On the other hand, shareholders could influence man-

agement through voice, for example, by dialogue with

management, issuing shareholder resolutions, or building

shareholder coalitions and accruing additionalvoting rights.

As mentioned by Gillan and Starks (2007), the extreme case

is the takeover market, where investors initiate takeovers

aimed at accomplishing fundamental corporate changes.

Greenwood and Schor (2009) show that the large positive

returns of hedge fund activisms are largely explained by

their ability to force target firms into a takeover. However, it

is important to note that walk activism and the extreme case

of takeover market are seldom discussed for CSR activism.

The effectiveness of shareholder activisms has long been,

and continues to be, an important debate (e.g., Gillan &

Starks, 2003; Nelson, 2006; Romano, 2001). Gillan and Starks

(2007) conclude that while some studies havefound positive

short-term market reactions to announcements of certain

kinds of financial activism, there is little evidence of

improvement in the long-term financial performance of the

targeted companies. In addition, studies have addressed the

influence of activism on, for instance, R&D investments

(David, Hitt, & Gimeno, 2001) or governance issues like

board structure (Wu, 2004), CEO compensation (David,

Kochhar, & Levitas, 1998) and CEO turnover (Parrino, Sias,

& Starks, 2003). Targets of shareholder activism tend to

perform poorly on measures of financial success or stan-

dards of good governance and to have lower insider share-

holdings (e.g., Romano, 2001). With regard to social

performance, target firms tend to give raise for social con-

cerns due to their products, operations or employmentprac-

tices and tend to be more visible as investors intend to

increase awareness of specific social issues of interest to

society (e.g., Rehbein, Waddock, & Graves, 2004). Socially-

driven shareholder activisms may have the potential to dis-

cipline managers and to raise their awareness of social

matters. However, it is also argued that these shareholder

activisms may merely signal the inability or unwillingness of

managers to improve their firms’ social performance (David

et al., 2007). Tkac (2006) indicates that the totalimpact of CSR

activism is quiet difficult to measure but likely larger than

the common estimates.

In general, the repeated failure to link activism to perfor-

mance could be caused by inadequate monitoring due to free

riding, incentive problems as well as legal and institutional

253

Corporate Governance: An International Review, 2010, 18(4): 253–257

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00806.x