Importing Activists: Determinants and Consequences of Increased Cross-border Shareholder Activism

In a recent working paper, we look at what drives shareholder activism around the world, with a focus specifically on the role of corporate governance reforms.

While shareholder activism has been a force in US capital markets for some time, the last decade has seen an explosion in activism globally, including in countries where activists have previously had little influence.  Our research explores what explains this growth and focuses specifically on the role of changes in regulations and laws that facilitate activism. We develop a country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence firm governance. We find that the incidence of both foreign and domestic activism in a given country, as measured by the number of campaigns, increases by more than 80% following reforms that improve shareholder voting rights and increase board independence. Using these shareholder-empowering changes to governance regulation as shocks that increase the threat of activism, and the presence of independent institutional investors to identify high-activism-risk firms, we find that firms facing a high threat of activism reduce investment and increase payouts. We document similar effects for firms not directly targeted by activists, suggesting that firms make significant preemptive changes to avoid being targeted. Overall, our results suggest that activists serve as necessary catalysts for corporate governance reforms to effect real change in corporate policies and practices, and that there are widespread spillover effects on firms not explicitly targeted by activists.

Specifics

Extensive academic literature, based primarily on US data, provides evidence that activist interventions are associated with positive capital market outcomes and affect the decisions of targeted firms. Yet, the threat of activism could have wide-ranging implications beyond targeted firms, leading many to question activism’s broader impact on corporate governance and the economy. It is difficult to assess the economy-wide impact of activism using US data alone; US-only evidence can’t tell us what it is about the relatively static US legal and institutional infrastructure that allows activists to be successful or about how activism affects the broader economy beyond those firms directly targeted.

To better understand the impact of shareholder activism, we use a sample of nearly 7,000 shareholder activism campaigns drawn from 55 countries between 2010 and 2018 to address two related questions. First, what regulatory conditions facilitate activism? Second, how does a country-level increase in the threat of shareholder activism, brought about by changes in shareholder-rights regulation, affect firm policies and practices and what are the implications of any such effects for broader efforts to improve corporate governance and the economy?

To speak to the first question, we investigate the role of a country’s shareholder rights provisions and corporate governance regulations in facilitating the activities of both foreign and domestic activists. In an effort to improve corporate governance and boost economic performance, many countries have enacted regulatory reforms that expand minority shareholder rights. This is important because in some countries—most notably in Asia—there is a view that US-style institutions and governance, including a focus on shareholder rights, can help drive economic growth. However, regulatory changes are necessary but not sufficient for meaningful change—Japan has made reforms since the late 1990s, but other institutions (eg, courts) have blocked activists, so actual change was limited, which many argue has stifled economic growth.

Because activists typically have limited capital and cannot take significant stakes in target companies, it is important that the regulatory infrastructure facilitates engagement by minority shareholders. We develop a country-level framework (and associated empirical measures) of regulatory characteristics that serve as necessary precursors for minority shareholders to influence firm governance for 41 countries. This framework is based on the G20/OECD Principles of Corporate Governance as well as industry publications that describe those features of corporate governance regulation necessary for activist campaigns to succeed. Our framework covers three categories of regulation: 1) the transparency and timeliness of governance information; 2) the ease and opportunities for shareholder engagement; and 3) the independence and structure of the board of directors.

Our analyses show that countries with corporate governance regulations that facilitate shareholder engagement—through meeting access, compensation voting, and requirements for boards to have a relatively high proportion of independent directors with relatively short term-limits—have approximately 70% more activism campaigns per year than countries whose regulations lack these characteristics (about 16 more campaigns annually). Meeting and compensation transparency have little incremental explanatory power for cross-sectional variation in activism campaigns.

We use our regulatory framework as the basis for a comprehensive search for changes in corporate governance regulations for our 41 sample countries between 2010 and 2018. We identify more than 26 changes (in 22 countries) to laws in one of the three categories of shareholder-empowering regulation. We find that the extent of activism in a given country, as measured by the number of campaigns, increases by more than 80% following reforms that increase shareholder voting rights and board independence. We find no evidence of significant changes in activism following increases in the transparency of meeting notifications or director compensation.

To speak to the second question and understand the impact of the increased threat of activism on the policies and practices of both targeted and non-targeted firms, we use the aforementioned shareholder-empowering regulatory changes as a set of plausible shocks to the threat of activism. We examine three primary firm-level outcomes: 1) profitability (ie, Tobin’s Q and ROA), 2) long-term investment (ie, CAPEX and R&D) and 3) payout policy (ie, dividends and repurchases).

We find that, compared to firms facing a relatively low threat of activism, high-activism-threat targets reduce R&D by nearly 17% and CAPEX by 8% (as a proportion of total assets), and increase repurchases by 18% (of cash flows) and dividend payouts by 4% after a shareholder-empowering change to their home country’s corporate governance regulations. Tobin’s Q decreases by about 13% and profitability remains fairly constant.

Overall, our results indicate that shareholder activism is a necessary catalyst for corporate governance reforms to effect meaningful changes in firms’ performance and policies, and that these effects spill over to firms not explicitly targeted by activists.

Mark G. Maffett is an associate professor of accounting at the University of Chicago Booth School of Business.

Anya Nakhmurina is an assistant professor of accounting at the Yale School of Management.

Douglas J. Skinner is the deputy dean for the University of Chicago Booth School of Business and the Eric J. Gleacher Distinguished Service Professor of Accounting.