2005 © Becht, Franks, Mayer and Rossi -1- Returns to Shareholder Activism: A Clinical Study Marco Becht ECARES, Université Libre de Bruxelles and ECGI

2005 © Becht, Franks, Mayer and Rossi -1-

Returns to Shareholder Returns to Shareholder Activism: A Clinical StudyActivism: A Clinical Study

Marco BechtECARES, Université Libre de Bruxelles and ECGI

Julian FranksLondon Business School and ECGI

Colin MayerSaïd Business School, University of Oxford and ECGI

Stefano RossiStockholm School of Economics and LBS

Preliminary: Do not reproduce or circulate without permission from the authors


MotivationMotivation1. Institutional shareholder activism is

controversial• Proponents argue that activism

improves corporate performance• Critics argue that activism is disruptive,

short termist and might reduce performance

2. Current empirical studies find no link between activism and performance

3. The empirical setup has been blamed

4. Can we do better?


No Returns to Voice in the No Returns to Voice in the U.S.U.S.

Type of “voice” Number of

Studies

Average Abnormal Return (%)

Range

Shareholder Proposals 12 0.3 to -0.22

Non-proposal pressure or negotiated settlements 6 0.11-1.86

“Most evidence indicates that shareholder activism can prompt small changes in target firms’ governance structures, but has negligible impact on share values and earnings“ (Karpoff 2001)

“A small number of American institutional investors … spend a trivial amount of money on overt activism efforts… Institutions achieve the effects on firm performance that one might expect from this level of effort - namely, not much.“ (Black 1998)


Hail Britannia?Hail Britannia?

Black and Coffee (Michigan Law Review 1994) argue that the U.K. provides an ideal institutional setting for shareholder activism.

1. More legal tools (EGM, voting rules for changing management)

2. Fewer constraints on what activist shareholders can do in private


The Hermes UK Focus Fund The Hermes UK Focus Fund (HUKFF) – A “Field (HUKFF) – A “Field Experiment” in ActivismExperiment” in Activism Focus fund applies triple investment

criterion1. Is the company under-performing?2. Can the fund engage the company

successfully?3. Does the fund expect it can get at least 20%

more value over current share-price? If triple “yes”

– Invest – Engage (bring about governance/real change)– Divest


Clinical Study : Clinical Study : Methodology Methodology Part 1: Observe and report what types

of governance interventions the fund has used – in public and in private

Part 2: What are the returns from the outcomes of these interventions?

Part 3: What proportion of the total return of the fund is attributable to these outcomes?

Part 4: What are the results for a control group that did not get the “treatment”?


DataData Data on 1 fund containing 41 stocks Data comprises:

– amounts invested, net-asset values and fees– letters, memos, minutes, presentations,

transcripts/recordings of telephone conversations

– client reports– fund staff coded additional information from

agendas, personal notes and memory External data collected includes

– stock prices (Datastream)– news flow on outcomes (Factiva)


EngagementEngagement

10

8

12

0

2

4

6

8

10

12

14

Collaborative Mixed Confrontational

8

3

30

0

5

10

15

20

25

30

35

40

45

Num

ber of

Com

pani

es

Not Engaged Not yet Engaged Engaged

Includes open positions at 31/12/2004

41 investments


Average Holding PeriodsAverage Holding Periods

186

16

894

0

100

200

300

400

500

600

700

800

900

1000

Num

ber of

Day

s


711796

1063

0

200

400

600

800

1000

1200



41 investments


Average Size of Hermes Average Size of Hermes StakesStakes

1.28

1.96

4.88

0

1

2

3

4

5

6

Num

ber of

Day

s


3.99 4.22

6.07

0

1

2

3

4

5

6

7



41 investments


Identity of Large Identity of Large StakeholdersStakeholdersHermes’ stake >3% 19 times (out

of 41)

Other stakeholders >3%: Legal & General 15 times, Prudential 9, Barclays 7, Fidelity 7, AXA 6, Schroeder 6, …

