Determinants of institutional investor activism: a test of the Ryan-Schneider model

Journal of Managerial Issues, Summer, 2009 by Michael J. Rubach, Terrence C. Sebora

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Investment Time Horizons

An important difference among institutional investors is their perspective towards their investments, whether long-term or short-term in nature (Ryan and Schneider, 2002). Institutional investors have different liquidity needs, especially pension plans that have predictable, long-term outflows to beneficiaries (Ryan and Schneider, 2002). Some institutional investors, particularly mutual funds, insurance companies, and banks, have beneficiaries who can depart at any time when dissatisfied with the returns, leaving these institutional investors with a much shorter investment horizon (Ryan and Schneider, 2002). The mobility of the principal constituents, that is, whether beneficiaries have the option of moving their investments, affects the institutional investor's potential for influence activism (Useem, 1996; Black, 1992). An unsatisfied constituent of a mutual fund, insurance company, or bank trust can simply take his or her assets elsewhere. It is likely that such constituents see themselves as short-term investors rather than long-term owners of the firms in an institution's portfolio.

Faced with competitive comparisons and pressures for short-term financial returns, institutional owners whose principal constituents are mobile may focus their efforts on maximizing short-term financial returns by trading rather than buying and holding (Ryan and Schneider, 2002; Useem, 1996). In contrast, pension plans, foundations, and endowments do not compete for constituents. Beneficiaries of pension plans are "completely captive" to their institutional owners (Useem, 1996); their vested benefits are not transportable. The charters of foundations and endowments often restrict those institutions from pursuing some forms of "influence" activities. Previous research has indicated that private pension plans are not usually associated with voice and activism (Rubach, 1999). Private pension plans are controlled by the corporations that establish them and are sensitive to the issues of activism (Brickley et al., 1988).

Following the theoretical arguments presented by Ryan and Schneider (2002), we hypothesize that institutions with longer time horizons will have the potential for increased voice and influence and practice activism, while those institutions with mobile constituents (mutual funds, insurance companies, and bank trusts), due to economic pressures, are less likely to be active shareholders.

H2: Shareholder activism will be positively associated with longer investment time horizons (the captivity of institutional investor beneficiaries being an indicator of investment time horizon).

Performance Expectations

One articulated goal of institutional activism is to improve the performance of investment funds (Conard, 1988). Based on the fiduciary standards under which many institutional investors operate, financial returns will be an overriding concern. Arguably, an institutional shareholder will become active in order to receive a benefit. The larger the total benefit to be derived, the more likely the institutional shareholder will undertake the activism (Hawley et al., 1994). Although it is argued that institutional owners practice shareholder activism to improve the performance of their portfolios, portfolio returns are not the only measure of performance. Ryan and Schneider (2002) argue that there are different motivations, both financial and non-financial, for institutional shareholders to involve themselves in corporate governance and decision-making processes.