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Determinants of Institutional Investor Activism: A Test

of the Ryan-Schneider Model (2002)

Article  in  Journal of Managerial Issues · June 2009

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JOURNAL OF MANAGERIAL ISSUES
Vol. XXI Number 2 Summer 2009: 245-261

Determinants of Institutional Investor Activism: A Test

of the Ryan-Schneider Model (2002)

Michael J. Rubach
Associate Professor of Management
University of Central Arkansas

Terrence C. Sebora
Associate Professor of Management
University of Nebraska - Lincoln
Corporate experiences with conse-
quences of the Sarbanes-Oxley Act of
2002 (SOX), changes in the listing
standards for the New York Stock
Exchange (NYSE) and NASDAQ
Stock Market, Inc. (NASDAQ), re-
cent corporate scandals, and the
emergence of activist investors have
fostered a climate of intense scrutiny
of corporate governance structures
and activities. The effects of these
changes are expected to increase
shareholder activism, especially insti-
tutional shareholder activism (White-
house, 2007). Indeed, the 2007 proxy
season reflected increased evidence of
shareholder activism (Brewer, 2007).
The scholarship on corporate gov-
ernance since Berle and Means
(1932) has generally assumed the
separation of ownership and control
to be an inevitable attribute of public
corporations (Bainbridge, 1995),
causing the research to focus on the
consequences of the separation. The
consequences of the separation are
generally referred to as agency costs
(Jensen and Meckling, 1976) and
agency theory has been the predom-
inant paradigm for understanding
and explaining corporate governance
issues. Within the discussion of the
consequences of ownership struc-
ture, the proper role of institutional
investors and the reduction of agency
costs ‘‘has spawned a generation of
corporate literature’’ (Garten, 1992:
588). Despite the disincentives of
prior and existing constraints against
collective action, ‘‘free-riding’’ by
some shareholders (i.e., that all in-
vestors will share in the gains gener-
ated by the efforts of a single activist
investor or small group of activist in-
vestors) (Black, 1998) and ‘‘free-walk-
ing’’ (i.e., that rather than expend
time and money trying to improve the
performance of a company in its port-
folio, an institutional investor will just
sell the shares of the under-perform-
ing company and walk away) (Ingley
and van der Walt, 2004), some share-

JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009

(245)
246 RUBACH AND SEBORA
holder activists find that the gains
from activism often outweigh its costs
(Rubach, 1999).
Prior research has demonstrated
that: (1) many institutional owners
are activists (Brown, 1998), (2) their
activism is expressed in a variety of
forms from confrontational to rela-
tional (Ryan and Schneider, 2002;
Useem, 1996), and (3) their activism
can affect firm performance (Cha-
ganti and Damanpour, 1991). While
much has been learned about the
ways in which institutions attempt to
influence governance and the conse-
quences of these attempts, at least
one central question remains unad-
dressed: which institutions are most
likely to be activists? To answer this
question, this study examines Ryan
and Schneider’s model (2002) of the
antecedents of institutional investor
activism.
The article proceeds as follows.
First, we discuss specific determinants
of activism as proposed by Ryan and
Schneider (2002) and develop the ba-
ses for our hypotheses. Next, we pres-
ent the sample, data collection, varia-
bles, and analytical methods employed
to test the hypotheses. This is fol-
lowed by the results of the analyses.
Finally, we discuss the implications of
the findings for both researchers and
practitioners and address the limita-
tions and additional opportunities
for future research.
DETERMINANTS OF ACTIVISM
Ryan and Schneider (2002) argue
that the type of institutional investor
determines whether an institutional
investor will practice shareholder ac-
tivism. While other influences are
possible, this study examines several
determinants of institutional share-
holder activism proposed by Ryan
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
and Schneider (2002) that are meas-
urable through survey data, yet par-
simoniously capture areas likely to ig-
nite activism: fund size, investment
time horizon, performance expecta-
tions, pressure sensitivity, legal re-
straints, and portfolio management
(internal versus external) (see Figure
I). The research is consistent with a
call for investigation of more finely-
grained measures of institutional in-
vestors by Sundaramurthy et al.
(2005).
Fund Size
Previous research on large inves-
tors (e.g., DelGuercio and Hawkins,
1997; Nesbitt, 1994; Romano, 1993;
Wahal, 1996) and involving specific
large institutions such as TIAA-CREF
(Carleton et al., 1998) or the Council
of Institutional Investors (Opler and
Sokobin, 1995) suggests that the size
of the institutional shareholder, as
measured by the value of the assets
being held for investment, affects ac-
tivism. Large institutions are likely to
have the necessary portfolio assets to
spread the risks and expenses of ac-
tivism (Admati et al., 1994). They are
likely to possess the power necessary
to gain access to, and be attended to
by, directors and top managers. In ad-
dition, the reporting of institutional
activism by the popular press has cen-
tered on the activities of a few large
public pension plans and coalitions
of firms (Hawley and Williams, 1996).
Empirical and anecdotal evidence, to-
gether with theoretical arguments
presented by Ryan and Schneider
(2002), suggest that larger institu-
tions will practice activism, leading to
the following hypothesis:
H1: Shareholder activism will be positively asso-
ciated with institutional investor size.
 DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM 247

