Investor influence on company management

Citation

Nisar, T.M. and Martin, R. (2007), "Investor influence on company management", Management Decision, Vol. 45 No. 5. https://doi.org/10.1108/md.2007.00145eaa.001

Investor influence on company management

Investors have traditionally shied away from openly participating in company management. The general view held by these investors was that any interference in company business strategy would harm management initiative and accountability. However, during the last two decades a movement has taken hold that favours an activist style of investment. Not only is it acceptable to the proponents of this movement to vote against management at shareholder meetings, but they are also willing to enforce corporate governance standards using overt means of public pressure. Notable activists are CalPERS, the California Public Employees’ Retirement System, and Hermes, a British fund. At any rate, investors now take an interest in how companies are being managed, and what possible actions can be taken to improve the operation of companies in their portfolios.

Different types of investors have different institutional interests – private trusts, portfolio equity investors, institutional investors – and may be expected to have different levels and forms of influence upon management practice. In terms of board membership of a portfolio company, institutional investors’ main concern is with fostering board independence rather than directly participating in board decision-making. They will engage with their companies using a variety of methods including discussion behind the scenes, publication of a list of “target companies”, proxy voting, running dissident slates and shareholder derivative suits, and using media pressure. On the other hand, venture capital and private equity firms are not only concerned with board composition but they also seek to directly influence board decisions through their representatives on portfolio company boards. Less directly, they influence employee recruitment, wages and salaries of lower level employees, selection of suppliers and launch customers and, more broadly, commercialization strategies.

Against this background, the UK Department of Trade and Industry (DTI) commissioned a research project into the effects of financial institutions and investor behaviour on management practice. The project was carried out by a team from the School of Management at the University of Southampton. The project’s findings have now been published by the DTI and by Oxford University Press in a book entitled Investor Engagement: Investors and Management Practice Under Shareholder Value. This special issue of Management Decision is aimed at exploring further many of the issues and research questions initially raised by the DTI report. Martin and Nisar’s paper examines the way asset managers apply the ISC Principles designed to improve corporate governance standards. Using a survey study of fund managers to evaluate the adherence of managers to the ISC Principles, the authors show that fund managers routinely analyse information concerning those companies in which they invest, and are actively involved in activities to promote standards of corporate governance and corporate accountability.

Nikolychuk and Sturgess analyse the interplay between voice and exit strategies and how they influence corporate control in the UK’s sports industry. They provide two cases of football clubs to demonstrate the extent to which socio-cultural and market oriented incentives jointly contribute to corporate control outcomes. Seitanidi investigates how investors can protect their assets by prioritising intangible resources. She argues that investors traditionally focus on tangible outcomes (money, land, machinery), and rather less on the intangible economy (trust, human resources, information, reputation). Using the case of Nonprofit-Business Partnerships, she demonstrates how investors can protect their financial assets by facilitating the shift from the tangible to the intangible economy.

Braun and Latham explore going-private transactions via leveraged buyouts (LBOs) as a response to deficient governance structures, as well as post-buyout board restructuring. Their study gives credence to the argument that boards represent a unique source of value creation in LBOs. The study complements previous agency-theoretic work by focusing on the monitoring function of the board, and introduces resource dependence theory to suggest the importance of a strategic service and support function. Casson and Nisar examine the role of organizational design in venture capital (VC) firms’ investment strategies. They find that VC firms’ engagement style is strongly related to their organizational focus. VC firms investing in one particular specialized area are significantly more likely to become involved with their companies than general firms.

Eldridge develops a conceptual framework to analyse optimal allocation of decision rights in venture capital environments. His particular focus is on how investors and investees search to find a suitable venture capital partner and how investors allocate significant decision rights to portfolio company managers. Casson and Martin’s paper is primarily concerned with the question of what makes VC firms more or less engaged investors. To examine these factors, Casson and Martin use hand-collected data about the venture capital practice in the UK. They find that the skills and experience (the human capital endowments) of VC partner managers are a key fact in investor engagement: VC partners with prior business experience are significantly more involved with the companies they finance. Finally, Abell and Nisar investigate the effects of syndication on VC firm performance. Their evidence suggests that better-networked VC firms are able to create a whole lot of business opportunities for network members.

Tahir M. Nisar, Roderick MartinGuest Editors