Coalitions can form relatively easily


ResultsResults

1. Actions2. Objectives and Outcomes3. Excess Returns Around

Publicly Observed Events


Results 1: ActionsResults 1: Actions

1. Contact with Management and Board

2. Contact with other Shareholders3. Shareholder Meetings4. Escalation to Public

Confrontation


Contact with Management and Contact with Management and BoardBoard

0 5 10 15 20 25 30

CEO

Chairman

CFO

Chief Operating Officer

Division Manager

Head of Investor Relations

Non-Executives

at least once during investment period


Contact with other Contact with other ShareholdersShareholders

0 5 10 15 20 25 30

Calls/Meetings

Solicit Support

Joint Letter

Joint Meetings



Shareholder MeetingsShareholder Meetings

0 5 10 15 20 25 30

Pose Questions

Add item toagenda

Solicit hostilevotes

Call EGM



Escalation to Public Escalation to Public ConfrontationConfrontation

0 5 10 15 20 25 30

U.K. Litigation

U.S. Class Action

Press Campaign

Hostile TakeoverAttempts

HUKFF induced induced by others


Results 2: Objectives and Results 2: Objectives and Outcomes Outcomes


Engagement ObjectivesEngagement Objectives

Board Changes– CEO– Chairman– introduction of > independence

Financial Policies– payout policy – rights issues

Restructuring – refocusing / asset sales– narrowing discount on investment funds


Board ChangesBoard Changes

0 5 10 15 20 25 30

Change CEO

Change Chairman

MoreIndependence

Change Non-Execs

Objective Outcome


Financial PoliciesFinancial Policies

0 5 10 15 20 25 30

Increase CashPayout

Rights Issue

Discipline CapitalExpenditure

Objective Outcome


RestructuringRestructuring

0 5 10 15 20 25 30

More Focus

Reduce Discounton NAV

Non-Diversified :Asset Sales

Stop Acquisition

Objective Outcome


Results 3: Excess Returns Results 3: Excess Returns Around Publicly Observed Around Publicly Observed EventsEvents


Event WindowEvent Window

Event : Date activism outcome first disclosed on FACTIVA*

eventtime

event window

t=0t=-5 t=+5

(* with the exception of restructuring events)


Type of Outcome EventsType of Outcome Events

CEO and Chairman turnover announcements

Restructuring Payout announcements Non-executive director turnover

announcements

For all groups of events filter out confounding information e.g. profit warning accompanying a change of CEO


ExampleExample

New Chief fuels recovery hopes– “Mr X's appointment was welcomed in the

City providing the first sharp upward movement in the group's shares in months. Yesterday AAA shares closed up almost 19 per cent at 57p. Current and former colleagues said he would not run away from making the difficult decisions required at AAA.” Financial Times, 2003

– Note: Names omitted.


All Observed EventsAll Observed Events

-1-0.5

00.5

11.5

22.5

33.5

44.5

55.5

66.5

77.5

88.5

-5 -4 -3 -2 -1 0 1 2 3 4 5

Trading Days in Event Time

Cum

ulat

ive

Aver

age

Abno

rmal

Ret

urn

(%)

All Events Clean Events

N=99

N=67

estimate of permanent change in market value of

company induced by event


CEO and Chairman CEO and Chairman TurnoverTurnover

-1-0.5

00.5

11.5

22.5

33.5

44.5

55.5

66.5

77.5

88.5

-5 -4 -3 -2 -1 0 1 2 3 4 5


Cum

ulat

ive

Aver

age

Abno

rmal

Ret

urn

(%)


N=28

N=19


PayoutPayout

-1-0.5

00.5

11.5

22.5

33.5

44.5

55.5

66.5

77.5

88.5

-5 -4 -3 -2 -1 0 1 2 3 4 5


Cum

ulat

ive

Aver

age

Abno

rmal

Ret

urn

(%)


N=17

N=5


RestructuringRestructuring

-1-0.5

00.5

11.5

22.5

33.5

44.5

55.5

66.5

77.5

88.5

-5 -4 -3 -2 -1 0 1 2 3 4 5


Cum

ulat

ive

Aver

age

Abno

rmal

Ret

urn

(%)


N=45

N=35


Non-Executive DirectorsNon-Executive Directors

-1-0.5

00.5

11.5

22.5

33.5

44.5

55.5

66.5

77.5

88.5

-5 -4 -3 -2 -1 0 1 2 3 4 5


Cum

ulat

ive

Aver

age

Abno

rmal

Ret

urn

(%)


N=9

N=8


Returns for similar events in Returns for similar events in other UK companies without other UK companies without HUKFF engagementHUKFF engagement

Restructuring : 0.33% (Menon et al.)CEO Turnover : -0.29% (Dedman and

Lin)CEO Turnover for under performing

companies -1% (Dimopoulos)


HUKFF Excess Returns against HUKFF Excess Returns against BenchmarkBenchmark

Raw Return(net of fees)

FTSE All (raw

return)

Relative to Benchmark

Arithmetic mean

Since Inception Oct 98 – Dec 2004

62.6% 22.4% 40.2%

Annual 8.1% 3.3% 4.8%

Source : Hermes Focus Asset Management


Contribution of Event Contribution of Event Outcomes to Total Fund Outcomes to Total Fund Excess ReturnExcess Return

7.7%

92.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Excess Return from other Factors

Excess Return from Event Outcomes

23%

36%

41%


Source : event outcomes – own calculations; total fund excess return - HUKFF


CaveatsCaveats1. Results for one fund only.2. Will it last?3. Are there alternatives such as

private equity? Which is more profitable?


SummarySummary

HUKFF seeks change in target companies

Large positive market reactions to observed outcomes

Part of fund’s excess returns due to activism

UK may be different from the US


DisclaimerDisclaimer

This presentation does not provide investment advice nor recommendations to buy or sell

securities.

Neither shall the authors be liable for any errors, inaccuracies or

omissions in content, or for any actions taken in reliance thereon.

Documents

2005 © Becht, Franks, Mayer and Rossi -1- Returns to Shareholder Activism: A Clinical Study Marco Becht ECARES, Université Libre de Bruxelles and ECGI