Figure I
Institutional Investor Activism Model

Investor Mobility

Pressure Resistance

Institutional
Regulation Investor
Activism

Investor
Expectations

Fund Management

Investment Time Horizons banks, have beneficiaries who can de-

An important difference among in-
stitutional investors is their perspec-
tive towards their investments,
whether long-term or short-term in
nature (Ryan and Schneider, 2002).
Institutional investors have different
liquidity needs, especially pension
plans that have predictable, long-
term outflows to beneficiaries (Ryan
and Schneider, 2002). Some institu-
tional investors, particularly mutual
funds, insurance companies, and
part at any time when dissatisfied with
the returns, leaving these institu-
tional investors with a much shorter
investment horizon (Ryan and
Schneider, 2002). The mobility of the
principal constituents, that is,
whether beneficiaries have the option
of moving their investments, affects
the institutional investor’s potential
for influence activism (Useem, 1996;
Black, 1992). An unsatisfied constit-
uent of a mutual fund, insurance
company, or bank trust can simply

JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009

248 RUBACH AND SEBORA
take his or her assets elsewhere. It is
likely that such constituents see them-
selves as short-term investors rather
than long-term owners of the firms in
an institution’s portfolio.
Faced with competitive compari-
sons and pressures for short-term fi-
nancial returns, institutional owners
whose principal constituents are mo-
bile may focus their efforts on maxi-
mizing short-term financial returns
by trading rather than buying and
holding (Ryan and Schneider, 2002;
Useem, 1996). In contrast, pension
plans, foundations, and endowments
do not compete for constituents. Ben-
eficiaries of pension plans are ‘‘com-
pletely captive’’ to their institutional
owners (Useem, 1996); their vested
benefits are not transportable. The
charters of foundations and endow-
ments often restrict those institutions
from pursuing some forms of ‘‘influ-
ence’’ activities. Previous research
has indicated that private pension
plans are not usually associated with
voice and activism (Rubach, 1999).
Private pension plans are controlled
by the corporations that establish
them and are sensitive to the issues of
activism (Brickley et al., 1988).
Following the theoretical argu-
ments presented by Ryan and Schnei-
der (2002), we hypothesize that insti-
tutions with longer time horizons will
have the potential for increased voice
and influence and practice activism,
while those institutions with mobile
constituents (mutual funds, insur-
ance companies, and bank trusts),
due to economic pressures, are less
likely to be active shareholders.
H2: Shareholder activism will be positively asso-
ciated with longer investment time horizons (the
captivity of institutional investor beneficiaries be-
ing an indicator of investment time horizon).
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
Performance Expectations
One articulated goal of institu-
tional activism is to improve the per-
formance of investment funds (Con-
ard, 1988). Based on the fiduciary
standards under which many institu-
tional investors operate, financial re-
turns will be an overriding concern.
Arguably, an institutional share-
holder will become active in order to
receive a benefit. The larger the total
benefit to be derived, the more likely
the institutional shareholder will un-
dertake the activism (Hawley et al.,
1994). Although it is argued that insti-
tutional owners practice shareholder
activism to improve the performance
of their portfolios, portfolio returns
are not the only measure of perform-
ance. Ryan and Schneider (2002) ar-
gue that there are different motiva-
tions, both financial and
non-financial, for institutional share-
holders to involve themselves in cor-
porate governance and decision-mak-
ing processes.
It is possible that institutional
shareholders may be concerned with
other than purely financial returns
(Blair, 1995). Institutional owners
may be responsive to the needs or
wants of their beneficiaries or owners,
even to the extent of championing
their preferences (Garten, 1992;
Rock, 1991). Pension plans in partic-
ular may consider long term goals
and objectives of society over in-
creased stock prices. These long-term
societal interests may include an ex-
panding economy with the creation
of economic opportunities and jobs,
increased personal wealth, a clean
and sustainable environment, an im-
proving infrastructure, technological
innovation and the promotion of re-
search and development, and global
 DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM
competitiveness (O’Barr and Conley,
1992). Free-walking has little social
impact, which leaves activism as a
means of affecting social change. Ro-
mano (1993) suggested that pension
plans, especially ‘‘politicized’’ public
plans, would invest not purely to max-
