Shareholder activism: performing for publicity or actual policy
change?
The influence of social and environmental shareholder activism on CSR
performance.
Abstract:
This paper examines the effect of shareholder activism, regarding social and environmental
issues, on Corporate Social Responsibility (CSR) performance of a firm in the period following
the proposal. In order to do so 599 activist proposals filed at the Securities Exchange
Commission regarding shareholder activism in the period 2006-2015 are examined. The
consequences of these proposals on the CSR performance in the period following the
shareholder proposal are examined. Further parameters are internationalization, stake size
and institutional effects and as control variables firm size and industry are used. No
significant statistical relation is found between these variables, except for the
internationalisation variable, which has a positive relation with CSR performance.
Field key words: Corporate Social Responsibility (CSR), Shareholder activism, Thomson
Reuters Asset4, Proxy Monitor, internationalization, social CSR performance, environmental
CSR performance.
Word count: 11.335
Supervisor:
P
rof. Dr. C.L.M. Hermes
Study programme:
International Financial Management, University of Groningen
Business and Economics, Uppsala Universitet.
Robert Zantinge
1
Introduction
In recent years there has been much debate about how a firm should behave within society, with special to which responsibilities it has to abide by. Furthermore, the debate includes the question of which of the stakeholders the firm actually has a responsibility to, regarding its policies. This debate is formed by a more classical approach on one side, with proponents such as Friedmann (1970), and more recent researchers on the other hand, who are pushing for more corporate social responsibility (CSR) within a firm. These recent researchers argue that firms have a responsibility to society, to behave in such a way that their activities to generate wealth are not at the cost of future generations.
This responsibility matters, as the costs associated with CSR can be substantial. In the classical view the costs of these policies are paid by shareholders, as the owners of the company, so it is not the responsibility of a manager to spend money on CSR. This responsibility lies with individuals, and not the management of a firm which would be spending resources that are not theirs to spend, as discussed by Friedman (1970). Current theories write about the cost of environmental and social policies made by firms to society. For example, the costs of the oil leak of BP’s oil platform
Deepwater Horizon were not only paid by shareholders, but also by people such as fishermen and people living at the coast near the oil spill (Cherry & Sneirson,2011). Because more researchers are looking at these issues from a broader perspective, and include other stakeholders, the focus of the debate has changed. From the classical view, that regards CSR as a waste of resources, towards shareholder activists trying to influence firm behaviour and improve their policies regarding CSR (Gillan and Starks, 2007).
Shareholder activism itself has been present for a long time in the United States. According to Gillan and Starks (2007) shareholder activism started in the thirties, and has been present ever since in varying degrees. Lately there has been an increase in activism aimed at corporations, which coincides with a greater societal awareness. This increase in activism also presents new problems, such as a type of agency problems. Classic agency problems originate from a divergence of interests between management and shareholders (Jensen & Meckling, 1976). Shareholder activism is often initiated by shareholders only holding a small amount shares (Copland and O’Keefe, 2015). Larger shareholders tend to be more focussed on profit and operational results due to their function, an example of this being investment funds. (Cziraki, Renneboog & Szilagyi, 2010). This creates agency problems due to a divergence in interest between often larger shareholders, who focus on profit, and activist
2 A prime example of this occurs within the well-known oil corporation Shell, where an activist
organization called ‘Follow This’ tries to completely change the strategy of Shell. ‘Follow This’ proposal states that Shell should focus on renewable energy and should only produce renewable energy by 2030 (the Guardian, 2015). This would be very costly, as the current strategy is still largely based on fossil fuels, with a slow growth towards more sustainable energy. Furthermore, current assets of Shell, such as oil rigs, are expensive to just discard in favour of more sustainable assets (Financieel Dagblad, 2016). ‘Follow This’ does not operate on its own, they try to get large
institutional investors on board with their agenda. By gaining support of large investors ‘Follow This’ wants to send a clear signal towards Shell’s top management regarding the need for change. For the last filing they got support from Actiam, a large investment fund at the annual shareholders meeting (Financieel Dagblad, 2016). Recently Shell has announced that it will change its strategy towards more wind energy, and has already purchased a concession to operate a large wind energy park just off the coast of the Netherlands (Financieel Dagblad, 2016). Whether this was the result of an activist shareholder pushing for change, the institutions backing the proposal or changing public opinion is not known, but it is a clear change from previous strategies. From a societal perspective it is very interesting to know which factors influence a firms strategy. If even a firm such as Shell, which is always in the spotlights regarding environmental issues, can change its strategy, which firm would be able to resist such outside pressure? For this reason it is important to do more research regarding this topic, as the benefits for the environment and society can be huge.
3 For this reason I formulate the following research question for my paper, which could answer some of these gaps in literature.
Does a CSR proposal regarding environmental or social oriented issues have a long-term effect on the environmental or social performance of a firm?
4
Theory
Many different definitions of the level of corporate social responsibility are found in literature, which makes it difficult to find one working definition. Furthermore, across different countries there are definition differences according to Matten and Moon (2008). Matten and Moon (2008) claim that firms from the United States use more explicit CSR policies compared to European firms. In this case, explicit means adopting corporate codes regarding corporate social responsibility and language used by a firm on their website. In this paper international effects are studied, so the definition of
corporate social responsibility needs to be broad enough to capture the concept in an international setting. The following definition is used by both Carroll (1999) and Devinney (2009:
CSR is the total of the company’s discretionary multidimensional activities which include social, political, environmental, economic and ethical actions.
This definition captures CSR, but is broad enough to be applied in an international setting according to Carroll (1999). Moreover, views about what level of activism is appropriate for a firm are heavily debated. Different theories disagree on the level of responsibility that a firm has towards society, and whether this responsibility to society exists at all. Following the perspective of Friedman (1970) firms should not engage in CSR, as this is a responsibility of the government and individuals who should decide for themselves if they want to spend their resources on CSR activities. Management should not spend the shareholders’ money on projects that are not increasing profits, as
management is hired by shareholders and their sole role is providing shareholders with returns for their investment. Alternatively, there are many theories arguing the opposite, which say CSR has a positive relation to firm value (Porter & Kramer, 2002; Saiia et al.,2003; Brammer & Millington, 2005; Orlitzky et al., 2003; and Roman et al., 1999). Zheng, Luo and Maksimov (2015) take this a step further and claim that CSR is necessary for a firm, as their legitimacy depends on it. Legitimacy is necessary in order to sustain a good relationship with stakeholders outside the firm according to Zheng, Luo and Maksimov (2015).
