Proxy Fight Research Articles

Is the role of shareholder activism in corporate governance overestimated?

Shareholder activism has become a prominent feature of corporate governance recently. Therefore, I collected 3,159 estimates from 78 empirical studies investigating the shareholder activism-return relationship to scrutinize the effect of shareholder activism on the firm’s returns. I find the effect of shareholder activism is often exaggerated; the literature attributes excessive importance to activism both in the short- and the long-run. For example, the abnormal returns caused by hedge fund activism and direct negotiations are often overestimated. This is, however, not the case with proxy fights, which I found to be the most abnormal-returns-creating activism approach.

StockWatch: Illumina Shares Steady as Icahn Escalates Proxy Fight

GEN EdgeVol. 5, No. 1 SequencingStockWatch: Illumina Shares Steady as Icahn Escalates Proxy FightEUA lifts InflaRx; Liminal rises on unsolicited offer; OncoSec falls on Phase II failure; Restructuring sinks VBIAlex PhilippidisAlex PhilippidisSearch for more papers by this authorPublished Online:7 Apr 2023https://doi.org/10.1089/genedge.5.1.56AboutSectionsView articleView Full TextPDF/EPUB Permissions & CitationsPermissionsDownload CitationsTrack CitationsAdd to favorites Back To Publication ShareShare onFacebookTwitterLinked InRedditEmail View articleFiguresReferencesRelatedDetails Volume 5Issue 1Jan 2023 Information© 2023 by GEN PublishingTo cite this article:Alex Philippidis.StockWatch: Illumina Shares Steady as Icahn Escalates Proxy Fight.GEN Edge.Jan 2023.300-305.http://doi.org/10.1089/genedge.5.1.56Published in Volume: 5 Issue 1: April 7, 2023PDF download

Shining a Light in a Dark Corner: Does EDGAR Search Activity Reveal the Strategically Leaked Plans of Activist Investors?

AbstractWe provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist’s campaign targets in the days prior to that activist’s 13D disclosures. This outside investor’s knowledge of pending activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

Huntsman wins proxy fight

Huntsman shareholders have backed the chemical company’s management and voted against four board members proposed by the activist investment firm Starboard Value. Starboard revealed in January that it owned 8.6% of Huntsman’s shares outstanding, making it one of the company’s largest shareholders. At the time, Starboard said it wanted to get four new directors on Huntsman’s board during elections at its annual meeting on March 25. In the weeks that followed, Huntsman and Starboard traded barbs through press releases, presentations, and reports. Huntsman announced March 25 that shareholders voted to elect all 10 of the company’s director nominees. In a statement, CEO Peter Huntsman said that “the outcome of today’s shareholder vote is validation of our portfolio strategy and recognition that the Huntsman of today is vastly different than the Huntsman of five years ago.” In a letter to Huntsman shareholders, Starboard noted that it still owns about 8.8% of

Huntsman wins proxy fight

Huntsman wins proxy fight

The Illusion of Success: A Critique of Engine No. 1’s Proxy Fight at ExxonMobil

With less than $40 million worth of ExxonMobil common stock in hand, but with $30 million to spend, Engine No. 1 executed a proxy fight that succeeded in getting three of its four nominated directors elected to the board of ExxonMobil. This victory was viewed as a success by environmentalists and Environmental, Social and Governance (“ESG”) investors. To defend itself in the proxy fight, ExxonMobil was estimated to have spent $35 million. However, besides the money, it not hard to believe that thousands of hours of ExxonMobil management time (board members, executive management, and other managers down the line) were also spent on the effort. Unfortunately, even after all these resources expended, this Article finds that nothing was really accomplished. The hedge fund activism of Engine No. 1 did not provide “a roadmap for Exxon[Mobil] to improve its performance or address the difficult questions impeding meaningful progress toward climate objectives.” In regard to the latter, Engine No. 1 did not provide the company with specific recommendations on how it could transition from a global leader in oil and gas production to a global leader in the production of clean energy. Also, there is no evidence that Engine No. 1 has served as a corrective mechanism (mitigating managerial inefficiencies) at ExxonMobil consistent with this Article’s theory of hedge fund activism. Moreover, and perhaps most importantly, Engine No. 1 may have created a deadly distraction in our global fight against climate change, a fight that should be taken on by governments all over the world, not hedge fund activists. The only apparent positive result of this activism, at least from the perspective of Engine No. 1, is that the entity got a huge marketing boost in its efforts to raise funds for its exchanged traded funds.

