The New Governance Imposed by Mutual Funds
In the shareholders' assembly that was supposed to appoint the new board member of Unicredit, a singular event occurred. The list of (supposedly) strong shareholders got 46% of the votes; the list representing mutual funds, coordinated by Assogestioni which normally comes second, got 54%. The former list had nominated 17 candidates for the 17 seats, the latter only one. As a consequence, the sole candidate of the funds entered the Board, while the remaining sixteen board seats went to the first list.
If the list forecasted to win had actually won, and not come second, the result would have been nearly identical. However this result was achieved in a way that was opposite to the one intended. Thus the new management of the bank is not, strictly speaking, expression of the majority of shareholders.
This case calls attention to institutional investors and their activism in the governance of listed companies. The debate revolves around the opportunity of a larger involvement of investment funds in the life of firms: some welcome it as a counterbalance to shareholders having controlling stakes, while others point out the risk of short-termism (in the US, people hold onto the same stock for 30 seconds on average!). Do funds play the virtuous role of scrutiny or do they bias corporate strategy towards short-term earnings, at the expense of R&D investment?
The growing activism of institutional investors is based on various tactics and instruments, according to existing rules and ownership structures. It can range from veritable battles with incumbents on voting delegates, and even battles in court, to suggesting entrepreneurial choices (for instance, on the compensation of CEOs and other executives); from opposing undesirable M&A operations, to media campaigns and requests to regulatory authorities for changes in corporate governance.
It is also hard to distinguish funds adopting a passive investment policy, from those engaging in a more active dialogue with top management. Many follow a pragmatic approach that mixes the two elements. What's unquestionable is that the number and weight of active investors is growing: in November 2014, in the US activist funds were managing $115 billion, +24% with respect to the year's start. A veritable industry has been growing around this, like proxy advisors specializing in consultancies telling funds how to vote in shareholders' annual general meetings.
In Italy, too, despite the traditionally strong presence of controlling shareholders, the trend is in this direction: the Unicredit story, while infrequent, shows the influence that funds can sometimes wield. Is the Italian voting list mechanism that enables organized minorities to participate in the composition of Boards of Administration and Supervisory Boards, and thus provides an incentive for the engagement of funds, a hindrance or a good thing? Hard to say. What we can say is that engaging in dialogue with investors and stakeholders comes at a cost, but is also an opportunity.