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E-MailOğuzhan Karakaş is Senior Lecturer in Finance at the University of Cambridge Judge Business School; Elroy Dimson is Research Director of Finance at the University of Cambridge Judge Business School; and Xi Li is Associate Professor of Accounting at the London School of Economics. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).
In our recent paper, Coordinated Engagements, we study the nature of and outcomes from coordinated engagements by a prominent international network of long-term shareholders cooperating to influence firms on environmental and social (E&S) issues. We examine the targeting and engagement strategy, success rates and financial outcomes of institutional investors who have coordinated their engagements through the Collaboration Platform provided by the Principles for Responsible Investment (PRI). Founded in 2006 and supported by the United Nations (the UN), PRI has become the leading network and the largest initiative worldwide for investors with a commitment to responsible ownership and long-term, sustainable returns.
Our dataset is granular and comprehensive, including 31 PRI engagement projects initiated between 2007 and 2015. Each project is originated and coordinated by PRI but is carried out by a group of investment organizations, including investment managers, asset owners, and service providers. A project involves dialogues with numerous targets—on average, with 53 public firms across the globe. Each target in a project may be engaged by a different group of owners, managers and service providers. On average, a group comprises 26 organizations (2 domestic and 24 foreign) whom we refer to collectively as ‘investors’.
We define an engagement sequence as a dialogue with a specific target firm in relation to a particular project. Our sample includes a total of 1,654 engagement sequences targeting 960 unique publicly listed firms located in 63 countries. These engagements encompass a total of
224 unique investment organizations. There are 87 asset owners and 121 investment managers from 24 countries, representing aggregate assets under management (AUM) of $23 trillion and an average AUM of $112 billion. Additionally, there are 16 service providers. Most engagements are conducted privately. The average and median elapsed time from the initiation to completion of these projects is around two years. Companies targeted for engagement are most frequently in the manufacturing sector, followed by the infrastructure and utilities, wholesale or retail trade, and mining sectors. Targeted companies are most commonly located in the United States, United Kingdom, France and Japan.
We find that coordinated engagements target large firms with a lower insider ownership, higher long-term institutional ownership, higher equity holdings from the coalition, and higher overall ESG ratings relative to their peers from the same country and industry. Our findings highlight the reputational concerns of target firms, the power of the aggregated “voice” of activists, the importance of lower entrenchment/resistance by target management, and the impact of a proactive approach to identifying potential ESG issues in an industry or region.
We document that, in collaborative engagements, leadership is decisive. Success rates are substantially elevated, and financial and accounting performance are improved when there are lead investors who head the dialogue and there are supporting investors collaborating with the lead. We refer to this as a “two-tier engagement strategy.” An average two-tier engagement has 1.4 lead and 21 supporting investors. Success rates are elevated when the lead investor is domestic, and the supporting investors are influential—as represented at the initiation of the engagements by signatories’ aggregate holding in the target firm, total AUM, and incorporation of formal process of engagements by internal staff. An investor is more likely to lead the collaborative dialogue when its exposure to and stake in the target firm is higher, when it is less busy with leading in other projects, and when the free-rider problem is less pronounced in coalition.
Coordinated engagements on E&S issues are surging in the institutional investment world and our study provides the first detailed evidence of the nature and impact of such engagements in a global setting. Our findings suggest that, for maximum effect, coordinated engagements on E&S issues would preferably have a lead investor who is well suited geographically, linguistically, culturally and socially to influencing target companies. Supporting investors are also vital, and they would ideally be major investment institutions that have influence because of their scale, ownership and resources.
Our findings also suggest that coordinating engagement activities through a third party can help exploit the advantages and overcome the challenges associated with collaborative engagements, and thus enhance shareholder value. Importantly, it can alleviate the free-rider problem that is a deterrent to active ownership. Institutions’ incentives to become leaders are shaped by their expertise and interest, alongside their resource base and the extent to which they behave like universal owners. Having a structured engagement strategy helps them achieve their stated objectives and contributes to improving the performance of target companies. Institutions with skin in the game relative to other investors are more likely to bear the engagement costs and to play the lead role.
The full paper is available for download here.