imize financial wealth. They would
maximize total wealth through the
targeting of investments to the local-
ities where the plans were located.
These arguments, together with Ryan
and Schneider’s (2002) proposition,
suggest that institutional sharehold-
ers who measure success in both fi-
nancial and non-financial terms, a to-
tal wealth maximization measure, are
more likely to have reasons to be-
come active.
H3: Shareholder activism will be positively asso-
ciated with institutional investors who have a
broad total wealth maximization performance ex-
pectation rather than a narrow financial returns
expectation.
Pressure Sensitivity
Brickley et al. (1988) proposed a
classification or taxonomy which dif-
ferentiates institutional investors
based on whether the institutions and
the businesses in which they invest
(or have the potential to invest) have
business relationships other than the
investment contracts. Such outside
relationships permit the firm to influ-
ence the actions of an institutional in-
vestor, due to the institution’s reli-
ance on the business for future
revenues. Institutional investors that
rely upon the firm in which they in-
vest for business are characterized as
pressure-sensitive; those which have
no business relationships are classi-
fied as pressure-resistant.
Brickley et al. (1988) identified
banks, insurance companies, and
non-bank trusts as pressure-sensitive
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
249
investors because they often rely
upon the firm for business. Public
pension funds, mutual funds, and en-
dowments and foundations are iden-
tified as pressure-resistant. Private
pension funds are likely to identify
more with management, and the
Brickley et al.’s (1988) typology char-
acterizes them as pressure-indiffer-
ent. Pressure-sensitive institutions are
more vulnerable to management
pressure and are not likely to be ac-
tivists because their ability to effec-
tively influence policy is reduced
(Kochhar and Parthiban, 1996).
There is a negative correlation be-
tween business relationships and
shareholder activism (Schmolke,
2006). Commercial banks, insurance
companies, and corporate pension
plans have been less active because of
the existence of business relation-
ships (Schmolke, 2006). Institutions
without business relationships, such
as public pension plans, endowments,
and foundations, have been identi-
fied as more active (Schmolke, 2006).
Since the early 1990s, the numbers of
mutual funds and money managers
have grown and have entered into
more business relationships with their
portfolio companies (Schmolke,
2006). The movement for transpar-
ency and disclosure caused by
changes in securities regulations and
SOX opens the possibility for retalia-
tion if institutional investors under-
take anti-management actions, such
as voting against manager-sponsored
proposals. The retaliation may take
the form of a denial of access to in-
formation. Palmiter (2002) argues
that mutual funds will be less active,
fearing that they will lose access to in-
formation, which will make them
pressure-sensitive, not pressure-resis-
tant.
250 RUBACH AND SEBORA
Ryan and Schneider (2002), follow-
ing Brickley et al. (1988), propose that
pressure-resistant funds will most likely
practice shareholder activism because
they will not be influenced by the gov-
ernance of corporations in their port-
folios. Following the proposition of
Ryan and Schneider (2002), it is hy-
pothesized that:
H4: Shareholder activism will be positively
associated with pressure-resistant institu-
tional investors.
Legal Restraints
Ryan and Schneider (2002) point
out that all institutional investors, as
financial intermediaries, exist under
different types of legal restraints,
whether fiduciary duties under trust
laws or responsibilities and duties un-
der federal and state securities laws.
They note that federal pension laws,
especially the Employee Retirement
Income Security Act of 1974 (ERISA),
restrict the shareholder activism of
corporate or private pension plans
(see Blair, 1995; Brancato, 1997;
Schelberg and Bitman, 1999). Fur-
ther, they suggest that insurance com-
panies, due to their unique nature as
holders of both equity and debt,
could damage their priority rights in
bankruptcy cases by engaging in ac-
tivism (Brancato, 1997; Ryan and
Schneider, 2002). They propose that
institutional investors affected by ER-
ISA and/or bankruptcy law conflicts
will not engage in shareholder activ-
ism. Following the proposition of
Ryan and Schneider (2002), it is hy-
pothesized that:
H5: Shareholder activism will be negatively as-
sociated with institutional investors directly reg-
ulated by ERISA and bankruptcy laws.
Portfolio Management
In the typical approach to institu-
tional fund management, the fund
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
administrator outsources the invest-
ment functions to external money