5 carefully and change them towards their stakeholders preferences, as there are potential benefits to be gained. According to Brown, Helland and Smith (2009) pharmaceutical firms can use donations to healthcare to create a connection with doctors and hospitals that later buy their products. And the petroleum corporation can use their environmental donation to legitimize their operation towards legislators and the general public. Industries with little international exposure (utilities, retailers, health etc.) give less to international CSR projects but target more local projects (Brown, Helland and Smith, 2009).
According to Mahoney, Thorne, Cecil and LaGore (2013) some firms use a CSR report for the wrong reasons. According to this paper the motivation for publishing a CSR report is often greenwashing or signalling. They define greenwashing as firms pretending to be a good corporate citizen with a strong CSR policy while actually not performing very well in this area. These type of firms publish CSR reports to try to convince investors of their policies, while these reports exaggerate their performance. Signalling is described as firms using a CSR report to inform investors of their CSR. There is a difference between firms engaging in greenwashing and firms using their CSR report as a signalling mechanism. Firms using greenwashing are pretending to be good corporate citizens, while firms that use the signalling mechanism use the CSR report to inform investors of strong
commitment to actually existing CSR policies.
Signalling theory is mostly directed towards shareholders with a strong social and environmental agenda. By giving of this signal the firm tries to attract extra investors in order to raise more capital. Contrastingly, social oriented investors also try to influence the firms in which they invest. This is done by shareholder activism or the filing of proposals at the shareholder meeting in order to try to influence the firm. Gillan and Starks (2007) defined shareholder activists as: “investors who,
dissatisfied with some aspect of a company’s management or operations, try to bring about change in within the company without a change in control.”
Shareholder activism can target different areas within a firm. As can be seen in the case of CalPERS there is a focus on corporate governance, but also on operating performance and shareholder wealth (Smith, 1996). An important reason for activist shareholders to target firms was underperformance compared to the S&P 500. Alternatively, there are also investors who focus on the environmental and social performance of their investments. According to O'Rourke (2003) environmental and social issues become more and more important for institutional investors, but also investment funds such as churches and public pension funds (O'Rourke, 2003). Social and environmental topics are
6 are also known as “gadflies” and have been around since the forties of the previous century,
although their level of activity fluctuated through the years according to Gillan and Starks (1998). These individuals, religious organizations, and institutions seem to target firms that underperform with regards to corporate social responsibility. This is confirmed by Rehbein, Waddock and Graves (2004) who argue that activists target firms that perform poorly on issues related to employee and community policies.
Shareholders that target firms for social policies can be divided in two different groups according to Rowley and Moldoveanu (2003). The first social shareholder group operates from an interest or principle based perspective and the second group argues from an identity perspective. This division is important, as most proposals regarding social policies do not get the necessary amount of votes to pass through the shareholder meeting. So why would social shareholders even bother with these proposals if their chance of success is so low? Rehbein, Waddock and Graves (2004) argue that the reason for this seemingly pointless behaviour is because of these two types of investors. Investors who follow the identity principle file activist proposals, because they are necessary to foster the common identity within their investor group. Alternatively, investor groups whose principles are interest based will file proposals when they feel their key issues are not receiving necessary attention and want to gather support for their social agenda. By filing proposals the issue receives attention and becomes more likely to be resolved (Rehbein, Waddock and Graves, 2004). Even when these proposals do not get the necessary amount of votes the proposals strengthen the identity for the first investor group and make sure that certain issues get on the agenda for the second group. Furthermore, by putting these topics on the agenda the investor has identified the problem, which can put out a signal to other stakeholders, which puts pressure on management. When the support for these proposals is higher as they receive more votes in favour of a proposal, the more potent the signal send out to management of the target firm becomes. This pressure can then lead to
negotiations between management and the involved shareholders (Rehbein, Waddock and Graves, 2004). So even when proposals regarding environmental and social policies do not get the necessary votes in the shareholders meeting there are still valid reasons for shareholders to file these
7
H1: there is a positive relation between shareholder support for an environmental or social
shareholder proposal and the change in CSR performance of the target firm in the following period.
Furthermore, there are specific types of investors who are more likely to target firms that are lagging in areas regarding environmental and social affairs. This is confirmed by Agrawal (2012) who reviews the activist behaviour of AFL-CIO in the United States. AFL-CIO represents several labour unions and has large investments in firms in the United States. According to Agrawal (2012) institutions engage more in activism when firms score particularly low on corporate governance. When an investment scores low on social issues that are important to workers, a labour union will chose to pursue its social agenda in spite of potential repercussions to operational performance according to Agrawal (2012).
8 factors influenced the decision to start an activist campaign. Institutional ownership was one of the common factors for a lot of the activist proposals initiated by CALpers. In addition, Del Guercio and Hawkins (1999) confirm the importance of institutional ownership for shareholder activism. Chen, Harford and Li (2007) confirm these findings, and they argue that monitoring within a target firm has to be done by investors with a long term orientation. Chen, Harford and Li (2007) further argue that there are economies of scale involved with gathering information and trying to influence the board. These scale economies also benefit shareholder activism, as investors need information to monitor the firm (Gantchev, 2013). Chen, Harford and Li (2007) claim institutional investors tend to be better equipped to do the kind of research necessary and have the necessary connections to senior
management within the firm to successfully influence the policy of the firm. As institutional investors are better equipped to monitor a firm, an activist proposal presented by an institution should have more credibility and have a larger chance of success compared to proposals filed by individuals. For this reason, a proposal presented by an institution should have a larger effect on the CSR
performance of a firm in the period following the proposal. From these arguments the following hypothesis is formed:
H2: There is a positive relation between institutional investors presenting a proposal and the change in CSR performance of the target firm in the following year.
