School of thought: activism

Commentators have been sceptical about the value of shareholder activism,
believing it to be disruptive and short-termist. Despite the importance of
institutional activism, until now, there has been no hard evidence about the way
in which institutional activism operates and the effects that it has on
corporate performance in the UK.

But new independent research by a team of corporate governance academics from
institutions including Saïd Business School and the Stockholm School of
Economics has found that activism can produce outcomes that generate significant
returns for shareholders.

The first results were presented to coincide with the launch of the new
London Business School Centre for Corporate Governance.

The LBS Centre aims to move governance practices beyond regulatory compliance
by providing independent research and recommendations of value to policy makers,
corporations, investors and other interest groups.

In the study, the research team was given unprecedented access to the Hermes
UK Focus Fund, which invests in companies that are fundamentally sound, but
whose shares have underperformed in the market as a result of strategic
governance or financial structuring weaknesses.

The findings pointed to three categories for Hermes’ engagement, namely:
restructuring, financial policies and board changes. Our findings show that via
these channels the fund succeeded in securing its desired outcomes in the
majority of cases.

For example, board changes at the top followed the fund intervention to
achieve this outcome as well as changes in cash payouts, rights issue plans and
capital expenditure plans. The fund was less successful in influencing
restructuring. Where more focus on the core business was sought, this was
achieved in just over half the stocks.

These results show positive market reactions to events initiated through
activism and much of the fund’s out-performance is attributable to that.

Admittedly, these results are for only one fund, and we do not yet know what
the impact is on the long-term performance of companies. But they do seem to
indicate that shareholder activism can work in the UK environment.

Professor Julian Franks is head of the new Centre for Corporate
Governance at London Business School

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