Stuart L. Gillan

Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors

We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To understand how these proposals are perceived by other investors, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Moreover, it appears that proposals by institutional and coordinated activists act as substitutes. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.

The Evolution of Shareholder Activism in the United States

In the early 1900s American financial institutions were active participants in U.S. corporate governance but the enactment of securities laws in the 1930s limited the power of financial intermediaries and thus their governance role. The consequence of such laws and regulations was a progressive widening of the gap between ownership and control in large U.S. public companies. In 1942, SEC rule changes allowed shareholders to submit proposals for inclusion on corporate ballots. Since that time, shareholder activists have used the proxy process, and other approaches, to pressure corporate boards and managers for change. In particular, during the mid-1980s, the involvement of large institutional shareholders increased dramatically with the advent of public pension fund activism. At the heart of shareholder activism is the quest for value, yet the empirical evidence suggests that effects of such activism are mixed. We review the evidence on activism and, while some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of improvement in the long-term operating or stock-market performance of the targeted companies. A recent increase in hedge fund activism appears to be associated with dramatic corporate change, however, the research in this area is still somewhat nascent and the long-term effects are still unknown.

Institutional Investors, Corporate Ownership and Corporate Governance: Global Perspectives

This chapter examines the role of institutional investors in financial markets and corporate governance. In many countries institutional investors have become the predominant players in financial markets and their influence is growing worldwide, chiefly due to the privatization and development of pension fund systems. Moreover foreign institutional investors are becoming a significant presence, bringing their trading habits and corporate governance preferences to international markets. In fact we argue that the primary actors prompting change in many corporate governance systems are institutional investors, often foreign institutional investors. In other countries institutional investors have only a limited role. In these countries large block-holders, often in the form of individuals, family groups, other corporations or lending institutions, are the dominant players.

Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data

We document that backfilling in the ExecuComp database introduces a data-conditioning bias that can affect inferences and make replicating previous work difficult. Although backfilling can be advantageous due to greater data coverage, if not addressed, the oversampling of firms with strong managerial incentives and higher subsequent returns leads to a significant upward bias in abnormal compensation, pay-for-performance sensitivity, and the magnitudes of several previously established relations. The bias also can lead to one misinterpreting the appropriate functional form of a relation and whether the data support one compensation theory over another. We offer methods to address this issue. Received May 12, 2014; editorial decision May 10, 2016 by Editor David Hirshleifer.

Evidence on Corporate Governance: The Joint Determination of Board Structures and Charter Provisions

We provide arguments and present evidence that corporate governance structures are composed of interrelated mechanisms, which are in turn endogenous responses to the costs and benefits firms face when they choose the mechanisms that comprise those structures. Examining board structures and the use of corporate charter provisions in a sample of more than 2,300 firms over a four-year period we find that firms cluster in their use of governance mechanisms. In particular, the set of charter provisions that firms use, as measured by the Gompers, Ishii, and Metrick (2003) G Index, is associated with board structure, with the laws of the state in which the firm is incorporated, and with firm and industry characteristics. We also find that some governance structures appear to serve as substitutes. Specifically, firms that have powerful boards (as measured by board independence) also have the greatest number of charter provisions, suggesting that the market for corporate control is less effective as a monitoring mechanism for these firms. In contrast, firms that have less powerful boards tend to have few charter provisions, suggesting that the market for corporate control plays a greater monitoring role at such firms. To address potential endogeneity issues, we employ three-stage least squares analysis to estimate these relationships within a system of equations. Our results from this analysis are consistent with the hypothesis that powerful boards serve as a substitute for the market for corporate control. Finally, our findings suggest that causality runs from the board to the choice of charter provisions, but not vice versa.

Human and Social Capital in the Labor Market for Directors

Abstract Purpose This study examines the director labor market to better understand which director attributes are important for board service. Design/Methodology/Approach Director level data, which includes proxies for both human and social capital, is analyzed to determine which characteristics increase the likelihood of gaining additional board appointments. Findings We find that general skills and director connections are valued in the marketplace. Among specific director characteristics, financial expertise, holding an MBA degree, and S&P 500 experience are positively associated with gaining new board appointments. Moreover, regardless of the director’s level of expertise, highly connected individuals are more likely to obtain new appointments. Finally, from a range of characteristics, only director connections mitigate the negative consequences of serving on the boards of firms that restate their financials. Originality/Value While most research has analyzed the effectiveness of boards of directors as a whole, this study examines the value of individual director characteristics within the context of the labor market.

Network Connections in REIT Markets

Relationships play a central role across the spectrum of real estate transactions. Whether negotiating prices, securing funding, or acquiring permits, knowing the right people provides multiple channels to facilitate deal making. To better understand the role of relationships in real estate markets, we examine how the connectedness of REIT directors is associated with deal making, growth, and profitability. We find strong evidence that REIT connections are positively associated with both deal making and accounting based measures of profitability, however, those relations do not translate into better market returns or higher valuations. One explanation of these somewhat contradictory results is that connections also increase firm risk. Preliminary support for this conjecture is found through our examination of each firm’s implied cost of equity capital. Specifically, we find increasing connectedness is associated with a higher cost of equity capital. Thus, connections appear to offer both advantages and disadvantages to REIT managers and shareholders.