The CSR performance of a firm is also influenced by the level of internalisation of a firm. As a firm becomes more international oriented the CSR performance will become more important. This was confirmed by Attig, Boubakri and Guedhami (2016). They argue that:
“Firms deal with increased pressures as a result from a larger and culturally, politically, institutionally, and economically more diverse stakeholder environment by integrating them into their CSR activities.”
This increased pressure occurs in the case of international diversification by the firm and is explained by the following arguments. First, as reported by Kacperczyk (2009), it becomes more difficult to replace management when a firm grows larger and more complex and therefore becomes more demanding on managers. As it is more difficult to replace management when alternatives are scarce, shareholders are more willing to negotiate with management and replacing them remains a last resort (Kacperczyk, 2009). Secondly, after expanding internationally firms can signal their commitment to a market by engaging in CSR. As mentioned before, the time horizon of CSR
9 can also lower the psychic distance between the home country and the foreign country by engaging in CSR (Johanson and Vahlne, 1977). The psychic distance is defined by Johanson and Vahlne (1977) as the “sum of factors preventing the flow of information from and to the market”. This presents an incentive for firms to engage in CSR to reduce problems associated with the psychic distance paradox.
Larger firms are more visible, which results in more media coverage, so any potential CSR problem is more likely to become public as the firm becomes more international and thus larger (Hong and Kacperczyk, 2009; El Ghoul, Guedhami, Kwok and Mishra, 2011). Because of this increased visibility shareholders will want to monitor more closely. This is related to the previously mentioned
argument about the need for shareholder activists to create a common identity or act on common principles. Activist shareholders need to clearly signal their commitment to their principles in order to create or maintain their common identity. As the visibility of a firm goes up, so does the need for an activist shareholder to present their views(Rehbein, Waddock and Graves, 2004). This implies that the level of shareholder activism is influenced by the level of internationalisation of a firm, as firms become more visible and deal with more institutional and pressure from more stakeholders. This influence of internationalisation is expected to moderate the relation between support for shareholder proposals and the CSR performance of a firm due to the previously mentioned arguments.
H3: Internationalisation positively moderates the relation between support for an activist shareholder proposal and CSR performance in the following period.
Shareholders with a larger stake in the firm tend to be better at monitoring the firm, which would imply that they are more likely to engage in activism if they disagree with firm policies according to
Zeckhauser and Pound (1990). They argue that large shareholders tend to have more resources available to engage in shareholder activism, but also a larger incentive as their stake is larger so are their potential gains and losses. Furthermore, a larger voting block logically has a larger chance at success due to the larger absolute volume of votes. Also, due to the larger stake size a large investor will suffer less from free riding (McCahery, Sautner and Starks, 2016). Free riding is defined by McCahery, Sautner and Starks (2016) as “a disincentive for shareholder activism as benefits are
spread equally across all shareholders but the costs are borne by the activist”. McCahery, Sautner and
10 investors are essential, because in a group of just small investors no investor feels the responsibility to monitor or lacks the resources or financial motivation, as their stake is too small to create a convincing signal to other investors. Furthermore, proposals made by an investor owning a larger stake in the firm signals a commitment to the firm, by the activist shareholder, that they are invested in the firm and are dependent on good results themselves. This can boost confidence of other investors and encourage them to vote in favour of the activist proposal. This signalling effect is essential for activist shareholders, as their public image is essential for their group identity and for getting their issues on the corporate agenda, according to Rehbein, Waddock & Graves (2004). For that reason, stake size should moderate the relation between shareholder support for activist proposals and CSR performance of a firm.
11
Methodology
Sample
In order to measure the effect of social and environmental activist shareholder proposals on the CSR score I use a sample of proposals from the Proxy Monitor database. The Proxy Monitor database is sponsored by the Manhattan Institute and covers the 250 largest US based firms. The ranking of included firms is determined by using total revenue. The Manhattan Institute obtains their data directly from the Securities and Exchange Commission (SEC) and link directly to the information, also present in form 14A. Form 14A, also known as the proxy statement, lists proposals filed by
shareholders to be presented at the annual shareholders meeting. In order to be able to file a proposal a shareholder needs to hold at least shares with a total value of 2.000 USD or they need to hold 1 percent of total outstanding firm shares with voting rights. Filing 14A became obligated through the Securities Exchange Act of 1934 and its goal is to ensure shareholders can make an informed choice regarding decisions made at the shareholders meeting. For that reason, the proponent of the proposal is mentioned together with his motivation for the proposal. Also, recorded in the filing is the management response to the proposal and a voting advice by the management.
The available data covers 2006 until 2015 and in total there are 5.570 observations of a shareholder proposal, regarding either corporate governance, executive compensation and social policy. The proposals are categorized across these three categories within the Proxy Monitor database, based on the topic of the proposal and the motivation, as presented by the proponent of the proposal. After excluding corporate governance and executive compensation proposals, 1.337 observations are left. Within the database a distinction is made between different types of investors such as institutions, individuals and coordinated groups such as religious organizations. These types are based on the identity of the filer, as indicated in filing 14A at the SEC database. Also recorded are the votes in favour of a proposal, and whether a proposal was presented at the shareholders meeting or not. Proposals that are withdrawn right before the meeting indicate an agreement or negotiations
between management and the shareholder activist. When a proposal gets withdrawn this is stated in filing 14A. After excluding all the proposals for which data concerning the shareholders’ identity or stakesize is absent there are 599 proposals left for the time period 2006 – 2015.
Dependent variable
12 matched to almost every observation in the Proxy Monitor database, although a few observations are missing, as they no longer exist due to for example bankruptcy, takeovers or mergers. Because the Asset4 holds different categories and provides data on these separate categories the proposals can be matched directly to the performance of the firm in that category. For example, for a proposal regarding environmental issues it is possible to check for improvements in the environmental Asset4 score in the following years.