managers. The fund administrator se-
lects, directs, and monitors the asset
management services supplied by the
money managers, banks, and insur-
ance companies (Crowell and Mai-
ner, 1980). An alternative portfolio
management technique locates all in-
vestment functions ‘‘in-house.’’ A
number of institutional investors
manage all or a portion of their assets
in this manner (McConville, 1995).
The focus of this study is not on
whether institutions should manage
their portfolios, but whether inter-
nal/external management affects in-
stitutional shareholder activism.
Ryan and Schneider (2002) argue
that institutional investors who have
more assets externally managed
would more likely be activists, that the
outsourcing of their portfolio man-
agement enabled activism. Following
their arguments, we hypothesize that:
H6a: External fund management will be posi-
tively associated with institutional investor activ-
ism.
We would argue that external fund
management involves the delegation
to outsiders of the responsibility for
investment decisions. This delegation
of responsibilities to outsiders would
lead to passivity by the delegating in-
stitutional shareholder/investor. In-
stitutional investors with internally
managed portfolios have already al-
located assets to monitor the activities
of the firms in their portfolios. Con-
trary to the proposition of Ryan and
Schneider (2002), those institutional
investors that already invested re-
sources in monitoring will likely use
those allocated resources to also prac-
tice activism in order to improve their
portfolio returns. This leads to an al-
ternative hypothesis:
 DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM 251
H6b: Internal fund management will be posi- insurance companies (approximately
tively associated with institutional investor activ- 50) listed in the Directory of Pension
ism.
Funds and Their Investment Managers,
plus a random sample of companies
METHODOLOGY listed in Weiss Ratings’ Insurance Safety
Sample Directory whose investments consisted
of stock holdings totaling at least ten
In this study, institutional sharehold- percent of all assets.
ers were defined to include the follow-
ing: private pensions plans, including Data Collection
union-sponsored and/or -adminis-
A questionnaire served as the pri-
tered plans (Taft-Hartley Plans), pub-
mary vehicle for data collection. The
lic pension plans, bank trusts, insur-
questionnaire was pretested by mail-
ance companies, money managers,
ing it to six institutional owners lo-
including mutual funds, and foun-
cated in a Midwest metropolitan area.
dations and endowments. The sam-
Pretest participants were interviewed
ple of institutional shareholders was
and their comments incorporated
assembled from two directories: Direc-
into the questionnaire. The question-
tory of Pension Funds and Their Invest-
naire was mailed to the sample of in-
ment Managers, which lists private pen-
stitutional investors. One hundred
sion, union, public pension, bank
and ten useable responses were re-
trust, insurance company, endow-
turned (a response rate of 7.32 per-
ment, and mutual fund investors, and
cent); eight responses were deleted
The Foundation Directory, which lists
because of missing data leaving a final
private US foundation investors.
sample for testing of 102 institutional
Previous literature might have as-
investors. While the small response
sumed that most funds are large and
rate raises questions of internal and
only the largest of these are active.
external validity, the number of re-
This lack of size differentiation could
sponses is adequate to test the varia-
have failed to reveal important differ-
bles of interest and detect a moderate
ences in small and medium-sized in-
effect size. To determine non-re-
stitutions. To discern size differences,
sponse bias, early and late responding
a stratified sample for each group of
firms were compared over various de-
institutional shareholders was assem-
scriptive variables. This extrapolation
bled. The sample was stratified over
method assumes the late or last re-
three levels of assets managed: less
spondents in a sample are similar to
than $100 million in assets, greater
theoretical non-respondents. The
than $100 million but less than $250
similarities found between early and
million, and greater than $250 mil-
late respondents in this study can be
lion. In attempting to sample insur-
interpreted as suggesting the absence
ance companies, a different phenom-
of non-response bias (none of the t-
enon was observed. At the time of the
tests were significant at p , .05)
survey, most insurance companies
(Armstrong and Overton, 1977).
did not invest heavily in stocks, if at
all. This is primarily due to state in- Definition of Variables
surance law constraints (Sherman et
al., 1996). Therefore, the sample of For this study, shareholder activism
insurance companies consisted of all encompasses both traditional and re-

JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009

252 RUBACH AND SEBORA
lationship mechanisms with boards of
directors and top management teams.
The dependent variable is the prac-
tice of shareholder activism. To mea-
sure the use of traditional influencing
mechanisms, the executives of the in-
stitutional shareholders were asked
whether during the last calendar year
their organizations performed any of
the following activities: voted with a
proponent of a proxy contest, be-
came a party to a shareholder deriv-
ative suit or shareholder class action,
filed a shareholder proposal, pre-
pared a list of under-performing
firms in its portfolio (targeting), or
performed any other activities which
the executives would consider to be
the practice of shareholder activism.
In addition, the executives were
asked whether during the last calen-
dar year their organizations made
contacts with board members and/or
top management team members of
any firms in their portfolios to discuss
the performance, business strategies
and/or corporate governance of that
particular firm. Consistent with what
might be expected, the data disclosed
that shareholder activism is not wide-
spread — about 10% of the respon-
dents practiced traditional influenc-
ing mechanisms, about 10%
practiced relationship investing with
boards, and about 30% practiced re-
lationship investing with top manag-
ers. Shareholder activism data were
dichotomized: ‘‘1’’ 5 performed ac-
tivism and ‘‘0’’ 5 did not perform ac-
tivism. The key question of this re-
search was not how many are active
but rather why do firms become ac-
tive at all.
The independent variables are the
factors that distinguish institutional
shareholders: size, investment time
horizon, performance expectations,
pressure sensitivity, legal restraints,
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
and portfolio management (internal
versus external). For purposes of this
study, size is a measurement of the
value of the assets in an institution’s
portfolio at market value (Romano,
1993). The natural log was used to
measure portfolio size because this
transformation of the data reduced
the effects of the large variances in
the sizes of the institutional share-
holders. For purposes of investment
time horizon, institutions were clas-
sified as captive or mobile based on
whether their principal constituents
legally have the ability to move their
invested funds (Useem, 1996). The
investment time horizon variable was
also operationalized as a dichoto-
mous variable: captive 5 1 and mo-
bile 5 0. Brinkley et al.’s (1988) ty-
pology for institutional investors was
used to determine pressure sensitiv-
ity: ‘‘1’’ for pressure-sensitive, ‘‘2’’ for
pressure-resistant, and ‘‘3’’ for pres-
sure-indifferent. The respondents
were asked to self-type their perform-
ance expectations (see Shortell and
Zajac, 1990). Performance expecta-
tion was operationalized as a dichot-
omous variable: ‘‘1’’ 5 concerned ex-
clusively with financial returns and
‘‘0’’ 5 concerned with mixed finan-
cial and non-financial performance.
Portfolio management was measured
as a continuous variable: what per-
centage of the institutional share-
holder’s portfolio is managed inter-
nally.
When the dependent variable is
categorical (the practice of share-
holder activism), logistical regression
is an appropriate statistical tech-
nique. Logistic regression is used for
predicting the likelihood that an
event such as shareholder activism
will occur. The backward stepwise
(likelihood ratio) method was used to
enter variables. In backward entry, all
 Table 1
Descriptive Statistics

