9 February 2006: First results of an ongoing independent
study of shareholder activism in the UK have found that
activism can produce outcomes that generate significant
returns for shareholders. The work was co-authored by Professor
Marco Becht, ECARES, Université Libre
de Bruxelles, Professor
Julian Franks, Centre for Corporate Governance,
London Business School, Professor
Colin Mayer, Said Business School, and Professor
Stefano Rossi, Stockholm School of Economics. The
results of the study were presented at a conference
at the London Business School on February 9th that was organised
jointly by the London
Business School Centre for Corporate Governance, the
ECGI and the Journal
of Applied Corporate Finance.
Many commentators have been sceptical
about the value of shareholder activism, believing it to
be disruptive and short-termist. Evidence about its effectiveness
has been inconclusive or found activism to generate no net-returns,
in particular pension fund activism in the United States.
Legal scholars have pointed to the US legal and institutional
environment as a possible explanation for the missing link.
Legal scholars have also argued that the UK provides the
ideal setting for shareholder activism to work, given the
legal and cultural environment, making the UK an ideal “laboratory”
for activism research.
The team focused on the Hermes
UK Focus Fund (“the Fund”), which invests
in companies that are fundamentally sound but whose shares
have underperformed the market as a result of strategic,
governance or financial structuring weaknesses and where
Hermes believes shareholder involvement can be the catalyst
for change and result in improved performance.
On a confidential basis the team
was given access to Hermes’ own records including
letters, memos, minutes, presentations, transcripts/recordings
of telephone conversations, client reports and staff’s
personal notes and recollections. The Fund in the study
was invested in 41 stocks with an average holding period
of 691 days (785 for 30 closed positions and 11 stocks still
held). The stakes held by all Hermes funds ranged from one
to 15 per cent.
The team found that the Fund had
engaged with 30 of the stocks held, had decided not to engage
with eight (in some cases because change was brought about
by means outside Hermes influence) and had yet to engage
with three of the stocks. Of the 30 stocks engaged with,
the engagement was characterised as collaborative in 10
cases, confrontational in 10, very confrontational in two,
and mixed in the remainder of cases. The average holding
periods in the stocks where there was engagement, and in
particular, where that engagement was confrontational, were
the longest of all stocks held (894 days and 1063 days respectively).
The objectives of the engagement
fell broadly under three headings, namely: restructuring,
financial policies and board changes. Engagement with the
companies was conducted most frequently by behind the scenes
methods of contact with the management and the board and
contact with other shareholders, and far less often at public
shareholder meetings or through other public channels.
The Fund succeeded in securing
its desired outcomes in the majority of cases. For example,
Board changes at the top (Chairman and Chief Executive)
followed the Fund intervention as well as changes in cash
payouts, rights issue plans and capital expenditure plans.
The Fund was perhaps less successful in influencing restructuring
where more focus on the core business was achieved in just
over half the stocks.
The ongoing study examines the
performance of stocks held around the time of public announcements
of events, such as restructuring, board changes and payout
announcements, both in the run up to the event and in its
aftermath. On average there was economically large outperformance
by the stocks in question around the event. These events
contributed significantly to the Fund’s overall performance.