Ac-ve Ownership Oğuzhan Karakaş Boston College (co-­‐authored with Elroy Dimson and Xi Li) The Impact of Responsible and Sustainable Inves-ng Conference 14 November 2014 – Hong Kong Slide 1 of 16 Prevalence Source: Global Sustainable Investment Review, GSIA, 2013 Slide 2 of 16 Organizing Thoughts •  Three views on CSR: 1. Win-­‐win (“Doing well by doing good”). (+) -  Long-­‐term perspec-ve to maximize intertemporal profits. 2. Delegated philanthropy. (+) -  Firm as an efficient channel for expressing ci-zens’ values. 3. Insider-­‐ini-ated corporate philanthropy. (−) -  Milton Friedman (1970). -  Managerial agency problem è CSR destroys shareholder value Source: Benabou and Tirole (2010) Slide 3 of 16 Contribu-ons •  First to study ac-vism on social, environmental & ethical (SEE) issues. –  “CSR ac-vism”: different objec-ves, tac-cs, and outcomes. –  Corporate governance (CG) issues: used as a basis for comparison. •  Robust performance results. –  Successful engagements: 7% one-­‐year size-­‐adjusted abnormal returns. –  Unsuccessful engagements: perform neutrally. •  Instrumental role of collabora-on and reputa-on. -  First to document the nature and impact of collabora-on among ac-vists. •  Literature on CSR/SRI and firm performance. –  Our data is dynamic and incremental, unlike CSR scores such as KLD. Slide 4 of 16 Data •  Unique and extensive dataset of CSR engagements. –  Point-­‐in-­‐-me record of engagements and outcomes. –  2,152 engagement sequences. –  613 public firms in the US over period 1999 to 2009. –  Comparisons with a sample matched by sector, size and MTB. •  Illustra-on of a successful engagement sequence: Raising Awareness Request for Change Milestone t0 t1 t2 7me Slide 5 of 16 Controls •  Accoun-ng data: Compustat NA Fundamentals Annual. •  Stock returns: CRSP; Compustat NA Security Monthly. •  Analyst coverage: I/B/E/S. •  Ins-tu-onal ownership: Thomson Reuters 13F. •  Corporate governance: RiskMetrics. •  Li-ga-on data: AuditAnaly-cs. •  Shareholder mee-ngs and news releases: Capital IQ. Slide 6 of 16 Ques-ons •  Which firms do ac-ve owners engage? -  Likelihood regressions of being engaged. •  Do ac-ve owners collaborate with other shareholders? -  Hard and sor collabora-ons, and their impact on success of ac-vism. •  What determines the success of CSR engagements? -  Likelihood regressions of being successful condi-onal on engagement. •  How does the market react to CSR engagements? -  Cumula-ve abnormal returns, buy-­‐and-­‐hold returns. •  What impact do CSR ac-vi-es have on firm performance? -  Difference-­‐in-­‐difference analysis for ex-­‐engagement period. Slide 7 of 16 Themes # of sequences % successful Horizon (days) •  Governance –  Corporate gov’ce (CG) 900 211 149 –  Business ethics –  Sustainability mgt & rptg •  Environmental –  Public health –  Human rights –  Labour standards Total/Average (SEE) Source: Table 1 & 3 525 647 284 24 14 9 156 77 221 –  Climate change –  Ecosystem services –  Environmental mgt •  Social 10 10 18 521 512 386 31 182 225 1,215 7 10 17 13 622 591 410 474 100 18 503 Slide 8 of 16 Collabora-on •  Hard Collaborators # of sequences % successful –  SRI Fund 415 –  Pension Fund 137 –  Asset Manager 62 –  Financial Ins-tu-on 27 –  Religious Fund 23 –  Other 48 All hard collaborators 712 •  Sor Collaborators 540 –  Code, Principle, Ini-a-ve, Standard, Bill 231 –  Forum, Network, Coali-on 92 –  Peer, Media 66 –  Ins-tute, University, ThinkTank, Center 15 –  Other 1,090 All sor collaborators Source: Table 4 52 32 48 63 48 60 48 32 36 86 30 46 39 Slide 9 of 16 Targe-ng: in words Which firms do ac7ve owners engage? •  Large and mature firms. –  Economies of scale (consistent with tradi-onal shareholder ac-vism). •  High adver-sing intensity. –  Consumer-­‐oriented industries with reputa-onal concerns. •  High shareholding. –  High vo-ng power. •  Weak corporate governance. –  Firms with headroom for improvements. •  Targe-ng strategy. –  Rela-vely ac-ve but less aggressive than HF ac-vists. Source: Table 6 Slide 10 of 16 Success: in words What determines the success of CSR engagements? •  Large firms. –  Benefits scalable, fixed costs of change more affordable for big firms. •  High cash holding and low capital and R&D expenditure. –  Less financially-­‐constrained. •  High adver-sing intensity. –  Consumer-­‐oriented industries with reputa-onal concerns. •  Corporate governance insignificant. –  Inconsistent with insider-­‐ini-ated CSR. •  Engagement strategy. –  Rela-vely ac-ve but less confronta-onal than hedge funds. Collabora-on increases the success rate. Source: Table 7 Slide 11 of 16 Performance Cumula7ve Abnormal Return (CAR) rela7ve to Ini7al Engagement Source: Figure 1 Slide 12 of 16 Mechanisms •  Aurac-ng socially conscious consumers and increasing consumer loyalty. –  Higher sales and profitability. •  Increasing employee loyalty. –  Higher efficiency. •  Aurac-ng socially conscious investors. –  Higher shareholdings. –  Lower stock return vola-lity. •  Signaling future governance improvements. Slide 13 of 16 Explana-ons •  Is the outperformance just good stock picking? –  Abnormal returns only for engagements that are successful. •  Do targets implement only the profitable proposals? –  No indica-on that well-­‐governed firms have higher abnormal returns. •  Do firms wait for stock to rise, and then adopt proposals? –  Abnormal returns do not explain engagement success. •  Why don’t firms voluntarily engage in CSR themselves? –  Target firms face agency issues: they have inferior governance. –  Firms can benefit from direc-onal guidance from the investor. Slide 14 of 16 Conclusions •  7% yearly abnormal return for successful engagements. –  No market reac-on to unsuccessful engagements. –  Posi-ve reac-on to governance and climate-­‐change engagements. •  Firms that are targeted reveal: –  Greater reputa-onal concerns, inferior governance, headroom to improve. •  Determinants of successful CSR change. –  Collabora-on, reputa-on, economies of scale, scope for improvement. •  Outcome from CSR change. –  Improved opera-ng performance, profitability, efficiency, and governance. Slide 15 of 16 Download ssrn.com/id=2154724 Slide 16 of 16