According to Semanova and Hassel (2015) the Asset4 database produces comparable results to other well-known databases, such as the KLD database. Asset4 rates firms on an annual basis and provides them with a ranking for different Key Performance Indicators or (KPI). These KPI’s are all based on the three pillars of the Asset4 which are Environmental, Social and Governance. The final score that Asset4 assigns to a firm shows how well the firm deals with environmental issues, such as energy and pollution, but also on social issues, such as for example human rights (Semanova and Hassel, 2015). As this paper discusses the effect of different measures on the CSR performance we need to consider the effect that on the year after the year in which a shareholder proposal occurred. For that reason we take into account the change between the year of the proposal and the subsequent year. So the change in CSR is measured as: CSRt
– CSR in year
t+1. However, according to Dimson, Karakas and Li(2013) it takes around 1.5 years before improvements in CSR policies are implemented, as it takes time to get from the stage of activism to actually implementing the changes within the firm. For this reason I include two periods in my analysis. I first lag the CSR performance of a firm only one year after the filing of the proposal and I also check for two years after this in order to see if the CSR performance actually improved. I use both the categorized Asset4 scores, so the social score for a social proposal. I also assess improvements in the total CSR score in the following year and two years. The reason for this is to ensure that the firm did not just shift the sustainability budget from, for example, the social to the environmental area. The total CSR score is also provided by theAsset4 database. When a firm increases its score in the separate category, but the total CSR score stays similar, this indicates that there was merely a shift in budget and not an improvement in the CSR performance as a whole.
Independent variables
13 Furthermore, some proposals are not brought to vote at the shareholder meeting after being
deposited at the SEC. This indicates success, as it is likely the shareholder chooses not to present the proposal due to negotiations with management (Appel, 2016). This is further elaborated in the descriptive statistics section.
The Proxy Monitor database also provides information regarding the type of proponent of an activist proposal. A proponent of a proposal is categorized as either an individual, religious organization or an institution. This information is retrieved from the SEC database as proponents are required to present their name in filing 14a. The influence of institutional investors is measured using a dummy variable. Institutions get labelled with a one and non-institutions such as individuals and religious organization a zero.
For the international variable I use the commonly utilized measurement of foreign sales divided by total sales. By comparing foreign sales to total sales the level of internationalization is determined for the firm which, as mentioned in the Theory section, influences the firms’ CSR performance. This method is also used by Attig, Boubakri, El Ghoul & Guedhami (2016), Sullivan (1994) and Li, Qiu & Wan (2011). As described in the theory section, internationalization moderates the relation between the level of support for a shareholder proposal and the CSR performance of a firm.
The final independent variable is stake size, which is measured by dividing the amount of shares owned by the shareholder filing the proposal and the total amount of outstanding shares. This information is available in filing 14A at the SEC although some firms only report that the shareholders own the necessary minimum of shares to file a proposal which is 2.000 USD. These proposals are excluded from the sample as mentioned previously.
Controls
As mentioned, firms in certain industries are more visible to the public and engage more in CSR behaviour, in order to legitimize their behaviour Bowen (2000). Adams and Hill (1998) found that firms in certain industries tended to publish more environmental and employee information regarding CSR policies. For example, Jenkins and Yakovleva (2006) discovered that the mining industry is an industry in which firms disclose more information in their CSR reports. Other such industries identified by literature are the oil industry and chemical industry (Clarke and Gibson-Sweet, 1999; Line, Hawley and Krut, 2002). Ness and Mirza (1991) claim that this industry
phenomenon differs per industry and in the case of the oil industry comes from the direct and clear relation between oil spills and their environmental consequences. Furthermore, also Holder-Webb, Cohen, Nath and Wood (2009) report differences in the frequency and level of detail in CSR
14 visible to the public and CSR reporting by corporations. The theoretical foundation for this relation can be found in the legitimacy theory and the signalling theory. The legitimacy theory states that a firm will try to follow society’s norms and values, because this is necessary for its continued existence. Without conforming to society the firm will lose its legitimacy and eventually cease to exist, according to Dowling and Pfeffer (1975). Signalling theory in the case of CSR is defined as firms trying to signal towards shareholders and society their commitment to CSR by Mahoney, Thorne, Cecil and LaGore (2013). As mentioned previously Mahoney, Thorne, Cecil and LaGore (2013) also claim a second reason for firms in sensitive industries which is greenwashing. Greenwashing implies that firms in sensitive industries try to signal to the market that their CSR performance is very
satisfactory, while in fact their CSR performance is not better than that of their competitors. Because of greenwashing, a negative relation between industry and CSR performance is expected. And industry is used as a control variable in this paper (Alves, 2009; Delmas and Burbano, 2011; Mahoney, Thorne, Cecil and LaGore, 2013).
The industry variable will be defined using the methodology provided by Reverte (2009). In that paper a standard is developed, describing which industries are more sensitive to CSR and which standards are less sensitive. Sensitive towards CSR means that the industry in which the firm operates is closely watched by media and society and susceptible to scandals. An example of this would be the oil industry. The proxy monitor database already divides the companies listed in the database in relatively detailed subgroups based on their core activities. Reverte (2009) names the following industries as “sensitive”: mining, oil and gas, chemicals, forestry and paper, steel and other metals, electrictity, gas distribution and water. The Industry Classification Benchmark (ICB) is used to assign firms to their industries. In the appendix in Table A2 I have provided the ICB classification. From these possible industries the following are determined to be sensitive by Reverte (2009): basic materials, industrials, oil and gas and utilities. Each industry is assigned a different number, but one industry is excluded in order to avoid the dummy variable trap as this would induce multicollinearity in the model.
The final control variable used in this study is firm size. Larger firms have more resources at their disposal and are at the same time more visible, thereby increasing their need to engage in CSR (Brammer & Millington, 2006; Burke, Logsdon, Mitchell, Reiner & Vogel, 1986). Firm size is measured using the methodology presented by Smith (1996) who proposed using the natural logarithm of the market value of equity. This data is annually available for each of the proposals in the Datastream database by Thomson Reuters.
15 Because the change in CSR will be determined in the first year after the proposal and two years after the proposal the dependent variable is defined as ChangeCSR in year t+n and n will be equal to either one or two.
