The New Face of Shareholder Activism

I am interested in the behavior of institutional investors, including defined benefit plans and large mutual funds, primarily because they trade in people's retirement savings.   Institutional investors and hedge funds are some of the only remaining investors under the big umbrella heading of "shareholders" that have the resources and incentive to act the way that corporate law theorizes shareholders should act.  They become the lab rats and the test case of governance experiments and debates.

Notably, the passivity of institutional investors has been described, empirically documented by number of initiated shareholder proposals and with voting records on such proposals, and debated at considerable length.  Alan Palmiter, Jill Fisch, Roberta Romano, as well as a recent article by Gilson & Gordon and many others have all grappled with the evidence for and against and provided theories that augment or diminish the view of passivity by institutional investors.

The New York Times DealB%k published an article yesterday, New Alliances in Battle for Corporate Control, describing the coordination between institutional investors (both pension funds and mutual funds) and hedge fund activists.  Drawing from industry sources, the article describes informal coordination of activists courting institutional investors' votes before shareholder meetings, which is just what we would expect and consistent with how we probably teach proxy contests and shareholder proposals to our students.  The article also adds new dimensions describing how institutional investors may solicit hedge fund investment in poorly performing companies providing them with investment ideas, targets and strategies.

"Periodically, we are approached by large institutions who are disappointed with the performance of companies they are invested in to see if we would be interested in playing an active role in effectuating change," said William A. Ackman, founder of the $13 billion hedge fund Pershing Square Capital, who is best known for his positions on J. C. Penney and Herbalife. Institutional investors even have an informal term for this: R.F.A., or request for activist.

Evidence of this successful strategy is found in the success rate of hedge fund proxy proposals of which over 20% succeed last year, up from 9% in 2011.

-Anne Tucker