Investor Responsibility Research Center Research Articles

PORTFOLIO FIRM RESPONSES TO INSTITUTIONAL INVESTOR ACTIVISTS AND THEIR TACTICS

ABSTRACT Purpose Institutional Investor Activism (IIA) has become a dynamic institutional force and a valuable tool for institutional investors in their attempt to influence their portfolio firms. Correspondingly, there has been a rapidly increasing body of scholarly literature devoted to understanding this phenomenon as it affects numerous disciplines within the organization science academy. Prior research in IIA has considered a number of antecedents and processes that may influence corporate outcomes (Goranova & Ryan, 2014b), yet results have been equivocal thus leaving unanswered questions critical for the scholarly discourse on IIA. An overlooked aspect of this literature is the heterogeneity that exists among institutional investor activists and the impact these differences can have on portfolio firm responses. This study examines the heterogeneity of private pension fund and mutual fund activists and answers the following research questions: 1: How do the characteristics of institutional investor activists ultimately influence the likelihood that a firm will comply with an investor's requests/demands?; 2: How is the relationship between institutional investor activists and firm responses moderated by activism tactics? Method To test the hypotheses, we built a database of activism events by institutional investors (II). For comparison purposes, we limited the database to activism events that occurred within the United States. The database included completed activism events from 2010-2017 with completed activism events defined as II demands that resolved (either positively or negatively) within four years. The sample used all activism events for private pension funds and mutual funds. The sample ended up being 238 IIA events spread across the two different types of IIs with the unit of analysis being the II-portfolio firm dyad. The sample included 122 non-proxy-based tactics and 146 proxy-based tactics used within the 238 activism events. Data and databases came from Activist Insight, Thomson Reuters, S&P Capital IQ, the Investor Responsibility Research Center (IRRC), Institutional Shareholder Services (ISS), and Lexis-Nexis. Portfolio firm-level data came from Standard & Poor's Compustat annual dataset. Drawing on 238 observations activism events in the United States, we undertake an empirical test of the effects of private pension fund and mutual fund activism on portfolio firm responses using ordered logistic regression. Results Overall, the tests of the models showed mixed support for the hypotheses. Private pension plans were found to be less likely to receive favorable responses from their portfolio firms whereas mutual funds are not less likely to receive favorable responses from their portfolio firms. In addition, the moderating effects of proxy-based tactics on both types of institutional investors were not supported which runs contrary to prior research. Future research should continue to explore the differences among institutional investors as we have limited understanding of their effects to date. Conclusion These results, and the use of ordered logistic regression with interaction terms, highlight both the success in understanding variance among institutional investors and the continued need for further research on shareholder activism. Keywords Shareholder Activism, Mutual Fund Activism, Stakeholder Salience Theory, Activism Tactics, Strategic Management

Can Staggered Boards Improve Value? Evidence from the Massachusetts Natural Experiment

We study the effect of staggered boards on long-run firm value, using a natural experiment: a 1990 law that imposed a staggered board on all firms incorporated in Massachusetts. We find a significant and positive average increase in Tobin's Q among the Massachusetts treated firms, suggesting that staggered boards can be beneficial for early-life-cycle firms, which exhibit greater information asymmetries between insiders and investors. These results are validated using a larger sample of firms from the Investor Responsibility Research Center. In exploring possible channels for these effects, we find that the effects are stronger among innovating Massachusetts firms, particularly those facing greater Wall Street scrutiny. The evidence is consistent with staggered boards improving managers' incentives to make long-term investments.

Corporate Governance Data and Measures Revisited

Researchers in accounting, corporate finance, economics, and law regularly evaluate the impact of corporate governance provisions on firm performance and managerial actions. Many of these studies rely on publicly available governance summaries developed by the Investor Responsibility Research Center (IRRC). These summaries have been coded and used in a variety of influential studies, including analyses that assess whether corporate governance practices impact shareholder value. This paper reexamines the coding of the IRRC summaries for the 1990s and early 2000s. We find that the IRRC coding and one commercial source of corporate governance data disagree significantly for several important governance indicators. Our own review of source documents uncovered measurement errors in the IRRC summaries, especially for golden parachutes and supermajority voting provisions. We also find that the IRRC’s definitions do not always clearly represent managerial entrenchment or the difficulty of a (hostile) takeover, as many researchers have assumed. To understand whether these issues matter for corporate governance research, we investigate the striking conclusion of prior work that finds that a hedge portfolio composed of a long (short) position in firms with few (many) anti-takeover provisions produces annual excess returns of six to twelve percent per annum from 1990 to 1999. We find that governance data corrected for errors and definitional concerns do not predict excess returns. We conclude researchers should exercise caution using IRRC data from this period, and that much more attention needs to be devoted to measuring corporate governance practices.

