Corporate Governance Through Exit and Voice

Marco Becht is the Goldschmidt Professor of Corporate Governance at the Solvay Brussels School for Economics and Management at Université libre de Bruxelles; Julian R. Franks is Professor of Finance at London Business School; and Hannes F. Wagner is Associate Professor at Bocconi University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

A Clinical Study of Investment Manager Stewardship

In a series of previous posts Bebchuk, Cohen and Hirst (discussed on the Forum here, here and here) have argued that investment managers have little incentive to monitor and engage with their portfolio companies. They present evidence collected from public sources to show that index funds in particular devote limited resources to stewardship. The authors argue that such asset managers communicate with only a small minority of portfolio companies, focus their attention on governance and pay, and only devote limited attention to issues that could be significant for beneficiaries, like strategy. In addition, asset managers are said to vote with management. This assessment has been challenged by some industry representatives and academic studies (discussed here).

Prior lack of empirical evidence

To the best of our knowledge none of these studies provide empirical evidence on the internal workings of asset managers and their engagements with companies, particularly private engagements.

Large sample evidence using proprietary data

In a recent ECGI Working Paper we present large sample evidence of the internal organisation and private engagements of a large UK asset manager, Standard Life Investments (SLI), that became Aberdeen Standard Investments in 2017 following the merger of Standard Life Plc and Aberdeen Asset Management Plc. The study covers the period 2007-2015. It suggests that the asset manager derives substantial tangible benefits from monitoring and its investment in stewardship.

Fund managers and internal analysts

SLI is an active manager. It employs a substantial, professional and centralised stewardship team. While the stewardship team is largely responsible for governance, including board composition, remuneration and ESG, it works closely with fund managers who engage on performance and strategic issues. The former selectively meets with non-executive directors and the Chairman of the company; the latter regularly and selectively meets with the CEO, the CFO and other management representatives. In special cases we observe joint meetings. The evidence for this particular asset manager belies the view that asset managers always underinvest in stewardship.

Trading decisions and stewardship

In addition, we examine the extent to which monitoring and engagement influence the trading decisions of fund managers, and how these contribute to performance, i.e. alpha. We measure abnormal trading and abnormal returns around selected events such as voting decisions (votes against and abstentions) and changes in internal analyst recommendations to buy or sell securities. We find that the largest contributor to abnormal returns are trading decisions around changes in analyst recommendations. These changes are significantly associated with information gathered by the governance and stewardship team and voting decisions.

Stewardship in the UK

The UK setting is particularly conducive for monitoring, engagement and trading. UK equity markets are liquid, the degree of institutional ownership is high, the listing rules favour independent shareholders and government policy encourages institutional shareholder engagement. In addition, Standard Life has a long history of governance engagement that pre-dates the adoption of the UK stewardship code and may not be typical of asset managers, even in the UK.

The full paper can be accessed here.

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