Underlying the policy debate about merits of institutional activism is the empirical question: Does such activism have a significant impact on corporations that are the target of that activism? The short answer is that it’s unclear.

In an attempt to provide an intermediate-level answer, let us review a few points that emerge from this debate on the impact of institutional activism. To begin, the studies do not usually include proxy fights or takeover bids since these are rare events for institutional investors. In addition, these studies are all premised on the efficient markets theory, so they assume that the impact from shareholder activism can be measured by looking at a change in stock price after a specific event, such as a pension fund’s submission of a stockholder proposal.

These economic studies tend to show no or little positive price effects from proposals to change general governance procedures, such as the introduction of confidential voting or the appointment of an external board chairman (separate from the CEO). Although most studies find no or insignificant price effects from proposals to have a majority of independent directors on a corporate board, there are exceptions in the academic literature and many anecdotes about the importance of independent directors in takeover situations. By contrast, the studies on campaigns to remove anti-takeover amendments tend to show positive price effects over the long term, though the short- term effects are ambiguous. Many stockholder proposals have aimed at rescinding poison pills, but the effects of these efforts on stock prices are particularly confused because the merits of poison pills are themselves the subject of heated debate.14

FundsThe studies tend to show more positive price effects from an announcement of a successful negotiation about a stockholder proposal between an institutional investor and a target company than the public submission or subsequent vote on a controversial proposal. Some commentators argue that such negotiated settlements have more positive price effects because company managements agree to settlements only if proposals increase stockholder values. Others argue that such positive price effects derive mainly from the market’s perception that negotiated settlements signal management’s general willingness to respond to stockholder concerns.

A separate category of studies has focused on whether institutional activism has resulted in discernible corporate responses, as opposed to stock price changes. Again, in general, the results are mixed There appears to be no significant correlation between institutional activism and CEO turnover; however, there does appear to be a significant correlation between institutional activism and corporate restructurings such as asset sales or spin-offs. But there is a further debate about whether these restructurings were caused by stockholder activism itself or whether the restructuring occurred because activists focused on underperforming companies, which tend to have a relatively high incidence of corporate restructuring.

Of course, certain types of stockholder activism are not aimed at improving the target company’s financial performance; therefore, it would be inappropriate to look for price effects from such stockholder activism. Filing a stockholder resolution that urges an oil company to cease its exploration activities is unlikely to affect the company’s stock price positively, but it may further the social agenda of the proponent. A limited group of such nonfinancial resolutions or requests can get a good reception in corporate circles. For example, a majority of the firms pressured by TIAA-CREF to name female or minority board members did so or are in the process of doing so. On the other hand, firms faced with stockholder proposals to cap the compensation of senior executives do not usually change such compensation.

More broadly, institutional activism has been defended on the ground that it has brought about salutary, though intangible, improvements in the corporate culture of the United States. For example, institutional activism has probably been a factor contributing to the enhanced sensitivity of company directors to issues raised by their shareholders. Moreover, stockholder activism by public pension plans has probably made advisers to mutual funds more sensitive to their fiduciary obligations to vote proxies diligently.

What are the policy implications of all these studies? Most commentators would agree that the mixed evidence on target impact means that institutional investors should proceed carefully by looking at the estimated costs and benefits of each instance of stockholder activism. Such a careful look is especially warranted because of the “free rider” problem inherent in institutional activism: its costs are borne by one or two stockholders, while all other stockholders reap its benefits.

A few critics would severely restrict stockholder activism because of their belief that the financial impact of activism on target companies is doubtful. These critics emphasize the dominant role in stockholder activism of public pension plans as opposed to mutual funds and other private investors. In the view of these critics, this dominance suggests that much stockholder activism is motivated more by the political or personal goals of public pension plan officials than by the financial interests of their pension beneficiaries. However, the supporters of stockholder activism by public pension plans emphasize that the corporate targets of their activism are selected on the basis of low scores on objective financial measures and not on the basis of any political criteria. They also note that the costs of stockholder activism are minuscule relative to the size of such public pension plans; for example, the annual cost of CalPERS’ stockholder activism program is roughly $500,000 per year, or .002% of the plan’s assets. Moreover, supporters point to a few studies showing positive financial results from activism by Ca1PERS and TIAA-CREF; critics, of course, challenge the methodological validity of these studies.

Similarly, there is no agreement on whether institutional activism should be permitted or encouraged on issues other than those designed to increase the financial return to company stockholders; as discussed above, these issues include environmental, labor and ethical concerns about corporate conduct. The critics maintain that social policy concerns should be resolved in a legislative or regulatory forum rather than in the corporate governance process. These critics would say, for instance, that stockholder activism should not extend to emissions standards utilized by car companies; instead, these companies should abide by the emissions standards set by Congress and the Environmental Protection Agency after public debate. On the other hand, supporters of social activism by institutional investors maintain that stockholders are only one. of several stakeholders in a company, which should take into account the interests of their employees, customers and local communities. In their view, Congress and the EPA set only the minimum emissions standards for cars; a car company may choose to meet higher standards in light of.community as well as stockholder interests.

In sum, the large increase in institutional ownership of publicly traded companies has significantly changed the dynamics of corporate governance in the United States. However, there is no consensus on the effects or merits of institutional activism.At present, most advisers to mutual funds diligently vote on all issues put to a stockholders‘ vote, including proposals by other stockholders as well as management. But these advisers become involved in stockholder activism only in unusual circumstances and generally prefer to follow the Wall Street Rule by selling a company’s shares if they are dissatisfied with the company’s performance.

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