Reputation and Investor Activism: A Structural Approach

We measure the impact of reputation for proxy fighting on investor activism by estimating a dynamic model in which activists engage a sequence of target firms. Our estimation produces an evolving reputation measure for each activist and quantifies its impact on campaign frequency and outcomes. We find that high reputation activists initiate 3.5 times as many campaigns and extract 85% more settlements from targets, and that reputation-building incentives explain 20% of campaign initiations and 19% of proxy fights. Our estimates indicate these reputation effects combine to nearly double the value activism adds for target shareholders.

Index-Fund Governance: An Empirical Study of the Lending-Voting Tradeoff

Institutional investors' role in shareholder voting is among the most hotly debated subjects in corporate governance. Some argue that institutions lack adequate incentives to effectively monitor managers; others contend that the largest institutions have developed analytical resources that produce informed votes. But little attention has been paid to the tradeoff these institutions face between voting their shares and earning profits—both for themselves and for the ultimate beneficiary of institutional funds—by lending those shares. Using a unique dataset and a recent change in SEC rules as an empirical setting, we document a substantial increase in the degree to which large institutions lend shares rather than cast votes in corporate elections. We show that, after the SEC clarified funds’ power to lend shares rather than vote them at shareholder meetings, institutions supplied 58\% more shares for lending immediately prior to those meetings. The change is concentrated in stocks with high index fund ownership; a difference-in-differences approach shows that supply increases from 15.6\% to 22.3\% in those stocks. Even when it comes to proxy fights, we show, stocks with high index ownership see a marked increase in shares available for lending immediately prior to the meeting. Overall, we show that loosening the legal constraints on institutional share lending has had significant implications for how index funds balance the lending-voting tradeoff.

Reputation and investor activism: A structural approach

We measure the impact of reputation for proxy fighting on investor activism by estimating a dynamic model in which activists engage a sequence of target firms. Our estimation produces an evolving reputation measure for each activist and quantifies its impact on campaign frequency and outcomes. We find that high reputation activists initiate 3.5 times as many campaigns and extract 85% more settlements from targets, and that reputation-building incentives explain 20% of campaign initiations and 19% of proxy fights. Our estimates indicate these reputation effects combine to nearly double the value that activism adds for target shareholders.

Shining a Light in a Dark Corner: EDGAR Search Activity Reveals the Strategically Leaked Plans of Activist Investors

We provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist’s campaign targets in the days prior to that activist’s 13D disclosures. This apparent leaking of activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

Speaking With One Voice: Shareholder Collaboration on Activism

Activist shareholders can often exert a large influence on corporate governance. However, the lead activist of a shareholder campaign typically only owns a small percentage of the target firm’s shares. How can a small activist govern a firm via intervention? By developing a game-theoretic model, I show that the small activist can organize a coalition with fellow active shareholders to share activism costs and win over passive shareholders. I analyze how the activist communicates and collaborates with fellow active shareholders behind the scenes. Perhaps surprisingly, a smaller coalition is more likely to win support from passive shareholders. The interplay between collaborating with active shareholders and winning over passive shareholders endogenizes the optimal size of the activist's coalition. I also find that potential shareholder collaboration makes boards more likely to reach agreements with activists before proxy fights.

Dancing with activists

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target's board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents’ reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits, and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in target companies.