Variables Mean s.d. 1. 2. 3. 4. 5. 6. 7. 8.

1
1. Institutional Activism .333 .474

2. Portfolio Size (nlog) 19.321 2.752 .304**

3. Investment Time Horizon

.784 .413 -.539** -.305**
(Captive v. Mobile)1

4. Performance Expectations1 .912 .285 .000 .175 .089

Pressure Sensitivity

5. Pressure-sensitive .177 .383 .436** .243** -.883** -.037

6. Pressure-resistant .510 .502 -.139 -.072 .344** -.028 -.472**

7. Pressure-indifferent .314 .466 -.209* -.122 .355** .061 -.313** -.690**

8. Legal Restraints1 .392 .491 -.057 -.047 .031 .037 .050 -.819** .842**

9. Portfolio Management
DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM

.320 .427 .482** .055 -.607** -.095 .491** -.040 -.361** -.240**
(Internal v. External)

**Significant at .01; *Significant at .05.

1
Dichotomous variable.
253

JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009

254 RUBACH AND SEBORA
independent variables are initially as-
sumed to be a part of the solution,
and the insignificant variables that
contribute the least are eliminated
one at a time at each step, until all of
the predictors in the model are sig-
nificant.
RESULTS AND FINDINGS
The results of the logistical regres-
sion analysis (Table 2), where deter-
minants of activism, as proposed by
Ryan and Schneider (2002), are set
forth below. The descriptive statistics
and correlations for the variables
studied are provided in Table 1.
There are significant correlations (p
, .01; p , .05) among some of the
independent variables.
The regression model is strong.
The goodness of fit of the model is
measured by the -2 log likelihood sta-
tistic (LL) and the Hosmer-Leme-
show chi-square test. The LL com-
pares the actual model to a ‘‘perfect’’
model in which all cases would be
correctly classified. The chi-square
for this statistic is used to test the sig-
nificance level of the model, compa-
rable to the F-test in standard regres-
sion. The model chi-square tests the
null hypothesis that the coefficients
for all the variables in the model, ex-
cept the constant, are zero. The LL is
90.707, which indicates that the ac-
tual model is very near to a perfect
model. For the final model, the Hos-
mer-Lemeshow chi-square test was
8.322, and the significance of the
Hosmer-Lemeshow test was 0.403,
also indicating that the model’s esti-
mates fit the data at an acceptable
level.
The Nagelkerke R square is similar
to R square in simple linear regres-
sion. The Nagelkerke R square was
.438 for the model, indicating a cor-
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
relation between predicted and ob-
served shareholder activism. This is
reflective of the overall correct clas-
sification. In other words, 43.8% of
the variance in the model is ex-
plained by the three variables: port-
folio size, investment time horizon,
and portfolio management.
The results of the analysis to deter-
mine the strength or relative impor-
tance/contribution of the independ-
ent variables are set out in Table 2.
The findings substantively profile the
characteristics of institutions that are
active and those which are not. The
findings suggest that activist institu-
tions are relatively large (p , .05),
have longer investment time horizons
(p , .05), and internally manage their
portfolios (p , .05), while non-active
institutions are smaller, have shorter
investment time horizons, and use ex-
ternal portfolio management. Per-
formance expectations, pressure sen-
sitivity, and legal restraints were not
statistically significant predictors. The
correlation matrices for the variables
in the regression equation did not in-
dicate the presence of multicollinear-
ity (none exceeded .400).
DISCUSSION
This study sought to identify which
institutional shareholders are more
likely to practice some form of activ-
ism. Ryan and Schneider (2002) pro-
posed that portfolio size, the invest-
ment time horizon of the institutional
investor, the performance expecta-
tions of the investor, the pressure sen-
sitivity of the investor, the legal re-
straints imposed upon certain
investors, and the way portfolios are
managed were among the factors that
would determine whether an institu-
tion would be active. Institutional
shareholder activism, as used in this
 Table 2
Results of Logistic Regression Analysis