Expanding ESG Coverage

Whether the approach is dubbed sustainable investing, impact investing, or screening for environmental, social, and governance (ESG) practices, the trend of applying these approaches for investing has definitely gone mainstream. Until recently, the focus has been on equity investing, but the practice of applying ESG screens for fixed-income analysis is growing. According to the Global Sustainable Investment Alliance, the global sustainable investment market (including equity and fixed income) climbed to $21.4 trillion at the beginning of 2014, encompassing 30.2% of professionally managed assets in the regions of Europe, the US, Canada, Asia, Japan, Australasia, and Africa. The number is up 61% from $13.3 trillion at the start of 2012. The US, Canada, and Europe now account for nearly 99% of these sustainable investments, but growth has been trickling into the Asian markets of Malaysia, Hong Kong, South Korea, and Japan. In August, CFA Institute announced the results of a global survey of 1,325 CFA Institute members. The survey, conducted jointly with the Investor Responsibility Research Center Institute during May and June 2015, found that 73% of investment professionals worldwide consider ESG factors in their investment analysis and decisions, with 63% using it to manage risk. A significant 61% of respondents believe that companies should be required to annually disclose ESG sustainability indicators within the most up-to-date reporting framework, with 69% agreeing that disclosures should be independently verified and 44% supporting high-level audits. Although the survey didn’t distinguish equity from fixedincome securities, the findings reflect a broader movement that is changing the way investment managers look at ESG issues. “We’re seeing a cultural change as to how investment analysis is done,” says Matt Orsagh, CFA, CIPM, director of Capital Markets Policy at CFA Institute. “Investors are using ESG factors to build the whole mosaic needed to see the complete picture, going beyond the numbers and taking a holistic approach.” Approaches to ESG screening, both inclusionary and exclusionary, vary; however, more and more investment professionals are taking an integrated approach to ESG analysis across equity, fixed-income, and even private investment markets. “A comprehensive ESG screen helps to minimize excessive risk and allows us to find high-quality companies and securities,” says Samantha Palm, portfolio manager of the Parnassus Fixed Income Fund. “Securities that do well on ESG screens tend to be better-run companies. Companies that cut costs on safety, for example, typically have more accidents that impact a company.” Parnassus Investments, based in San Francisco, has built its reputation on deploying socially responsible screens and analysis across equity securities since its inception 31 years ago. In 1992, with the beginning of the Parnassus Fixed Income Fund, it adapted its approach for fixed-income sectors by incorporating corporate bonds and convertible bonds and, in 2013, commercial mortgagebacked securities and residential mortgage-backed securities. ESG screens are more narrowly defined, whereas socially responsible investing covers a wider swath, explains Palm. Not only does Parnassus use the same exclusionary screens for fixed-income securities that it uses for equities (e.g., nixing companies with ties to weapons, alcohol, tobacco, gambling, and direct investments in Sudan, with some minor allowances), but it also evaluates for positive performance attributes of environmental impacts, products, employee benefits and corporate culture, and corporate governance and business ethics. “We can apply ESG to either asset class,” she says. “The most important thing is to have a robust and repeatable process toward that end goal.” The trend has two main drivers: aging investors with diversified portfolios and enlightened investment managers, according to David Kathman, CFA, a senior analyst with Morningstar in Chicago. Although Morningstar hasn’t historically broken out ESG-screened fixed-income mutual funds, Kathman has been following several, some with rapidly growing assets under management. “Today there is much more of a focus on positive screening,” he says. Savvy managers “generally have a percentage of fixed-income securities that support renewable energy, community and economic development, plus green bonds to support green projects.” By year-end 2015, Morningstar will launch ESG scores for all of its 200,000 tracked global mutual funds and exchangetraded funds, to be based on each fund’s ESG footprint as determined by portfolio holdings. To develop its scoring system, Morningstar partnered with Amsterdam-based Sustainalytics, which provides ESG research and analysis and assigns companies 70 scores related to ESG policies and practices.

