The Mechanisms of Institutional Activism in the US and Europe

Abstract

The corporate governance literature has identified several mechanisms through which institutional investors may be able to conduct shareholder activism in practice, either privately or publicly. Private mechanisms are used by shareholders for behind-the-scenes communication and negotiation with management and are not publicly observable. Public mechanisms are used by shareholders to issue public threats to management and are observable through media such as newspapers, television or websites. Relatively speaking, institutional investors prefer private mechanisms to public mechanisms when they engage with management (Butz 1994, 296). This is perhaps because private mechanisms are not confrontational or hostile, making it easier to communicate with management. Private mechanisms are usually used before shareholding acquisition; public mechanisms are therefore resorted to only after relevant shareholding has been acquired. If public mechanisms are used, it might imply that private mechanisms have failed. For example, “a shareholder proposal signals the failure of direct negotiations to prompt such change” (Karpoff 2001, 30). In this scenario, institutional investors may need to launch an activist campaign and a public mechanism is probably the last resort before a divestment or takeover.