Catching the Conscience of Kings: How Activists Persuade Mutual Funds

Do hedge fund activists tailor their campaigns to mutual fund family's preferences? And if so, does the strategy work? Using supervised machine learning on the fund family's proxy voting choices, I estimate their preferences. I find that activists align proxy communications with the preferences of fund families that own a larger share in targeted firms. Activists learn from interactions with fund families and align their campaigns better in subsequent proxy fights. Tailored campaigns enjoy improved shareholder attention, more votes, and a greater likelihood of success. My findings suggest that activism helps push shareholders' implicit agendas.

Not all threats are taken equally: Evidence from proxy fights

AbstractPrevious research shows that activist threats lead to corporate policy concessions. We find that the threat of proxy fights is responded to differently based on its credibility. Decomposing proxy fight threats, we find that only credible threats are associated with more leveraged, more innovative, and less acquisitive corporate policies. Management, however, does not respond to noncredible threats. Further, for materialized fights, the market reaction at announcement is also conditional on the credibility of the threats. Overall, not all activist threats are responded to equally by management or the market, and only credible threats achieve disciplinary effects and favorable valuation.

Corporate control activism

This paper studies the role of activist investors in the market for corporate control. Our theory proposes that activist investors have an inherent advantage relative to bidders in pressuring entrenched incumbents to sell. As counterparties to the acquisition, bidders have a fundamental conflict of interests with target shareholders from which activist investors are immune. Therefore, unlike activists, the ability of bidders to win proxy fights is very limited. This result is consistent with the large number of activist campaigns that have resulted with the target’s sale to a third party and the evidence that most proxy fights are launched by activists, not by bidders.

Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism

Abstract We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to seek board representation when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights, settlements, and a higher likelihood the activist achieves board representation or the sale of the targeted company. Our findings suggest that the recent growth of passive institutional investors mitigates free-rider problems and facilitates activists’ ability to engage in costly, value-enhancing forms of monitoring. Received September 28, 2016; editorial decision August 18, 2018 by Editor Andrew Karolyi.

Hostile Resistance to Hedge Fund Activism

When facing hedge fund activists, target firms often fight back. Targets with agency problems and those confronting the threat of investor coordination frequently engage in hostile resistance by implementing governance changes associated with managerial entrenchment. The market negatively responds to hostile resistance, and unless hedge funds counterresist, these campaigns have worse operating performance, faster activist exit, and fewer mergers than do campaigns without hostile target resistance. By contrast, when hedge funds counterresist with proxy fights, lawsuits, or unsolicited tender offers, the impact of hostile target resistance is reversed, and these campaigns have similar outcomes to campaigns without hostile target resistance. Received September 8, 2016; editorial decision March 18, 2018 by Editor Francesca Cornelli.

Firm Risk and Proxy Fights: Evidence from SOX

The Sarbanes Oxley Act of 2002 (SOX) is documented to curb executive risk-taking and firm risk. Utilizing SOX as an exogenous shock on firm risk, we find that proxy fight threats are positively related to a firm’s total risk and idiosyncratic risk. Specifically, although firm risk generally decreases post-SOX, high proxy fight threats mitigate this change in firm risk. We also find that although firms adopt more conservative policies such as decreasing their leverage and payout post-SOX, these changes are mitigated by proxy fight threats. In sum, our findings indicate that proxy fights act as an external disciplinary mechanism, encourage executive risk-taking, and increase firm risk.

Technological Knowledge and Corporate Governance

As is well-known, firms' innovative efforts can benefit from information about past implementations of similar technologies by other firms (technological knowledge). In this paper, we examine the effect of technological knowledge on agency problems. We present robust evidence that technological knowledge makes shareholder rights more valuable since it improves the ability of outsiders to effectively monitor managerial decisions. In addition, the announcement of stricter board independence standards due to the Sarbanes–Oxley Act of 2002 has a positive effect on the value of weakly governed firms only when these firms operate better-known technologies. Firms with better-known technologies are more likely to experience performance-induced monitoring interventions such as performance-based CEO turnover and proxy fights. Overall, our evidence suggests that, in a knowledge economy, strong governance is an ever more important source of shareholder value.

Dancing with Activists

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents’ reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in target companies.