𝐶ℎ𝑎𝑛𝑔𝑒𝐶𝑆𝑅𝑡+𝑛 = 𝛽1 %𝑉𝑃𝑟𝑜𝑝𝑡+ 𝛽2𝑇𝑦𝑝𝑒𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑡+ 𝛽3𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛𝑡
+ 𝛽4%𝑉𝑃𝑟𝑜𝑝 ∗ 𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛𝑡+ 𝛽5𝑆𝑡𝑎𝑘𝑒𝑆𝑖𝑧𝑒𝑡
+ 𝛽6%𝑉𝑃𝑟𝑜𝑝 ∗ 𝑆𝑡𝑎𝑘𝑒𝑠𝑖𝑧𝑒𝑡+ 𝛽7𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑡+ 𝛽8𝐹𝑖𝑟𝑚𝑆𝑖𝑧𝑒𝑡
ChangeCSR stands for the change in CSR from year t to year t+1. %VProp is the amount of votes in favour of a proposal as a percentage. TypeInvestor is a dummy variable, which equals either one, if an institutional investor is the proponent, or zero for a non-institutional investor being the
16
Descriptive statistics
In this section the descriptive statics for the main variables are presented and a number of extra analysis is done for the industry effect. Furthermore, the correlation matrix is presented to check for correlation between variables.
In Table 1 the distribution of proposals per year is presented for the total amount of proposals subdivided into social and environmental proposals and the type of investor presenting the proposal is given.
Table 1: Distribution of proposals
Amount of activist shareholder proposals regarding environmental or social issues
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Total Proposals 75 67 60 59 62 64 51 54 60 47 599 Social Proposals 63 50 47 50 48 54 43 46 43 29 473 Environmental Proposals 12 17 13 9 14 10 8 8 17 18 126 Presented by Institutional investor 18 15 14 26 14 17 15 20 23 13 175 Religious organisation 18 13 19 14 18 14 1 7 8 6 118 Others 39 39 27 19 30 33 35 27 29 28 306
As can be seen in Table 1 the distribution remains steady over the years. In the first two years a relatively large amount of proposals was presented at the shareholder meetings, followed by a slight decline in proposals in the last year. This decline can partly be explained by data availability, as for some proposals data was missing in 2015 so they are eliminated from the total sample.
The most obvious conclusion that can be drawn from the type of investor filing the proposal is that religious organisations were more active in the first years and after that their amount of proposals is reduced significantly. There is no clear reason for this declining interest, but the number of different investors filing is relatively small, so if a few religious organizations decide to stop filing proposals this would have a large impact.
17 the amount of proposals that sensitive firms received, which indicates that firms operating in a sensitive industry do not receive more proposals than firms operating in non-sensitive industries.
Table 2 Distribution of Firms and Proposals per industry
Industry Firms n Proposals n
Basic materials * 2 14 Consumer goods 37 167 Consumer services 26 81 Financials 8 69 Health care 6 13 Industrials * 25 133
Oil and gas * 11 52
Technology 4 30 Telecommunications 3 28 Utilities * 6 12 Total 128 599 Sensitive industry 44 211 Non-sensitive industry 84 388
Industries marked with * are sensitive industries following Reverte (2009)
The descriptive statistics for the main variables are presented in Table 3. The values for CSRTotal correspond to the total score for a firm in the Asset4 database. CSREnv and CSRSoc are respectively the environmental and social scores within the Asset4 database. VProp stands for the number of votes in favour of a proposal. As such those numbers are given in percentages as well, for the subdivision for institutional investors, religious organisations and other investors.
18
Table 3 Descriptive statistics
Variable Mean Median Min Max Std. Dev.
CSRTotal 82.14 89.51 6.65 98.45 17.53 CSREnv 73.38 84.95 9.61 97.20 26.09 CSRSoc 73.67 78.93 6.91 98.79 20.66 Vprop % 14.57 8.44 0.00 67.11 11.83 Institutional investor % 21.00 22.08 0.00 55.39 12.08 Religious organisation % 11.90 7.42 0.30 38.07 10.14 Other % 11.92 6.98 0.00 67.11 10.82 Internationalisation % 32.09 31.43 0.00 100.00 25.43 StakeSize % 0.05 0.00 0.00 0.92 0.11 The CSR values all have a relatively large standard deviation considering that the theoretically smallest possible score is 0, while the largest score possible is 100. Next to the total CSR score also the values for the Environmental and Social performance are given, as they are used in in evaluating effects on the CSR performance.
It is noteworthy that the total number of votes in favour is relatively high compared to, for example, Cziraki, Renneboog and Szilagyi (2010) who reported a total percentage in favour of CSR related proposals of 8,1% in the United Kingdom and 2% in Europe. These differences could occur due to cultural differences, as shareholder activism has been present longer in the United States (Gillan and Starks, 2007). Gillan and Starks (2000) recorded a similar average percentage of votes in favour of shareholder activism of 23.0% for proposals filed in the United States by institutional investors, which is in line with the results in Table 3 regarding institutional investors.
The internationalisation variable has an average of 32.09% which is relatively low, as the sample consists of the largest firms within the US. This can be explained by a relatively large amount of firms who operate solely in the United States within the sample. A total of 35 firms only sell within the United States and they operate mainly in the healthcare, utilities and oil and gas industry in Table 2 . There is one firm doing its business entirely outside the United States which is Philip Morris
19 In table 4 the Correlation matrix is given for the dependent and independent variables and Firm Size. Industry is excluded as it is a dummy variable and consists of nominal data and would not add to the correlation matrix.
Table 4 Correlation Matrix
Variable 1 2 3 4 5 6 1 CSRTotal 1.000 2 %Vprop -0.072 1.000 3 Internationalisation 0.230 ** -0.190 ** 1.000 4 StakeSize -0.141 ** 0.227 ** -0.047 1.000 5 Institution -0.132 ** 0.262 ** -0.102 * 0.450 ** 1.000 6 FirmSize 0.311 ** -0.072 0.273 ** -0.197 ** -0.092 * 1.000
* Significant at the 5% level ** Significant at the 1% level
As can be seen in Table 4 the correlations between most variables are relatively low. Yet there is a strong correlation between CSRTotal and FirmSize i.e. larger firms do seem to have a better CSR performance. This could be related to the visibility argument mentioned in the Theory section, which states that larger firms are more visible to institutions and investors and therefore need to improve their CSR performance. The relation between number of votes in favour of a proposal and CSR performance is slightly negative, which contrasts hypothesis 1. Internationalisation, on the other hand, has a relatively strong relation to CSR performance and this relation is also significant at a 1% level. However, internationalisation has a negative relation towards the number of votes in favour of a proposal, which is inconsistent with hypothesis 3. Stake size has a strong positive relation with the number of votes in favour of a proposal, so an investor with a larger stake in the firm receives more votes in favour if they present an activist proposal. This supports hypothesis 4. An institution
presenting a proposal regarding environmental or social issues has a positive effect on the number of votes in favour of a shareholder proposal, but not on the relation between CSR performance and institutional investors. In general, the relation between the number of votes in favour of proposals seems stronger than the relations between CSR performance and other variables.
