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Flexing Their Muscles

Man flexing his muscles
  • Owners influence company management decisions.
  • Ownership, in fact, is a form of corporate governance.
  • As ownership becomes more varied and sophisticated, owners and managers need to understand how ownership affects both governance and management.

Skim the headlines of the Wall Street Journal, and it’s clear that owners interact with their corporations in a kaleidoscope of ways. And when owners sell, it’s not simply because the investment no longer fits their interests.

Instead, shareholder activists such as Carl Icahn employ a range of sophisticated strategies to force corporate boards and management to take specific actions. Mutual funds do the same. A prime example: Ralph Whitworth’s mutual fund, Relational Investors, which drove Home Depot’s management to divest in its contractor services business.

How owners interact with firm management, in other words, has become an increasingly potent form of corporate governance. This is especially true now that activist investors hold a significant portion of US and UK public equity.

Yet research about the way different forms of ownership govern, or control, managerial actions has not caught up with this trend. In response, now retired Rice Business professor Robert Hoskisson and a team of colleagues surveyed the research in finance, accounting, economics, law and management to assess the existing body of knowledge.

As a first step, Hoskisson and colleagues differentiated between corporations with inside ownership and those with outside ownership. Inside ownership types include executives, board members and non-executive employees. Outside owners include blockholders, agent owners and private equity owners.

Inside ownership, the researchers note, lends itself to coordinating owner and corporate interests. The idea is that owners may be more inclined to align their choices with managers’ interests if they have skin in the game. Outside owners complement inside owners, the researchers write, by more closely monitoring managers’ choices.

Hoskisson and colleagues next delved into the effect of ownership structure on firms. Historically, owners shaped management they didn’t like by threatening to leave the business. Today, however, disgruntled owners have more options than simply taking the Wall Street walk. Depending on the owner and the motivation, investors can make their wishes known by actions including triggering restructuring, plunging into activism or simple buying-and-holding.

Activist investors use a variety of influencing tactics, including holding private meetings with management, launching hostile media campaigns or filing shareholder proposals through the proxy voting process or through the SEC. The SEC has allowed owners to band together like members of social movements to influence firm or management behavior. Alternatively, one owner with a significant share position can influence behavior singlehandedly.

Finally, owners such as Warren Buffett, who buy-and-hold, can play the long game. These investors are often especially valuable to companies because their loyalty allows management to focus on action with longer-term benefits. General Mills' 2000 acquisition of Pillsbury exemplifies this: although its initial quarterly earnings dropped, the corporation better positioned itself to compete with Kellogg in the long-term.

Overall, the researchers write, ownership affects firm outcomes, performance, strategy and governance processes. And the impact isn’t remotely neutral: evidence shows that the influence wielded by internal ownership, outside blockholder ownership and long-term ownership all result in better firm performance.

So check out the headlines. This year, for example, after Occidental Petroleum’s acquisition of Anadarko Petroleum, Warren Buffet, T. Rowe Price and Carl Icahn each weighed in with a different strategy to advance shareholder interests. As Hoskisson and his team confirm, the ongoing tussles, deals and maneuvers between managers and owners shows how much corporate governance is determined outside the office walls.


Robert E. Hoskisson was formerly the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University.

To learn more, please see: Connelly, B. L., Hoskisson, R. E., Tihanyi, L., & Certo, S. T. (2010). Ownership as a form of corporate governance, Journal of Management Studies, 47(8), 1561-1589.