The Motivation and Impact of Pension Fund Activism

Abstract

Pension funds have become increasingly active in the governance of companies in which they own stock. A common form of activism includes the submission of shareholder proposals to the corporate proxy statement. This study examines the impact and motivation of pension fund activism by studying the targets of the largest, most active funds from 1987 through 1993. Previous studies show that shareholder proposals are associated with negligible shareholder wealth effects, which some attribute to personal publicity or political motivations associated with public funds. We argue that a proper assessment of fund motivation and impact requires recognition of the heterogeneity across pension funds in investment strategies, and activism objectives and tactics. In addition, due to event date uncertainty common to shareholder proposals, a more powerful method of measuring impact is useful; we measure the effectiveness of the funds in generating significant changes in target company policies. Relative to a performance, size and industry matched control sample, we find that companies receiving pension fund proposals subsequently experience a higher frequency of governance events such as shareholder lawsuits, and responsive corporate policies such as asset sales, restructurings, and layoffs. We also show that variation in impact across target firms is related to fund heterogeneity. We conclude that the funds are more successful at monitoring target firms than previously recognized, and find no evidence to support motivations other than fund value maximization.