Corporate governance antecedents to shareholder activism: A zero‐inflated process

Abstract

Research summary: Shareholder activism has become more widespread, yet the role of corporate governance as antecedent to shareholder activism remains equivocal. We propose a new conceptual model that characterizes the stochastic of observable shareholder activism as a compound product of two latent components representing (1) shareholder activists' propensity to target a company and (2) executives' propensity to settle activists' demands privately. Our model explicitly decouples corporate governance expectations for the two latent components embedded in activism process, and thus allows us to relax assumptions of homogenous shareholder interests and constrained managerial discretion where corporate managers are expected to negotiate privately and settle only value‐creating activist demands. Bayesian analysis of zero‐inflated Poisson regression reveals that corporate governance relationships with activism vary across shareholder demands and private settlements. Managerial summary: Increasing shareholder activism has generated debates as to whether activism promotes managerial accountability and responsibility or instead encourages managerial short‐termism. Our research model allows for heterogeneous interests among a company's shareholders. We theorize and empirically investigate a broader role of corporate governance: governance mechanisms need to ensure that executives are not (1) ignoring activists' value‐increasing demands or (2) accommodating activists' value‐decreasing demands in a private, opaque manner that disenfranchises other shareholders. Our results indicate that corporate governance implications differ for visible shareholder demands in contrast with private activism. A plausible application of our model is that it provides estimates of the probability of the numbers of shareholder demands to be received by a firm and the probability of privately settling a demand. Copyright © 2015 John Wiley & Sons, Ltd.

Private engagement by Nordic institutional investors on environmental, social, and governance risks in global companies

“…The empirical results of the study provide support for companylevel drivers of targeting that are typical for traditional financial activism (Dimson et al, 2015;Goranova & Ryan, 2014;Goranova et al, 2017;Poulsen et al, 2010;Rehbein et al, 2004 Eurosif's conclusion that "active engagement has the potential to deliver value by generating profits, reducing risks and negative ESG externalities, encouraging better business practices, changing ethical behavior, and improving reputations" (Eurosif, 2013, p. 62).…”

“…Past research tends to support company performance and size to drive activism (Goranova & Ryan, 2014;Goranova et al, 2017). Large companies are more attractive to the activism of institutional investors because of their high visibility, social exposure, and capacity for change (Bauer et al, 2014;Dimson et al, 2015;Goranova & Ryan, 2014;Lee & Lounsbury, 2011;McDonnell et al, 2015;Rehbein et al, 2004;Tkac, 2006).…”

“…Empirical research on private ESG engagement suggests that investor activists target companies by focusing on company-level drivers that are typical for traditional financial activism (Barko et al, 2018;Dimson et al, 2015). A stakeholder movement focuses primarily on ESG company performance (Goranova et al, 2017;Reid & Toffel, 2009;Vasi & King, 2012). In this tradition, Rehbein et al (2013) suggest that companies with strong ESG practices have an incentive to respond to private dialogue with social movement activists who have filed resolutions.…”

“…This paper will focus on the hidden and direct mechanism of investor activism, namely, private engagements by institutional investors on ESG issues prior to or independent of a shareholder resolution (Barko et al, 2018;Bauer et al, 2014;Dimson et al, 2015;Goodman et al, 2014;Hoepner et al, 2018;Rehbein et al, 2013). Private engagements or dialogues with the target companies are probably widely used, but data restricted to proprietary databases on behindthe-scenes interactions that take place without public knowledge have constrained more broad-scale empirical research (Gifford, 2010;Gillan & Starks, 2003;Goranova, Abouk, Nystrom, & Ehsan, 2017;Logsdon & Buren, 2009;Rehbein et al, 2013;Yamahaki & Frynas, 2016). The broad-scale empirical work at hand that investigates private engagement with respect to ESG issues has been presented by Dimson et al (2015), Bauer et al (2014), Hoepner et al (2018), and Barko et al (2018).…”

Models and monitoring of zero‐inflated processes: The past and current trends

“…Specific applications of the zero‐inflated distributions may be found in several sectors such as in the manufacturing industry: Li et al and Zhang et al; in health care industry: Lee et al and Gauran et al; in veterinary science: Wang et al; in policy‐making: Goranova et al; in agriculture: Martin and Hall; in law and enforcement: Park and Fisher, and Lundy and Dean; in safety and control: Dong et al; and in business and finance industry: Imami et al, Dai et al, Bradley and Ziniel, and Jiang et al However, Xie and Goh referred zero‐defect process with random shocks because, in the zero‐defect process, many conforming units were observed with a few random shocks that contained a large number of nonconformities. Moreover, in the industrial terminology, near zero‐defect process is referred to a high‐yield process, and in health care studies, it is related to rare health‐related events.…”