It's been a core tenet of my critique of shareholder activism that insitutional investors who parent organizations have close business ties with corporate America are unlikely to be particularly active in corporate governance. In Shareholder Activism in the Obama Era, for example, I opined that:
... corporate managers are well-positioned to buy off most institutional investors that attempt to act as monitors. Bank trust departments are an important class of institutional investors, but are unlikely to emerge as activists because their parent banks often have or anticipate commercial lending relationships with the firms they will purportedly monitor. Similarly, insurers “as purveyors of insurance products, pension plans, and other financial services to corporations, have reason to mute their corporate governance activities and be bought off.” Mutual fund families whose business includes managing private pension funds for corporations are subject to the same concern.
The claim is confirmed by a recent study that examined the relationship between how mutual funds voted on shareholder proposals relating to executive compensation and pension-management business relationships between the funds’ families and the targeted firms. The authors concluded that such ties influence fund managers to vote with corporate managers rather than shareholder activists at both client and non-client portfolio companies.[1] Voting with management at non-client firms presumably is motivated by a desire to attract new business and send signals of loyalty to existing clients.
[1] Rasha Ashraf et al., Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation (November 23, 2010), http://ssrn.com/abstract=1351966.