Investment opportunity set, board independence, and firm performance

Purpose– The purpose of this paper is to investigate the impact of Sarbanes-Oxley Act (SOX) on high growth firms’ corporate governance. Specially, the study examines whether there is a negative impact of SOX on the interactive effect of board independence and investment opportunity set on firm performance.Design/methodology/approach– Sample firms were selected from the Investor Responsibility Research Center Directors’ database. Both accounting- and market-based firm performance measures are used. Regressions are run to test the hypothesis.Findings– It was found that the impact of SOX on the interaction effect of board independence and investment opportunity set on firm performance is negative.Originality/value– The results suggest that the impact of SOX in corporate governance and regulatory environment mitigates the effect of board independence on the relationship between investment opportunity set and firm performance, consistent with the notion that the enactment of SOX increases monitoring costs of board governance especially for high-growth firms.

Finding Common Ground on the Metrics that Matter

Investors and companies increasingly agree on the key corporate environmental, social, and governance (ESG) issues that can affect a company’s financial value. Because, however, traditional accounting metrics fall short in assessing sustainability, there is no agreement on how to measure corporate management of those issues. As a result, investors find it difficult to gather and analyze corporate ESG data, even while companies experience ‘survey fatigue’ from the time and resources required to fulfill data requests from various investors, investor advocates, and others seeking to create their own metrics. This new study provides the first comprehensive analysis of which corporate ESG information is tracked by companies and how it is or is not consistent with analogous information sought by investors, research companies and others. The study, “Finding Common Ground on the Metrics that Matter,” was commissioned and funded by the Investor Responsibility Research Center (IRRC) Institute. Major findings include: 1) There is agreement on key corporate sustainability issues, but not on the metrics used to measure the management of them, nor on the purposes served by examining corporate ESG information; 2) Although ESG metrics routinely are reported on request by substantial percentages of companies, few companies report all the ESG information they collect internally; and 3) ESG researchers, investors, and corporate representatives approach ESG issues from a risk mitigation perspective, not a value creation perspective.

Identifying influential directors in the United States corporate governance network

The influence of directors has been one of the most engaging topics recently, but surprisingly little research has been done to quantitatively evaluate the influence and power of directors. We analyze the structure of the US corporate governance network for the 11-year period 1996-2006 based on director data from the Investor Responsibility Research Center director database, and we develop a centrality measure named the influence factor to estimate the influence of directors quantitatively. The US corporate governance network is a network of directors with nodes representing directors and links between two directors representing their service on common company boards. We assume that information flows in the network through information-sharing processes among linked directors. The influence factor assigned to a director is based on the level of information that a director obtains from the entire network. We find that, contrary to commonly accepted belief that directors of large companies, measured by market capitalization, are the most powerful, in some instances, the directors who are influential do not necessarily serve on boards of large companies. By applying our influence factor method to identify the influential people contained in the lists created by popular magazines such as Fortune, Networking World, and Treasury and Risk Management, we find that the influence factor method is consistently either the best or one of the two best methods in identifying powerful people compared to other general centrality measures that are used to denote the significance of a node in complex network theory.

Identifying the Legal Contours of the Separation of Economic Rights and Voting Rights in Publicly Held Corporations

