Home bias in corporate engagement revealed

Investors should take care in selecting corporate engagement firms to ensure the engagement reflects their portfolio holdings, warn academics at Oxford and Maastricht Universities following a new study which reveals a home bias in such activity.

As the investment portfolios of large institutional investors become increasingly global, it is particularly important that they carefully select engagement provider so it mirrors their investment portfolio, says Michael Viehs, research fellow at the Oxford University Smith School of Enterprise and the Environment and co-author of the paper.

“If investors are actively exercising proxy votes, shareholder resolutions and engagement the implications of this paper are they should move carefully to select providers to ensure engagement activity reflects their portfolio,” he says. “If they are delegating engagement and hire intermediaries then it is most important that asset owners are aware of the home bias.”

The paper, co-authored with Professors Rob Bauer from Maastricht and Gordon Clark from Oxford, entitled  “The geography of shareholder engagement: Evidence from a large British institutional investors”, shows that geography is an important determinant in the occurrence of engagement.

The study looks at the global corporate engagement activities of a UK-based engagement agent, which acts on behalf of 25 institutional investors.

It analyses the engagement activities of that firm with 397 firms identified as “priority firms” in 37 different countries from 2006 to 2011.

Through an empirical investigation the paper examines the extent to which geography drives those engagements, and the extent to which geography is a determinant of successful engagement.

The paper finds the engagement agent to be very active during the period, raising 6,837 objectives at the 397 firms. Further, there were 592 instances in which the investee firms changed according to the requests of the investors, which the authors determine to represent successful engagement.

The existence of a home bias is evident in that firms from the UK, the agent’s home country, get significantly more objectives than their foreign counterparts.

“We argue that the proximity to target firms and better knowledge of the regulatory environment in the home market, and hence reduced information asymmetries, drive our results,” the authors say in the paper.

Further, one of the more interesting results is that while there is a home bias in that more UK firms are engaged, the success of engagement is higher with corporations outside the local jurisdiction.

The academics proffer that this is because the institutional investor more carefully targets and selects firms abroad for which the expected success likelihood is highest in the first place.

Understanding how to best use corporate engagement is important Viehs says, because it can be a boost to shareholder returns.

The paper “Active Ownership” examines corporate social responsibility engagements with 613 US public companies from 1999–2009.

It shows that there is an abnormal stock price reaction of 4.4 per cent to firms where the institutional investors successfully achieved change, providing the first evidence that the corporate engagement activities of the institutional investor are value-enhancing for shareholders.