Ownership, Activism and Engagement: Institutional Investors as Active Owners

• Author: Donald Nordberg,Terry McNulty
• Published date: 01 May 2016
• DOI: http://doi.org/10.1111/corg.12143
• Date: 01 May 2016

Ownership, Activism and Engagement:

Institutional Investors as Active Owners

Terry McN u l t y *and Donald Nordberg

ABSTRACT

Manuscript Type: Conceptual

Research Question/Issue: We research two questions: First, why do some institutional investors operate at a distance from

organizations seemingly acting only to “exit”and “trade”shares, while others actively engage through various means of

“voice”? Second, what processes and behaviour are associated with active ownership?

Research Findings/Insights: We develop the concept of active ownership by drawing on contrasting theories and images of

ownership, identifying antecedentsof active ownership and distinguishing between alternative processes of activeownership.

Theoretical/Academic Implications: Alternative pathways to active ownership contrast the distant, sometimes adversarial nature

of shareholder activism with an engaged, collaborative relationship between investors and corporations. Few studies examine active

ownership as a process of engagement and mutual exchange between parties taking a generally longer-term perspective toward

investment in the firm and its affairs. After modeling active ownership, we develop a research agenda of substantive issues ranging

from market and institutional conditions, through investment organization and practice, to board and investor relations.

Practitioner/Pol icy Implications: Opening up the multidimensionality of engagement and relations between investors and

corporationsis crucial to promoting good corporate governance.Policymakers and practitioners require suchknowledge when

anticipating and developing adjustments to institutions of corporate governance.

Keywords: Corporate Governance, Institutional Investors, Ownership, Activism, Engagement

INTRODUCTION

The global financial crisis of 2007–09 raised questions about

many aspects of the economic system. After decades of con-

cern about how corporations govern themselves, more attention

is turning to other aspects of the complex web of connections that

make up the system of capital. This article examines one aspect

of that system, shareholders –in particular institutional investors

and their engagement with the companies in which they invest.

We review a broad body of literature crossingseve raldi sciplines

to develop a model of active ownership by institutional share-

holders and a related research agenda. Using the model, we

address the following questions: First, why do some institutional

investors operate at a distance from organizations seemingly

acting only to “exit”and “trade”shares while others actively

engage through various means of “voice”?Second,what

processes and behavior are associated with active ownership?

The literature on shareholder activism

1

addresses these

questions according to the characteristics of activists, target

firms, and the environment (Goranova & Ryan, 2014).

However, while shareholder activism is sometimes described

as a broad phenomenon (Chung & Wynn,2014), our reflection

on the literaturesuggests it has been treated in quitea narrow

way conceptually, methodologically, and empirically. More

can be done tounderstand institutional investorheterogeneity

and related motivations, processes, and effects involved in

what we term “active ownership.”

Our concept of active ownership includes shareholder

activism, defined as “actions taken by shareholders with the

explicit intention of influencing corporations’policies and

practices”(Goranova & Ryan, 2014: 1232) but extends to a

wider range of institutional investor behavior, that incorpo-

rates developingrelations with corporationsthrough different

influence processes and intent. This type of on-going active

ownership is likely to involve mutual exchanges aimed at

understanding more than change, and taking a generally

longer-term perspective toward investment in the firm and

its affairs. Continuing engagement of this sort does not

preclude change-seeking, but it is part of the process, rather

than the process itself. Defined in this way, active ownership

also contrasts with passive ownership, which involves

holding the shares; collecting dividends and perhaps voting,

but in an undeliberated way;

2

and trading.

This article thus augments recent work on shareholder

activism (Goranova & Ryan, 2014) by considering alternative

*Address for correspondence: Terry McNulty, University of Liverpool Management

School, ChathamStreet, Liverpool L697ZH, UK. Email: t.h.mcnulty@liverpool.ac.uk

This is an open access articleunder the terms of the Creative Commons Attribution-

NonCommercial-NoDerivs License, whichpermits use and distributionin any medium,

providedthe original work isproperly cited, the useis non-commercial andno modifica-

tions or adaptations are made.

© 2016The Authors. CorporateGovernance: An InternationalReview Publishedby John Wiley& Sons Ltd

doi:10.1111/corg.12143

346

Corporate Governance: An International Review, 2016, 24(3): 346–358