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May 18, 2017

Shareholder Activism: An Investment Opportunity

by: Marlon E. Kimpson

The National Conference on Public Employee Retirement Systems (NCPERS) featured the following article in the Winter 2017 edition of its PERSist newsletter.

By: Marlon Kimpson and Meredith Miller, Securities Fraud Litigation Attorneys, Motley Rice LLC

Shareholder activism is one important way in which shareholders can influence a corporation’s behavior by exercising their rights as owners. This term has many different meanings, but for purposes of this article, shareholder activism refers to shareholders who are engaged in holding companies accountable through securities litigation.

For public pension fund trustees, being an engaged shareholder might be part of your fiduciary obligations to the fund, as corporate fraud can have a very real impact on the beneficiaries’ financially-vulnerable retirement savings. The challenges faced by trustees of public employee retirement systems are increasing in number, so caring for trust assets now involves more than merely protecting the assets from diversion or mishandling. There are several ways – both tangible and intangible – that shareholder activism can be an investment opportunity for public pension funds.

Aside from holding accountable fraudulent corporations that mismanage shareholder’s funds, perhaps the most obvious benefit of participating in securities class actions is receiving a share of any settlement against the company for its securities fraud violations. In 2015, there were 80 securities class action settlements with a total settlement value of $3 billion. That is real money going back to investors. Board members should be proactive in ensuring that their portfolios are adequately monitored. That way, when they learn of a potential loss, plan fiduciaries and their staff can thoroughly consider the impact on the plan assets and weigh the costs and benefits of participating in any resulting shareholder litigation. At the very least, all possible settlement claims must be filed – don’t leave money on the table.

Securities actions also benefit investors through less obvious means. For example, shareholders in a securities class action or in a shareholder derivative action can require that the settlement incorporate corporate governance reforms. Improvements in corporate governance are achieved to protect the value of the fund’s ongoing investment in a particular company. Examples include measures relating to employee training and the creation of a compliance committee. If companies make the right decisions and govern responsibly, everyone wins. While the investment return is not as concrete as a settlement check, it is still a significant way that trustees can contribute and not allow the fraudulent actions to continue. 

Another way that shareholder activism can be an investment opportunity is that it can combat loss of investor confidence in the stock market. A 2013 study by two economics professors concluded that corporate fraud damages investors in two distinct ways. Following a corporate scandal, household investors not only decrease their stock holdings in these fraudulent companies, but they also decrease their holdings in “non-fraudulent” companies. Thus, shareholders need to be engaged in stopping securities fraud to ensure the health and stability of the entire market.

Finally, public pension trustees who are engaged in this discourse of deterring corporate fraud will become better investors and advocates for their beneficiaries. Knowledge is power, and trustees will be able to ask better questions of their investment managers, such as how the portfolio’s risk is spread, and how certain companies’ securities are chosen to be included. Ultimately, shareholder engagement can provide a material return to plan assets that is invaluable to the members for which a trustee serves.