Passive Investors, Not Passive Owners Webinar January 14, The Investor Responsibility Research Center Institute

Transcription

1 Passive Investors, Not Passive Owners Webinar January 14,

2 Agenda Introductions Research Review IRRCi Perspective Q&A 2

3 Webinar Logistics Attendees in listen only mode. Questions encouraged. Type using the Question function, and we will answer following report overview. You will receive with link to replay. Report and all others available at Share info on social media. Find us Audio issues during webinar, contact

4 Speakers Ian Appel, Ph.D. Report Co-Author Assistant Professor, Finance Department Boston College Jon Lukomnik Executive Director Investor Responsibility Research Center Institute 4

5 About the Investor Responsibility Research Center Institute Not-for-profit established in Funds, disseminates objective, unbiased research on range of issues at intersection of corporate responsibility, investors informational needs. Academic and practitioner research that examines the capital market context that impacts how investors and companies make decisions. Annual research award with two $10K awards More than 40 research reports available at no charge. 5

6 Broad Range of Research Poison Puts: Corporate Governance Structure or Mechanism for Shifting Risk? Environmental, Social and Governance Survey The Materiality of Human Capital to Corporate Financial Performance The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design Nanotechnology and the S&P 500: Small Sizes, Big Questions The Impact and Future of High Frequency Trading What Investors Need To Know About Cybersecurity Informed Options Trading prior to M&A Announcements: Insider Trading? Board Oversight of Sustainability Issues Integrated Financial and Sustainability Reporting in the United States Controlled Companies in the Standard and Poor s 1500: A Ten Year Performance and Risk Review Executive Superstars, Peer Groups and Over-Compensation Voting Decisions at US Mutual Funds: How Investors Use Proxy Advisors Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing Download at no cost at 6

7 Passive Investors, Not Passive Owners Ian R. Appel (Boston College) Todd A. Gormley (Wharton) Donald B. Keim (Wharton)

8 Growth of Passive Investors Passive institutional investors (e.g., Vanguard) offer funds designed to deliver returns of a market index and are a large & growing component of ownership 35%! 30%! %!of!equity!mutual!fund!assets!that!are!passively!managed! 25%! 20%! 15%! 10%! 5%! 2014! 2013! 2012! 2011! 2010! 2009! 2008! 2007! 2006! 2005! 2004! 2003! 2002! 2001! 2000! 1999! 1998! 8

9 But, Could This Be Bad for Governance? A rising chunk of the stock market sits in the hands of lazy investors. Index funds and exchange-traded funds mimic the market s movements, and typically take little interest in how firms are run 9

10 Do Passive Investors Affect CG? Reasons why they might weaken governance Lack influence; unwilling to accumulate or exit positions Lack motivation; only seek to deliver benchmark performance Reasons why they might strengthen governance Fiduciary duty to vote in best interest of investors Are motivated; fund flows respond to absolute performance Unable to exit, they care more about governance 10

11 Answering Question Challenging Correlation does not imply causation! Firms with higher passive ownership may differ along other dimensions (e.g., active ownership levels) Need to use a natural experiment 11

12 Experimental Design [Part 1] Use variation in passive ownership around the cutoff between the Russell 1000 and 2000 indexes Each June, Russell determines index assignments for next 12 months using end-of-may market caps Largest 1000 US stocks put in Russell 1000 index Next 2000 US stocks put in Russell 2000 index Sample runs from Indexes are market cap-weighted; so, portfolio weights vary considerably around threshold 12

13 Experimental Design [Part 2] Large jump in portfolio weights at top of R2000 Because a similar amount of passive assets track each index, passive ownership will be higher at top of R2000 [by about 66%] 13

14 Break in Passive Ownership Passive ownership % On average, passive ownership increases by about 66% 4! 3! 2! 1! 0! 100! 200! 300! 400! 500! 600! 700! 800! 900! 1000! Ranking based on end-of-may market cap 14

15 Governance Outcomes We analyze governance issues explicitly mentioned by passive investors as important and find that passive ownership is associated with More independent directors Higher likelihood of removing antitakeover provisions [e.g., poison pills, restrictions on special meetings] Fewer dual class share structures 15

16 Possible Mechanisms The voice of passive may be an important mechanism to influence governance Higher support for governance proposals Lower support for management proposals Also find evidence of a decrease in activism by other types of shareholders (e.g., hedge funds) 16

17 Analysis of Performance & Policies Presumably, passive investors care about governance because they think it will improve firm-level performance But, the value implications of specific governance structures are widely debated And, could be one-size-fits-all concerns... We find that, on average, passive ownership is associated with higher long-term profitability 1 standard deviation increase in passive ownership associated with 1/3 standard deviation increase in ROA 17

18 Concluding Remarks While not active in the traditional sense, passive investors are not passive owners Institutional influence is not limited to those that are active or activist Findings highlight importance of voice as a mechanism to influence managerial decisions 18

19 From IRRCi s Viewpoint Always been mystified by view of indexers as lazy Historically, large indexers always have been concerned with corporate governance Many Founders of Council of Institutional Investors (e.g. NYC, CalPERS) have historically had large passive allocations Fits organizational theory: With exit option negated, indexers choose voice 19

20 From IRRCi s Viewpoint Indexers not concerned with differential performance of portfolio companies But perhaps they are more concerned with overall market performance than stock-picking firms Economic incentives Asset growth equals fee growth E/S/G teams way to differentiate offerings Demonstrates thought leadership 20

21 Type your question using the Question function. We will read questions aloud, speakers will respond. 21

22 Contacts Jon Lukomnik Executive Director IRRC Institute Ian Appel Report CoAuthors Boston College 22