20
Results
This section presents the results of multiple OLS regressions in order to provide an answer to the main research question. In the first section I look at the total CSR performance of a firm following activist shareholder proposals, with a one and a two year lag, as is consistent with Dimson, Karakas and Li (2013). The second section presents a subsample of only activist shareholder proposals regarding social issues, and for that reason CSR performance is also narrowed towards just the social part of CSR for that section. The final section does the same, but then for an environmental
subsample and only considers the environmental part of CSR performance. Both of the subsamples include a one year and a two year lag.
Total CSR performance
The regression results for the OLS-regression regarding total CSR performance are presented in Table A3 in the Appendix. The first model only shows the control variables industry and firm size regressed on the dependent variable CSR performance in year t+1. For the industry variable one industry had to be left out to function, as a reference point and to avoid multicollinearity. In this case, the industry consumer goods is used as a reference point, as according to Reverte (2009) this is a non-sensitive industry. Table 2 in the descriptive statistics section shows that consumer goods is one of the larger industries in the sample, thereby offering a good reference point. The control variable firm size is consistently highly significant throughout all the regression models used, which is in line with theory, as numerous papers have described this relation. The industry variable has mixed results, but most of the industries marked by Reverte (2009) as a sensitive industry do have a higher coefficient
compared to the reference point, which as mentioned is the consumer goods industry. The total amount of variance explained by the control variables, as given by the adjusted R², is 21.2% for the control variables. This is relatively low compared to, for example, Gillan and Starks (2000) although they study all types of shareholder activist proposals in their study, which might explain the difference.
21 the StakeSize variable, as well as the control variables. It has a negative relation to CSR performance and is significant at a 5% confidence interval. This contrasts the expectation of a positive relation between the variables StakeSize of an investor presenting a proposal and actual CSR performance in year t+1. Model 5 includes the control variables and the institutional variable; the relation between total CSR performance and institutional investors presenting a proposal is negative and significant at 5%. In model 6 all the variables are tested together with the interaction effects for stake size, internationalisation and the amount of votes in favour of a proposal. The introduction of the interaction variables improves R² a little to 22.4%. Both interaction variables are not significant, which means that both Stake size and internationalisation have no significant relation to the amount of votes in favour of an activist proposal. This means that both hypothesis 3 and 4 have to be
rejected as there is no evidence of a moderating relation between these variables.
Model 7 introduces an extra lag in the model. All the variables including the interaction variables are regressed on total CSR performance two years after the proposal. Since Dimson, Karakas and Li (2013) claim it takes 1.5 years before changes are implemented there could be a significant effect two years after the initial shareholder proposal. This is not the case as can be seen in Table A3. The adjusted R² is lowered significantly to 8.9%, so adding another lag does not improve the model. This could be due to other factors influencing the CSR performance of a firm. Two years is a relatively long period and it is possible other factors have influenced the CSR performance.
The final regression done with the total CSR score is presented in table A6 in the Appendix. In model 1 the top quartile of proposals with the most votes in favour of the proposal are selected. This is done because these proposals have received the most attention by shareholder and it is possible that management perceives this as a clear signal to implement changes. This is also reflected in the adjusted R² in the model as 32.2% of the variance is explained. This is significantly higher than for model 2, in which the bottom quartile of proposals is used so these are the proposals with the least amount of votes in favour. In model 2 only 15.2% of the variance is explained. This provides some evidence for signalling theory as it seems that proposals receiving more attention also have an increased effect on CSR performance in year t+1.
Social CSR performance
22 CSR performance. Regarding the relations between variables there is not much difference between the regressions on total CSR performance and just social performance. The internationalisation variable is again the variable with the most significance and is slightly positive. Model 7, which includes a two year lag for social CSR performance, does add value since the adjusted R² is higher than with just a one year lag and is 28.3%. Thus, for social performance proposals more change in firm behaviour is reached after two years compared to one year. In the social subsample the institution variable is significantly negative which does not respond with hypothesis 2.
Environmental CSR performance
In Table A5 the regression is presented with environmental CSR performance as the dependent variable. This subsample is significantly smaller than the social subsample, which explains why the variance for the environmental sample is larger. Especially in model 3, which includes the control variables and internationalization, there is a large increase in the adjusted R². Overall variance explained by the total model presented in model 6 is significantly higher than the other models as the adjusted R² is 50.0%. This number is very large compared to the previous scores, but comes near values reported by Gillan and Starks (2000). The institution variable is in this model insignificant but positive.
Concluding, hypothesis 1 has to be rejected due to overall negative relations between the amount of votes in favour of a shareholder proposal and actual CSR performance in both 1 year and 2 years following the proposal. Furthermore, in the sample of the 150 most favoured proposals and least voted on proposals no significant effect is noted. Although, when just the 150 proposals with the largest number of votes in favour are included in the model the adjusted R² is higher.
Hypothesis 2 regards the effect of an institutional investor presenting an activist shareholder
proposal, and also has to be rejected. In both the total CSR performance and social CSR performance samples the sign was negative and significant contrasting the hypothesis. Only in the smallest sample, the environmental subsample, there was a positive relation but insignificant.
