Tuesday, March 1, 2011

Hedge Funds and Proxy Advisors Professionalize Shareholder Activism in France

The emergence of hedge funds and proxy advisors has, in the United States, profoundly changed domestic shareholder activism. Not so long ago, the investment strategy was performed primarily by labor unions and public pension funds to advance corporate governance best practices. Today, the 2 decade-long+ proliferation of lightly-regulated hedge funds and proxy advisors has given way to a more dynamic and complex form of activist investing. (Click here to receive a copy of The Shareholder Activism Report and access to the supplementary online Resource Portal, which further details the evolution of the investment strategy.)

And now the development is taking place again--this time, in France.

The Conference Board recently released a report titled "The Professionalization of Shareholder Activism in France", which demonstrates "the rise of proxy-voting advisory firms and the search for innovative investment strategies by hedge funds". The authors, Carine Girard and Stephen Gates, note that just a few years ago, activist announcement returns had little impact on stock price. This was primarily due to the passive strategies of institutional investors. Regulatory changes since then--such as, declining legal thresholds for submission of shareholder proposals, requirements to disclose exercise of voting rights, and establishment of a record date system--has paved the way for a more active breed of investors, hedge funds.

In order to raise shareholder support, activist hedge funds have increasingly teamed up with pension funds in their campaigns. One example in Europe has been CalPERS' financial and voting support for Knight Vinke, a corporate governance activist investor. The emergence of proxy advisors (RiskMetrics/Deminor, Proxinvest, Association Francaise de Gestion) has also expanded shareholder franchise through encouraging voting.

The report also details how activist investing has developed a more systematic modus operandi, involving (1) target selection, (2) private engagement, (3) public engagement, and (4) hostility. And, "[u]nlike the dynamic in the U.S. and the UK, in France, the proxy battle remains [the main form of dialogue between shareholders and the Board]". The proxy campaigns in France have involved everything from ousting a CEO, improving corporate governance, exploring strategic alternatives to initiating corporate restructuring.

To download a copy of the report, click here.

Posted by David Schatz