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‘Less confrontational’ investor engagement

Environmental and social engagement by investors helps firms improve both financial performance and governance, finds study co-authored by Elroy Dimson of Cambridge Judge Business School.

Active ownership
Successful shareholder engagement on environmental and social issues helps companies improve both their financial performance and governance, showing that involvement that is “less confrontational” than hedge fund activism can achieve results, says a study co-authored by Elroy Dimson of University of Cambridge Judge Business School.

The study entitled “Active ownership” is forthcoming in the Review of Financial Studies.

The authors find that environmental, social and governance “engagements” increase shareholder value when successful in changing company policy or actions, and do not destroy firm value even when such engagements are unsuccessful.

In finding that such engagement (particularly environmental and social) improve performance and governance, the study concludes that active ownership “attenuates managerial myopia” of the sort that focuses too much on short-term profit at the expense of long-term shareholder value and other stakeholders.

“This approach is differentiated from other styles of shareholder action, particularly hedge fund activism,” says the study.

Responsible investment initiatives are less confrontational, more collaborative and more sensitive to public perceptions; yet they achieve success.

Professor Elroy Dimson

The study is co-authored by Elroy Dimson, Chairman of the Newton Centre for Endowment Asset Management at Cambridge Judge Business School, O?uzhan Karaka? of Boston College, and Xi Li of Temple University.

The study is based on engagements by a large institutional investor (ranked in the top 100 globally for assets under management) that actively engages with companies in its portfolio via letters, proxy voting, email, phone and direct conversations with management. It looks at 2,152 engagements with 613 US public companies between 1999 and 2009.

The study found that environmental, social and governance engagements generated a cumulative size-adjusted abnormal return of +2.3 percent over the first year following the initial engagement, and a +7.1% cumulative abnormal return for successful engagements over the first year, with returns gradually flattening out after a year. The success rate for engagements in this sample was 18 per cent, and it took on average two to three engagements before success in achieving a change could be recorded.

Among examples of successful engagements cited in the study: Apple announced new environmental initiatives; Yahoo!, following media attention related to China, announced new commitments to human rights and online freedom of expression; and Illinois Tool Works instituted a new corporate social responsibility report.

“To our knowledge, this study is the first to examine the impact of shareholder activism on environmental (E) and social (S) issues,” the study says. “After successful engagements, particularly those on ES issues, engaged companies experience improvements in their operating performance, profitability, efficiency, shareholding and governance.”

The authors caution that their study looks at an asset manager that is skilled in active ownership, so the abnormal positive returns generated would likely not be matched by an under-resourced activist investor.