Shareholder Activism: Can it be an Effective Governance Mechanism?

This paper sets out to examine whether shareholder activism can be an effective governance mechanism, i.e. if it can increase firm performance to the benefit of shareholders. We have based our study on examining and interpreting the results from previous research of the subject. Initially, we describe the theoretical constraints facing shareholder activism. Agency problems between management and shareholders introduce the need for shareholder monitoring. The incentives to monitor are limited by the free-rider problem, legislation, market liquidity and activist bargaining power. One central insight is that the cost of monitoring must be offset by the expected gains from engaging. We continue in detailing the different options commonly used by activists to influence target firms, as well as the activists themselves. Finally we examine the extent and efficiency of shareholder activism. We conclude that the amount of activism has increased during the last few years. A majority of the studies could, however, not find a link between monitoring and an increase in firm performance…


1. Introduction
1.1 Background and relevance
1.2 Purpose of this paper
1.3 Outline
2. Methodology
3. Theoretical Framework
3.1 Shareholder activism
3.2 Corporate governance
3.3 Ownership vs. Control
3.3.1 Interior agency problem
3.3.2 Free-riding problem
3.3.3 Exterior agency problem
3.4 Market liquidity
3.4.1 Incentives to earn money with regards to free-riding
3.5 Exit vs. Voice
3.6 Public vs. Private channels
3.6.1 Public channels
3.6.2 Private channels
4. Analysis
Part: 1 Do activists engage in changing governance mechanisms of firms?
4.1 Shareholder activism by different institutions
4.1.1 Mutual and pension funds
4.1.2 Hedge Funds
4.1.3 Labor unions
4.1.4 Investment companies
4.1.5 Ethical investment companies
4.2 Shareholder activism in different countries
4.3 Regulatory constraints concerning shareholder activism
4.3.1 Staggered boards
4.3.2 Shareholder proposals and coordination restrictions
4.3.3 Regulations concerning shareholder activism in Sweden
4.3.4 Regulations concerning different financial intermediaries
Part: 2 Can it be an effective governance mechanism?
4.4 Measurements
4.5 Relationship between activism and performance
4.6 The effectiveness of different shareholder activists
4.6.1 Gadflies as activists
4.6.2 Pension funds as activists
4.6.3 Hedge funds as activists
4.7 Experiences with other institutional investors
4.7.1 Reasons behind alternative shareholder activism
4.7.2 Their governance role
5. Concluding remark
5.1 Do shareholder activists create an effective governance mechanism?
5.2 Further research and discussion
5.3 Limitation in research and critical evaluation

Author: Otto Lilliehöök, Dan Margolin

Source: Stockholm School of Economics