Variable B S.E. Wald df Sig. Exp(B) 95.0% C.I. for EXP(B)

Lower Upper
Constant -5.023 2.069 5.894 1 .015 .007
Portfolio Size .215 .099 4.752 1 .029 1.240 1.022 1.504
Investment Time Horizon
(Captive v. Mobile) .870 .374 5.409 1 .020 2.386 1.147 4.965
Portfolio Management
1.864 .715 6.791 1 .009 6.447 1.587 26.183
(Internal v. External)
Performance Expectations .179 1 .673
Pressure Sensitivity
Pressure-sensitive .022 1 .882
Pressure-resistant .527 2 .768
Pressure-indifferent .024 1 .877
Legal Restraints .179 1 .672

Model: λ2 = 38.326; df = 3; sig. = 0.000.

Hosmer and Lemeshow Test: λ2 = 8.322; df = 8; sig. = 0.403.
DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM

-2 Log Likelihood 90.707

Cox and Snell R2 .316
Nagelkerke R2 .438
255

JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009

256 RUBACH AND SEBORA
study, encompassed both traditional
influencing mechanisms and rela-
tionship investing. The study’s
breadth covered the different types of
institutional shareholders, and did
not concentrate upon either the ac-
tivism of a few large institutional
shareholders or the use of specific in-
fluencing mechanisms, especially the
accessible records for shareholder
proposal filings.
The logistic regression showed that
activist institutional shareholders
were relatively large, had longer in-
vestment time horizons, and inter-
nally managed their portfolios, as was
hypothesized (H1, H2 and H6b).
Contrary to the proposition of Ryan
and Schneider (2002), institutions
that have more assets externally man-
aged were not activists. It appears that
institutional investors with internally
managed portfolios have already al-
located and invested assets and re-
sources to monitor the activities of
the firms and likely are using those
allocated resources to practice activ-
ism in order to improve their portfo-
lio returns.
Performance expectations (H3),
pressure sensitivity (H4), and legal re-
straints (H5) were not found to sig-
nificantly determine shareholder ac-
tivism. The vast majority of the
respondents (90%) use financial
measures, not a total wealth maximi-
zation standard. This is not surprising
given the performance pressures
faced by these institutional investors
and the fiduciary standards under
which many of them operate.
Research Implications
The results both support and con-
flict with portions of Ryan and
Schneider’s model of the determi-
nants of institutional shareholder ac-
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
tivism. That portfolio size is a deter-
minant of activism is not surprising.
Both prior theory and empirical evi-
dence have demonstrated this, and
Ryan and Schneider (2002) posited
that size would affect the practice of
activism. It should be pointed out,
however, that most institutional in-
vestors are small. This is especially
true for foundations, endowments,
and many public and private pension
plans, many of which have assets of
less than $50 million (Rubach, 1999).
As Ryan and Schneider (2002) ad-
vanced, firms with longer investment
time horizons were activists. Ryan and
Schneider (2002) argued that firms
which externally managed their port-
folios would be activists. The results
of this study do not support this prop-
osition. Internally managed firms
were found to be activists. This may
be explained by the definition of ac-
tivism used in this study, which en-
compasses relational investing.
It is likely that the differences be-
tween this study and the Brickley-
Lease-Smith typology may be attribut-
able to the definition of institutional
shareholder activism which encom-
passes both traditional and relation-
ship mechanisms. Further, Brickley et
al. (1988) classified mutual funds as
pressure resistant, a conclusion which
may now be questionable due to the
phenomenal growth of 401(k) plans
run by mutual funds. Mutual fund ac-
tivism is likely attributable to their in-
vestment time horizon (mobility of
their constituents) rather than their
resistance to pressures. Future re-
search should examine the validity of
the newer taxonomies for institu-
tional shareholders.
The results support the growing ev-
idence of institutional shareholder
heterogeneity (DelGuercio and Haw-
kins, 1997; Rubach, 1999; Ryan and
 DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM
Schneider, 2003). Prior research of-
ten grouped all institutional investors
together, treating them as a homo-
geneous group that reacts together.
