How do firms benefit from shareholder engagement?
The study Active Ownership by Elroy Dimson, Oguzhan Karakas, and Xi Li aims to understand the impact of active ownership ESG issues on corporate performance, governance, and shareholder value.
The authors analyse a database of ESG engagements with U.S. public companies from 1999 to 2009 to show that:
- Successful engagements lead to an average abnormal return of 4.4% over the year following the engagement, compared to no significant abnormal return for unsuccessful engagements.
- Companies that successfully engage in ESG issues experience a better return on assets and return on equity, as well as enhanced board structures and executive compensation practices.
- Post-engagement, there is an increase in institutional ownership, particularly from socially conscious investors.
- Collaborations among activist investors significantly increase the success rate of engagements.
- Engaging firms with reputational concerns and a higher capacity to implement changes also leads to higher success rates.
- Firms with inferior governance structures and those with socially conscious institutional investors are more likely to be targeted for ESG engagements.
- The positive effects of successful engagements on firm performance and governance are sustained over the long term for the period analysed.
- Engagements in certain sectors, such as energy and utilities, are more likely to be successful due to the higher visibility and impact of ESG issues in these industries.
These results suggest effective active ownership can enhance shareholder value, make companies more attractive to institutional investors, and improve firms' accounting and governance practices.
As specified by the authors, their results must be interpreted with caution, as firms' performance may depend on many different factors, and their dataset is not necessarily representative of all active ownership practices.