London Business School Roundtable on Shareholder Activism in the U.K.

Finance scholars have produced little evidence of the effectiveness of direct attempts by institutional shareholders to improve corporate performance. What studies we have—focused mainly on the activities of U.S. pension funds—show no clear effect on shareholder returns. But a new study of shareholder activism in the U.K. looks promising. The subject of the study is a “Focus Fund,” launched in 1998 by the U.K. investment firm Hermes, whose aim is to identify underperforming companies, propose changes to their managements and boards, and—in contrast to the practices of the best‐known U.S. shareholder activists—work mainly “behind the scenes” with the companies to bring about those changes. In keeping with the more private nature of U.K. activism, which reflects in part the fewer restrictions on communication between companies and their investors than in the U S., the study's method of investigation is also notably different from the methods used in studies of U.S. investors. Four academics were allowed to examine Hermes' records of its “engagements” with companies, including letters, recordings and transcripts of telephone conversations, and the staff's personal notes and recollections. Using this information, the researchers show that the Fund has been remarkably successful in bringing about three kinds of proposed changes: replacements of CEOs and Chairmen; changes in investment and financial policies (mainly increased payouts and more disciplined capital spending); and restructurings (typically leading to greater corporate focus). Of equal importance, the study also shows that the market reaction to the announcement of such changes has been significantly positive, and that the cumulative effect of these positive reactions accounts for as much as 90% of the Fund's impressive “alpha,” or market out‐performance, over its eight‐year life. The first public presentation of these findings took place on February 9 at the inaugural event of the London Business School's Center for the Study of Corporate Governance. In our account of the event, an overview of the study's findings by two of its authors is followed by an “insider's” view of the Hermes' success story (presented by the Chief Executive of the Fund from 2002–2004) and a panel discussion of the general import of the findings featuring four distinguished practitioners.