As a continuation on my blog from October 25th, 2014 on so-called activist or engagement investors, The University of Pennsylvania Institute of Law and Economics has published on SSRN a research paper entitled Oxford Handbook: Institutional Investors in Corporate Governance by Edward R. Rock this week. The author is a well known researcher on corporate governance, especially focusing on agency theory and the relationship between shareholders and management. You can find this paper at http://ssrn.com/abstract=2512303.
This paper is an approachable and insightful piece of literature on the role of institutional investors and corporate governance. Rock suggests that traditional institutional investors, such as large money managers, have failed to become "active stewards" themselves but may use as proxies activist hedge funds to do their bidding. Rock rightly points out the funds available to these proxy players are estimated to be $100 billion or so, a small fraction of AUM of larger institutional investors such as pension funds. I recall a panel this summer at the SLS corporate governance course with an activist hedge fund manager flanked and supported by pension fund investors, and heard first hand of the virtues of this asset class including low correlation to existing investment strategies and good returns.
Rock identifies a significant difference between large institutional investors and hedge funds from a governance perspective is their different business models, with the former appearing to lack the incentives to intervene when problems or opportunities occur. For the later, this does not hold with activism applied both ex ante and in a strategic manner. Ex ante because activist investors seek to identify problem situations and given a high octane performance fee structure, do have strong incentives to get involved with firms they feel are problem or under performing. Activist investors are solely pursuing a single aim related to investment performance without any conflict of interest vis-a-vis the target firm (such as managing the firm's pension assets), and thus strategic.
Rock also investigates somewhat the differences of the current activist environment in North America and the type of landscape that the EU hopes to nourish with its Green Paper, seeking to promote a more patient type of engagement capital for companies on European bourses.
Professor Stephen Bainbridge at the UCLA Law School (who runs a corporate governance course) has recently written on this paper and you can find his blog and more here: http://www.professorbainbridge.com/.
This paper is an approachable and insightful piece of literature on the role of institutional investors and corporate governance. Rock suggests that traditional institutional investors, such as large money managers, have failed to become "active stewards" themselves but may use as proxies activist hedge funds to do their bidding. Rock rightly points out the funds available to these proxy players are estimated to be $100 billion or so, a small fraction of AUM of larger institutional investors such as pension funds. I recall a panel this summer at the SLS corporate governance course with an activist hedge fund manager flanked and supported by pension fund investors, and heard first hand of the virtues of this asset class including low correlation to existing investment strategies and good returns.
Rock identifies a significant difference between large institutional investors and hedge funds from a governance perspective is their different business models, with the former appearing to lack the incentives to intervene when problems or opportunities occur. For the later, this does not hold with activism applied both ex ante and in a strategic manner. Ex ante because activist investors seek to identify problem situations and given a high octane performance fee structure, do have strong incentives to get involved with firms they feel are problem or under performing. Activist investors are solely pursuing a single aim related to investment performance without any conflict of interest vis-a-vis the target firm (such as managing the firm's pension assets), and thus strategic.
Rock also investigates somewhat the differences of the current activist environment in North America and the type of landscape that the EU hopes to nourish with its Green Paper, seeking to promote a more patient type of engagement capital for companies on European bourses.
Professor Stephen Bainbridge at the UCLA Law School (who runs a corporate governance course) has recently written on this paper and you can find his blog and more here: http://www.professorbainbridge.com/.
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