Collective Action and Governance Activism

Abstract

We examine how an investor collective action organization (ICAO) enhances activism by institutional investors. The ICAO initiated a new form of engagement—private meetings with independent directors to discuss governance proposals. Compared to a single investor acting alone, the ICAO has stronger incentives to engage in activism. Its dollar holdings and voting power are six times larger and predict direct access to the board and the firms it engages. Firms engaged by the ICAO are at least 58% more likely than non-engaged firms to adopt the ICAO’s governance proposals that include adoption of majority voting, say-on-pay, and specific compensation policies. Engaged firms also increase CEO incentive pay. An event study around the announcement of the ICAO’s formation shows a positive impact on value that increases in both dollar holdings and voting power. We conclude that institutional investors improve governance outcomes through collective action.

Keywords: Collective action, Corporate governance, Institutional investor activism

JEL Classification: G34, G23