Corporate governance in the age of shareholder activism

Thursday, March 19, 2020

Research exploring friction between investors and management

Since joining the faculty at Oklahoma State University in 2001, much of Dr. Ramesh Rao’s research has examined the workings of corporate managers and boards of directors, and the organizations that invest in those companies. Sometimes the interests of those who manage and those who invest are at odds and the stories behind those differences are rich in material for business researchers like Rao.

As a professor and Paul C. Wise Chair of Finance, Rao has enjoyed a high level of research productivity at the Spears School of Business. He has twice received OSU’s Regents Distinguished Research Award, most recently in 2019, and has won many other awards from OSU, Spears Business and scholarly organizations. Rao is also recognized for mentoring students, many of which he continues to collaborate with once they graduate from OSU and become researchers themselves.

“I’ve been blessed in terms of having very good mentors myself and I think to some degree it’s a way to return that favor,” Rao said. “Our goal is to educate students, whether it’s undergraduates, masters or Ph.D. students. That’s our core mission.”

Rao’s research interests focus on corporate finance and governance and include the impact of shareholder activism to influence or even force changes in corporate management to increase shareholder value. Shareholder activists include hedge funds and other huge institutional investors representing thousands or even millions of people in the case of CalPERS, the California public employees’ retirement system known for flexing its financial muscles to improve governance of companies it invests in on behalf of 1.6 million Californians.

“So, in theory, the idea behind shareholder activism is that you are trying to get management to do things in the interest of shareholders, to align the behavior of management with what shareholders want,” Rao said. “That has been one of the core areas that I’m interested in. Their basic goal is to ensure that firms they’re invested in are well managed in order to receive a good return on their investment.”

But sometimes the actions of activists don’t align with those of company CEOs and boards and at times the conflicts shine a bright light on the presumed motives of the parties involved.

Rao has studied results of numerous examples of shareholder activism, including one of the best-known personalities behind activism, hedge fund manager and “corporate raider” Carl Icahn, who most famously took the airline TWA private and selling much of its assets. Rao and collaborators conducted a case study in 2010 examining in depth the results of Icahn’s ability to wield substantial influence over companies by buying stock.

“In terms of the public discourse, Icahn gained notoriety for maybe not always doing things in the interests of the broader group of shareholders and maybe being in it for himself,” Rao said.

But in the case study published in the Journal of Applied Corporate Finance examining 30 of Icahn’s corporate targets, Rao and his coauthors found that he may not deserve his sullied reputation.

“Although he's been painted in a negative light, actually the evidence shows otherwise,” he said, including Icahn realizing significant increases in the value of the majority of the companies he bought stakes of.

Rao notes that although most cases of investor activism are meant to increase shareholder value, in recent years activist investors have also begun pushing agendas motivated not by return on investment, but to encourage socially responsible and sustainable investing.

“Now there’s something called ESG – environmental, social, and governance – and that’s become big,” said Rao. “So big, in fact, that a lot of mutual funds are built around ESG and these funds are doing quite well.”

Another evolving trend is redefining corporations as more than mere money-making tools, Rao said. The movement includes investors calling for corporations look beyond shareholders as their only stakeholders to include a company’s larger community, its employees and others in their decision-making. That call to action was taken up by the world’s largest asset management company, BlackRock, in 2019.

As an OSU business researcher for two decades, Rao said he has been blessed to be able to work at a university, a college and a department where the atmosphere has been supportive of research and teaching.

“I feel very blessed to be in this profession and that I’m doing something that I truly enjoy,” Rao said. “It has not been difficult at all to come in to work each day and teach students who are interested and motivated and to mentor students.”

Media contact: Jeff Joiner | Communications Coordinator | 405.744.2700 | jeff.joiner@okstate.edu