The third and fourth hypothesis regarding interaction effects between respectively
23
Conclusion
This paper examines several factors influencing the Corporate Social Responsibility performance of a company in the years following an activist shareholder proposal. To study this effect I look into shareholder proposals regarding environmental and social issues in the period 2006-2015, filed under Filing 14A at the SEC. From these proposals the percentage of votes in favour of the proposal is taken and used to look for a correlation with a firms CSR performance in the year following the proposal. Also, the influence of internationalisation is considered as internationalisation has a relation to the visibility of a firm for shareholders and other outside stakeholders. Thus, it was expected that an interaction exists between the internationalisation of a firm and the number of votes in favour of an activist proposal. Most of the activist shareholder proposals do not gain the necessary majority to pass the shareholders meeting, but they do send a clear signal for change when they are backed by more investors. Furthermore, the credibility effect of an institutional investor is considered. When an institutional investor, such as a pension fund, files a proposal it becomes more credible, thereby could theoretically increase the effect of the proposal on other shareholders and the management of the firm. As a final independent variable stake size by the investor filing the proposal is considered. It was expected that an investor owning a larger stake in a firm would be more credible for both management of the firm and other investors. As credibility increases also the number of votes in favour of a proposal would rise, thereby having an interaction effect. As control variables the size of the targeted firm and industry are included.
All hypotheses regarding the independent variables’ effect on the CSR performance of a firm have been rejected due to statistical insignificance. Both the hypotheses regarding the interaction effects between respectively stakesize and internationalisation and the amount of votes in favour of a proposal have also been rejected. This means that no definite conclusion can be drawn from them. What was confirmed is that firm size does have a positive influence on the CSR performance of a firm. Furthermore, internationalisation does have a significant effect on CSR performance, both one year and two years after the initial proposals.
24 As all research this paper has limitations in which can be improve. For example, for the independent variable CSR performance only the Asset4 by Thomson Reuters performance score has been used. However, according to literature this score and other environmental rating scores do converge. It would be prudent to cross-reference the scores from the Asset4 with scores from, for example, the Kinder Lydenberg & Domini (KLD) database which could not be done due to data availability. A larger sample size would also help create more insights in the effect of activist proposals. Especially the subsample regarding environmental proposals was rather small and would benefit from a larger sample. Another improvement could be made in the reliability of CSR measurement. In this study I look for relations between total CSR performance, social or environmental performance in regards to specific activist proposals. It would be interesting to study the effects of specific proposals into more detail, i.e. check whether the specific proposed change was implemented instead of looking at total performance.
25
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31
Appendix
Table A1 Operationalization variables
Variable Explanation
FirmSize The natural logarithm of the market value of equity
IndustryBM Dummy variable that equals one if the firm operates in the basic materials industry, zero otherwise.
IndustryCS Dummy variable that equals one if the firm operates in the consumer services industry, zero otherwise.
IndustryFin Dummy variable that equals one if the firm operates in the financial industry, zero otherwise.
IndustryHC Dummy variable that equals one if the firm operates in the health care industry, zero otherwise
IndustryIND Dummy variable that equals one if the firm operates in the industrial industry, zero otherwise.
IndustryOG Dummy variable that equals one if the firm operates in the oil & gas industry, zero otherwise.
IndustryTECH Dummy variable that equals one if the firm operates in the technology industry, zero otherwise.
IndustryTELEC Dummy variable that equals one if the firm operates in the telecommunications industry, zero otherwise.
IndustryUTIL Dummy variable that equals one if the firm operates in the utilities industry, zero otherwise.
%Vprop
Amount of votes in favour of an activist shareholder proposal. Calculated as percentage of shares at the annual shareholder meeting.
Internationalisatio n
The level of internationalisation. Calculated as foreign sales scaled by total sales, presented as a percentage.
StakeSize
Number of shares owned by the investor filing a proposal. Calculated as shares owned divided by total outstanding shares.
Institution
Dummy variable that equals one if the investor filing a proposal is an insitution, zero otherwise.
%VProp_Internatio nalisation
Interaction term between the amount of votes in favour of a proposal and the level of internationalisation.
%Vprop_StakeSize
32 Table A2 Industry Classification Benchmark
Assigned number Industry
1 Basic materials * 2 Consumer goods 3 Consumer services 4 Financials 5 Health care 6 Industrials *
7 Oil & Gas *
8 Technology