IRRC Institute and Stanford’s Rock Center Submit Report to SEC That Raises Questions About Fundamental Underpinnings of Corporate Governance, October 19, 2010. A report commissioned by the Investor Responsibility Research Center Institute (IRRC) and conducted by the Rock Center for Corporate Governance at Stanford University raises concerns that the financial markets’ ability to divorce economic interests from ownership rights – via derivatives and other means – has outpaced the existing corporate governance and bankruptcy legal framework. report provides an analysis of the decoupling phenomenon – also known as “empty voting” – that occurs when shareholder voting rights substantially exceed economic interest in a company. “Concept Release on the U.S. Proxy System”The report, “Identifying Legal Contours Of Separation Of Economic Rights And Voting Rights In Publicly Held Corporations,” was submitted today to the Securities and Exchange Commission (SEC) as part of the agency’s request for comments (“Concept Release on the U.S. Proxy System”) to examine aspects of the proxy system including ways empty voting can occur, its nature, extent, and effects on shareowner voting and the proxy process.Joseph A. Grundfest, former SEC Commissioner and co-director of Stanford University’s Rock Center for Corporate Governance said, The study's findings raise important questions about the very foundations on which corporate governance is based. Modern financial markets make it very easy for sophisticated shareholders to cast important votes in corporate elections even if they have no financial exposure to the company's stock price performance.” Grundfest added, “It's a bit like voting in a country's election even though you are no longer a citizen. Yet, we have no clear idea about how frequently this problem arises or its actual implications for corporate governance.“Ironically, we just enacted a massive reform of the financial system. underlying presumption, however, was that economic and ownership interests are inseparable. We know this is not true,” said Jon Lukomnik, IRRC Institute program director. He added, “We commissioned the report because we are increasingly concerned that the fundamental philosophic basis of corporate governance – that the owners of the company who can determine its fundamental fate are incented to want it to thrive – is eroding. As worrisome, if those who control ownership rights can be incentivized towards value destruction rather than value creation, it is only a matter of time until the real economy is affected due to a large-scale impact on corporations. Our study suggests that the law, unfortunately, has not kept pace with financial market reality.”The key research findings in the report include:* potential for and reality of decoupling transactions that can generate empty or negative voting can present significant challenges to existing shareowner and creditor governance practices.* Existing disclosure provisions in federal securities law and federal bankruptcy law assume that the economic rights and voting rights associated with share or debt ownership are inseparable. Because these rights may be freely decoupled, existing law fails to provide necessary transparency as to the existence of hedging transactions that can affect the economic rights and voting incentives of shareholders and creditors. This, in turn, can mean that others, including regulators, corporate directors, other shareowners and creditors, are made on a less than informed basis.* It is unclear that disclosure alone is sufficient to address the problems that can be created by empty and/or negative voting. Policy makers may therefore wish to consider substantive measures that might address the rights of shareowners or creditors to cast votes without regard to their participation in decoupling transactions that can give rise to empty or negative voting.The report is a comprehensive review that identifies the different manifestations of the decoupling issue in the corporate governance, securities regulation, and bankruptcy arenas. More specifically, it summarizes 19 research studies; analyzes relevant provisions of federal securities law; critiques policy-relevant proposals; discussed the Dodd-Frank Act reporting swap contracts; considers opportunities within SEC’s “Proxy Plumbing;” catalogues implications of decoupling and of empty or negative voting in the context of the federal bankruptcy process; and summarizes several key judicial opinions indicating in growing concerns in litigated transactions.

Idiosyncratic Risk, Governance and Equity Performance

We use a sample of democratic firms (with 5 or less anti-takeover provisions) from the Investor Responsibility Research Center (IRRC) database and use idiosyncratic volatility as a proxy for information from the market of corporate control as in Ferreira and Laux (2007) to link the equity performance, market of corporate control and corporate governance. We find that firms which are the least vulnerable to takeover threat (the least idiosyncratic risk) outperform the others. We also find that market information of takeover vulnerability is negatively related to future merger and acquisition shocks. All these effects are mitigated by the Sarbanes-Oxley Act 2002.

What Matters in Corporate Governance?

We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990–2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.

Non-Executive Stock Options and Firm Performance

We examine whether options granted to rank and file employees have effects on the performance of the firm, by exploring the link between broad-based option grants, option portfolio implied incentives and firm operating performance. We employ an instrumental variables approach that combines information about the labor market characteristics in which firms compete with information on firm option programs from the Investor Responsibility Research Center to identify causal effects. Firms that broadly grant options to non-executive employees exhibit higher operating performance than firms that do not grant options broadly. We find a similar positive relationship between the implied incentives of the portfolio of outstanding non-executive options and subsequent firm operating performance. Consistent with economic theory, we find that the incentive-performance effect is larger in smaller firms, and in firms with higher growth opportunities and higher growth options per employee. Finally, we find that the performance effect is concentrated solely in firms that grant options broadly to non-executive employees, supporting the argument that options may induce monitoring among co-workers.

Why are firms with entrenched managers more likely to pay dividends?

Purpose – The purpose of this paper is to examine the relation between managerial entrenchment and dividend policy for a large number of US industrial firms and examine the relative importance of three competing explanations behind the empirical association between managerial entrenchment and dividend policy, namely, the entrenchment irrelevance hypothesis, the dividend signaling hypothesis, and the optimal entrenchment hypothesis.Design/methodology/approach – Utilizing all firms in the Investor Responsibility Research Center database, Compustat and center for research in security prices (CRSP), this paper investigates firm's propensity to pay dividends based on various logit and Tobit regressions as a function of managerial entrenchment measured by Gompers et al. G index after controlling for known determinants of firms' dividend decisions during the period from 1990 to 2003.Findings – Results show that firms with entrenched managers are more likely to pay dividends. Their high propensity to pay persists...

