Understanding and Augmenting Institutional Shareholder Activism: A Comparative Study of the UK and China

Abstract

Institutional shareholder participation has long been considered as vital to good corporate governance in the UK, and increasingly recognized as, at least potentially, an important part of Chinese corporate governance too. But its potential does not yet seem to have been realised. The reasons for that are undoubtedly complex, and this thesis seeks to understand that complexity, and to offer some (modest) proposals to promote greater shareholder engagement.

At the core of the thesis’ explanation of shareholder activism is the model it seeks to develop to explore the factors that determine institutional shareholders’ propensity for activism. This model is built up in several stages, running across the whole thesis. The first ‘setup’ stage is composed of a two-step analysis. It first elaborates the collective benefits of activism as a means of achieving managerial accountability. The second step switches to the individual level of analysis, asking whether and when shareholder activism is individually rational i.e. rational for any individual shareholder. The thesis considers two inquires as essential to determine engagement for individual institutional investors: whether the temptation to free-ride that faces an individual shareholder can be overcome and whether a shareholder’s individual benefits from action exceed its individual costs.

The model suggests that, in working out the strength of the temptation to free-ride, and the balancing of costs against benefits – much will depend upon the governance or regulatory environment, upon the type of institutional shareholder concerned, and upon the form of activism being undertaken. This thesis adds in as much empirical knowledge as can reasonably be currently gathered about these three variables both for the UK and for China.

The application of the model explains the remarkable contrast in respect of the level of institutional shareholder involvement between the UK and China. The small presence of institutional investment and the lack of awareness of the importance of institutional shareholder activism are considered as two of the most relevant contributory factors to the comparatively passive institutional shareholder involvement in China. Moreover, besides working as an explanatory model, identifying those factors which contribute most significantly to the form and level of shareholder activism, the model also allows prescriptions to be developed for improving the environment for shareholder activism primarily (although not exclusively) in China.