9 Telecommunications
33
Table A3 Regression Results CSR Total performance score
Model 1 2 3 4
Coefficient Probability Coefficient Probability Coefficient Probability Coefficient Probability
FirmSize 11.865 0.000 *** 11.697 0.000 *** 10.371 0.000 *** 11.355 0.000 *** IndustryBM 10.323 0.018 ** 10.600 0.015 ** 8.760 0.045 ** 11.148 0.011 ** IndustryCS -7.909 0.000 *** -7.703 0.000 *** -7.593 0.000 *** -7.535 0.000 *** IndustryFin -1.729 0.446 -1.254 0.583 0.195 0.934 -1.532 0.498 IndustryHC 5.506 0.220 5.460 0.224 6.056 0.175 5.101 0.255 IndustryIND 7.820 0.000 *** 7.839 0.000 *** 7.081 0.000 *** 8.015 0.000 *** IndustryOG 2.924 0.238 3.563 0.156 2.927 0.235 3.795 0.129 IndustryTECH 15.134 0.000 *** 15.510 0.000 *** 14.342 0.000 *** 15.055 0.000 *** IndustryTELEC 10.704 0.001 *** 11.058 0.001 *** 12.228 0.000 *** 10.790 0.001 *** IndustryUTIL 12.680 0.007 *** 13.174 0.005 *** 14.258 0.002 *** 13.485 0.004 *** %Vprop -0.081 0.144 Internationalisation 0.082 0.005 *** StakeSize -1.278.369 0.031 ** Institution %VProp_Internationalisation %Vprop_StakeSize Constant -11.248 0.288 -8.975 0.401 -2.582 0.814 -6.974 0.516 Observations 599 599 599 599 Adjusted R² 21.2% 21.4% 22.2% 21.7%
34
Table A3 Regression Results CSR Total performance score continued
Model 5 6 7
Coefficient Probability Coefficient Probability Coefficient Probability
FirmSize 11.629 0.000 *** 10.041 0.000 *** 7.558 0.000 *** IndustryBM 11.333 0.010 ** 9.958 0.024 ** -0.334 0.938 IndustryCS -7.392 0.001 *** -6.942 0.001 *** 7.195 0.005 *** IndustryFin -1.047 0.648 0.750 0.753 3.124 0.194 IndustryHC 5.373 0.231 5.454 0.224 1.936 0.671 IndustryIND 7.922 0.000 *** 7.233 0.000 *** 6.323 0.001 *** IndustryOG 3.179 0.199 4.130 0.103 7.316 0.004 *** IndustryTECH 14.777 0.000 *** 14.195 0.000 *** 1.855 0.544 IndustryTELEC 10.555 0.001 *** 12.571 0.000 *** 15.925 0.003 *** IndustryUTIL 13.555 0.004 *** 15.052 0.002 *** 2.522 0.602 %Vprop -0.034 0.564 0.295 0.682 Internationalisation 0.078 0.008 *** -0.787 0,297 StakeSize -1.382 0.076 * 0.098 0.900 Institution -2.416 0.081 * -0.969 0.533 -2.864 0.048 ** %VProp_Internationalisation 0.247 0.691 1.105 0.090 * %Vprop_StakeSize 0.507 0.396 0.051 0.935 Constant -8.780 0.410 1.086 0.923 23.349 0.042 ** Observations 599 599 492 Adjusted R² 21.5% 22.4% 8.9%
35
Table A4 Regression Results CSR Social performance
Model 1 2 3 4
Coefficient Probability Coefficient Probability Coefficient Probability Coefficient Probability
FirmSize 14.969 0.000 *** 14.748 0.000 *** 13.006 0.000 *** 14.703 0.000 *** IndustryBM 9.463 0.062 * 9.838 0.053 * 7.555 0.135 9.136 0.072 * IndustryCS -11.730 0.000 *** -11.450 0.000 *** -10.955 0.000 *** -12.069 0.000 *** IndustryFin -6.648 0.019 ** -6.010 0.036 ** -3.576 0.225 -6.812 0.016 ** IndustryHC 7.332 0.083 * 7.862 0.064 * 9.731 0.022 ** 7.053 0.096 * IndustryIND 4.134 0.082 * 4.342 0.068 * 3.604 0.127 3.857 0.106 IndustryOG 8.385 0.028 ** 9.332 0.016 ** 7.408 0.051 * 8.090 0.034 ** IndustryTECH 16.827 0.000 *** 17.524 0.000 *** 15.918 0.000 *** 16.608 0.000 *** IndustryTELEC 15.869 0.000 *** 16.412 0.000 *** 18.084 0.000 *** 15.617 0.000 *** IndustryUTIL 12.590 0.056 * 13.633 0.040 ** 14.936 0.023 ** 12.207 0.064 * %Vprop -0.092 0.184 Internationalisation 0.119 0.001 *** StakeSize 0.447 0.934 Institution %VProp_Internationalisation %Vprop_StakeSize Constant -42.351 0.003 *** -39.595 0.005 *** -31.643 0.027 ** -40.042 0.005 *** Observations 473 473 473 473 Adjusted R² 25.4% 25.6% 26.9% 25.0%
36
Table A4 Regression Results CSR Social performance continued
Model 5 6 7
Coefficient Probability Coefficient Probability Coefficient Probability
FirmSize 14.375 0.000 *** 12.240 0.000 *** 12.956 0.000 *** IndustryBM 10.846 0.033 ** 8.754 0.086 * 6.811 0.209 IndustryCS -11.153 0.000 *** -10.749 0.000 *** -14.828 0.000 *** IndustryFin -5.628 0.048 ** -2.857 0.339 -2.623 0.436 IndustryHC 6.459 0.127 8.662 0.044 ** 8.544 0.064 * IndustryIND 4.154 0.079 * 3.464 0.144 2.305 0.366 IndustryOG 9.184 0.016 ** 8.156 0.036 * 5.606 0.215 IndustryTECH 16.062 0.000 *** 15.334 0.000 *** 15.865 0.001 *** IndustryTELEC 15.499 0.000 *** 17.429 0.000 *** 17.220 0.000 *** IndustryUTIL 12.446 0.058 * 14.481 0.028 ** 12.035 0.195 %Vprop -0.168 0.853 -0.211 0.832 Internationalisation 2.836 0.003 *** 3.221 0.002 *** StakeSize 0.253 0.758 0.246 0.635 Institution -4.134 0.018 ** -3.689 0.045 ** -2.899 0.162 %VProp_Internationalisation -0.268 0.734 -0.338 0.710 %Vprop_StakeSize 0.167 0.739 0.246 0.635 Constant -36.365 0.011 ** -20.480 0.172 -25.240 0.140 Observations 473 473 401 Adjusted R² 26.2% 26.7% 28.3%
37
Table A5 Regression Results CSR Environmental performance
Model 1 2 3 4
Coefficient Probability Coefficient Probability Coefficient Probability Coefficient Probability
FirmSize 12.066 0.011 ** 9.659 0.033 ** -4.627 0.353 12.187 0.010 ** IndustryCS -9.447 0.240 -5.580 0.468 -6.702 0.344 -10.429 0.194 IndustryFin -21.080 0.089 * -18.366 0.119 -11.808 0.282 -22.124 0.073 * IndustryHC -9.950 0.675 8.483 0.713 12.952 0.542 -10.285 0.663 IndustryIND 14.369 0.021 ** 10.348 0.083 * 2.512 0.663 13.726 0.027 ** IndustryOG -19.921 0.001 *** -13.792 0.021 ** -12.255 0.025 ** -18.134 0.003 *** IndustryTECH 18.223 0.064 * 17.715 0.058 * 8.919 0.308 18.520 0.059 * IndustryTELEC 11.379 0.214 14.340 0.101 25.973 0.002 *** 12.175 0.182 IndustryUTIL 9.277 0.407 7.097 0.504 23.378 0.022 ** 13.154 0.249 %Vprop -0.846 0.000 *** Internationalisation 0.622 0.000 *** StakeSize -3.950.678 0.119 Institution %VProp_Internationalisation %Vprop_StakeSize Constant -17.095 0.636 10.638 0.761 89.491 0.015 ** -16.895 0.638 Observations 126 126 126 126 Adjusted R² 19.6% 27.7% 38.0% 20.6%
