The topic of common ownership has received substantial attention from both academics and policymakers in recent years. Broadly defined, common ownership exists when investors hold partial and significant shares in related firms. Institutional investors—the largest form of common owners—have grown to control over 70% of the US stock market.
While a growing body of empirical research has linked common ownership to product market outcomes, little evidence has been uncovered to reveal a common owner’s use of corporate governance mechanisms as a conduit to affect firm decision-making. In my recent paper, ‘Interventions by Common Owners,’ I attempt to fill this void by describing 30 cases of common owner intervention found in the public domain. These interventions reveal the selective use of corporate governance mechanisms in a broad set of industries including pharmaceuticals, oil & gas, banking, ride-hailing services, and many more.
Institutional investors report thousands of engagements with portfolio firms in their annual stewardship reports. In its 2019 Investment Stewardship Annual Report, BlackRock, for example, recorded 2,050 engagements with 1,458 companies in 42 different markets, all in 2019.
Despite the frequency of reported engagements, a common owner’s ability to work behind-the-scenes yields limited disclosure on the details of each intervention. My paper delves into the specifics of engagements found through a comprehensive search of media coverage, regulatory proceedings, policy group analysis, and annual stewardship reports. I taxonomize each case of engagement under three corporate governance mechanisms: i) voice, ii) executive compensation, and iii) voting.
I first document cases of intervention where a common owner explicitly articulates their preferences towards some form of specific or broadly coordinated action among firms. These calls to action typically take the form of public statements or organizing private meetings with firm leadership.
Cases in this category include (but are not limited to) private meetings with oil & gas executives, pharmaceutical executives, and CEOs from consumer-staple firms. In one notable example, common owners openly directed pharmaceutical firms to collaborate with rivals, drop patent enforcement, and put qualms about competition aside in response to the COVID-19 crisis. In a separate case, common owners organized meetings with biotech executives to demand that the firm leaders do a better job defending their drug pricing strategies. Stewardship reports from institutional investors supplement this evidence. For example, BlackRock reported ‘substantive dialogue’ with pharmaceutical firms such as Pfizer, Johnson & Johnson, Allergan, Bristol-Myers Squibb, and others.
Recent empirical work has shown that performance-insensitive managerial compensation serves as a mechanism connecting common ownership to softer product market competition (Antón et al, 2020). In my paper, I document cases in which common owners have supported managers’ preferences for high and performance-insensitive pay.
In one case, BlackRock, Vanguard, and State Street unanimously backed pay packages at beauty company Coty Inc. which had lost 72% of its value in the three years ended in 2018. Separately, oil and gas executives at Whiting Petroleum were paid $15 million in cash bonuses six days before filing for bankruptcy. Broader analyses from policy groups show this pattern is not limited to specific firms. BlackRock voted against CEO pay in the S&P 500 a mere 3%, with similar results holding for Vanguard (3%), State Street (4%), and Goldman Sachs (7%).
Voting is often regarded as the fundamental source of power for shareholders. I document a common owner’s use of voting to apply targeted mechanisms of intervention (such as appointing favorable firm leadership) and a common owner’s use of its substantial stakes in both acquirers and target firms to vote for a merger or acquisition.
As an example, SoftBank’s private equity Vision Fund took a 15% stake in Uber (in 2017) and added two members to the ride-hailing company’s board. At the time, Uber was fighting Grab (of which SoftBank was the largest shareholder) for market share in Southeast Asia. SoftBank founder Masayoshi Son ‘aimed to ensure that none of the ride-hailing firms in which SoftBank holds stakes waste money fighting each other.’ In March 2018, Uber sold its ride-hailing business in Southeast Asia to Grab for a 27.5% stake in the company. Masayoshi Son then visited Jakarta for exploratory discussions to merge the two remaining competitors, Grab and Gojek. As of December 2020, Grab and Gojek ‘had made substantial progress in working out a deal to combine their business […] the final details [were] being worked out among the most senior leaders of each company with the participation of SoftBank’s Masayoshi Son.’ This pattern of selective consolidation by a common owner appears in several other examples.
Regulators and scholars have called for evidence to determine the mechanisms through which common owners influence firm behavior. My paper offers concrete evidence found in 30 such cases involving the use of three corporate governance mechanisms in a variety of industries. Due to limited disclosure requirements for common owners, I suspect these cases are a mere blip on the broader radar of common owner intervention.