Measuring environmental performance: use of the toxics release inventory (TRI) and other US environmental databases

AbstractThis article examines the most comprehensive databases that measure US corporate environmental performance that have become available during the 1990s. These include the US Environmental Protection Agency's Toxics Release Inventory (TRI) and databases maintained by Kinder, Lydenberg, Domini, and Co., the Council on Economic Priorities and the Investor Responsibility Research Center. We describe these databases and identify the significant studies on environmental performance in the field of management that use these databases. We indicate three trends that should improve the quality and quantity of publicly available environmental performance data. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment

Global Labor and Worksite Standards: A Strategic Ethical Analysis of Shareholder Employee Relations Resolutions

The purpose of this paper is to analyze from a strategic ethical perspective four selected shareholder resolutions reported by the Social Issues Service of the Investor Responsibility Research Center regarding international labor and workplace standards. Particular attention will be paid to specific employee relations issues at the operating and tactical level of individual multinational firms. The paper concludes with policy recommendations for proxy statements.

The Sweatshop Quandary: Corporate Responsibility on the Global Frontier: Edited by Pamela Varley Investor Responsibility Research Center

The Sweatshop Quandary: <i>Corporate Responsibility on the Global Frontier</i>: Edited by Pamela Varley Investor Responsibility Research Center

DOES IT PAY TO BE GREEN? AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN EMISSION REDUCTION AND FIRM PERFORMANCE

Evidence can be marshalled to support either the view that pollution abatement is a cost burden on firms and is detrimental to competitiveness, or that reducing emissions increases efficiency and saves money, giving firms a cost advantage. In an effort to resolve this seeming paradox, the relationship between emissions reduction and firm performance is examined empirically for a sample of S&P 500 firms using data drawn from the Investor Responsibility Research Center's Corporate Environmental Profile and Compustat. The results indicate that efforts to prevent pollution and reduce emissions drop to the ‘bottom line’ within one to two years of initiation and that those firms with the highest emission levels stand the most to gain.

DOES IT PAY TO BE GREEN? AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN EMISSION REDUCTION AND FIRM PERFORMANCE

Evidence can be marshalled to support either the view that pollution abatement is a cost burden on firms and is detrimental to competitiveness, or that reducing emissions increases efficiency and saves money, giving firms a cost advantage. In an effort to resolve this seeming paradox, the relationship between emissions reduction and firm performance is examined empirically for a sample of S&P 500 firms using data drawn from the Investor Responsibility Research Center's Corporate Environmental Profile and Compustat. The results indicate that efforts to prevent pollution and reduce emissions drop to the ‘bottom line’ within one to two years of initiation and that those firms with the highest emission levels stand the most to gain.

Benchmarking and environmental trend indicators

Companies are increasingly incorporating quantitative environmental data in their benchmarking activities as the search for ways to improve corporate environmental performance continues to expand. The Investor Responsibility Research Center supplies time series data to support several benchmarking activities. This article introduces two new trend indicators that may be used for certain environmental benchmarking applications.

The Challenge of Sanctions1

South African Journal of EconomicsVolume 57, Issue 4 p. 227-240 The Challenge of Sanctions1 M. LIPTON, M. LIPTON Senior Analyst at the Investor Responsibility Research Center Inc., Washington, D.C.Search for more papers by this author M. LIPTON, M. LIPTON Senior Analyst at the Investor Responsibility Research Center Inc., Washington, D.C.Search for more papers by this author First published: December 1989 https://doi.org/10.1111/j.1813-6982.1989.tb00204.xCitations: 7 * Extracts from a Paper Presented at the Biennial Conference of the Economic Society of South Africa in Johannesburg, 67 September 1989. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume57, Issue4December 1989Pages 227-240 RelatedInformation

Book Review: Kenneth A. Bertsch and Linda S. Shaw, The Nuclear Weapons Industry (Washington, DC: Investor Responsibility Research Center, 1984, 405pp., $19.95 pbk. (individuals and not-for-profit organisations), $45.00 (others))

Book Review: Kenneth A. Bertsch and Linda S. Shaw, The Nuclear Weapons Industry (Washington, DC: Investor Responsibility Research Center, 1984, 405pp., $19.95 pbk. (individuals and not-for-profit organisations), $45.00 (others))