However, the results show that insti-
tutional activism differs along a num-
ber of dimensions. These differences
distinguish their activism and call for
more fined-grained research. This
heterogeneity might also reflect sig-
nificant and practical consequences
of the missions of these different
types of institutions.
Managerial Implications
While the findings have their
greatest impact on theoretical devel-
opment, they have some practical
managerial implications. Firm man-
agers will continue to face the in-
creasing presence of institutional
ownership. Useem (1996) has argued
that shareholders are a strategic re-
source, which can be nurtured and
exploited. Companies can target and
attract certain kinds of investors, es-
pecially institutional shareholders
(Brancato, 1997). While the activities
of a few institutional shareholders
continue to dominate shareholder
activism and firm managers are likely
to be wary of these particular institu-
tional shareholders and their prac-
tices, the findings may help managers
identify which institutional share-
holders are most likely to be activists
and which are the most likely candi-
dates for lasting relationships. The
implication of the pursuit of activism
by only certain institutions suggests a
need for additional research.
This study examined only one-half
of the equation. Future research
should examine how managers are
responding to activism — what hier-
archies are they creating to manage
the different institutional sharehold-
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
257
ers. Prior research has identified the
creation of institutional relations of-
fices (Rao and Sivakumar, 1999), and
issue management and public affairs
departments (de Bakker and den
Hond, 2008; Dalton and Dalton,
2007). Transparency and disclosure
have long been recommended as re-
sponses to activism (Useem, 1996).
The adoption of good governance
practices, including the disclosure of
corporate governance guidelines,
serves to demonstrate a board’s open-
ness and willingness to discuss issues
and concerns of shareholders. Some
corporations have begun to initiate
face-to-face meetings between their
boards of directors and their largest
institutional investors and hold share-
holder forums (Friday and Crum,
2008). Additional research should ex-
amine the evolution and effectiveness
of these and other responses.
Other categorizations of institu-
tional shareholders besides Brickley-
Lease-Smith are being presented (see
Brancato, 1997) and further exami-
nation of these newer typologies is
necessary. While this study did not
find performance expectations to be
a determinant of activism, there is ev-
idence that some institutions are fol-
lowing a total wealth maximization
standard. While the sustainable de-
velopment movement was initially
seen as a matter of environmental
concern, it is now viewed by many re-
searchers as a complex web of four
dimensions — environmental, social,
institutional, and economic (Giljum
et al., 2005; Becker et al., 1999). While
financial performance is still very im-
portant (see Esty and Winston, 2007),
both green and financial performance
are drivers of both firm-level perform-
ance and investment decision making.
The growth of the sustainability move-
ment merits the further examination
258 RUBACH AND SEBORA
of whether non-financial performance
measures may drive institutional inves-
tor activism.
The study does not examine the re-
cent emergence of new activist inves-
tors (Levin and Masterson, 2006; Da-
vis et al., 2006). Hedge funds, in
particular, have been identified as the
leaders of this new shareholder activ-
ism (Pearson and Altman, 2006).
However, it is not clear whether
hedge funds—which are privately or-
ganized, not widely available to the
investing public, and highly unregu-
lated—should be considered institu-
tional investors (Briggs characterizes
hedge funds as ‘‘not ‘normal’ ’’ insti-
tutional investors (2007: 681)). Re-
cent research has indicated that
hedge fund activism generates signif-
icant abnormal returns (Brav et al.,
2006), and future research should ex-
amine the determinants of hedge
fund activism (see Briggs, 2007).
Limitations
The results of this study should be
cautiously interpreted in light of the
following limitations. It examined
only six classification variables. The
response rate to the questionnaire
may be open to criticism, but the
study’s design is exploratory in nature
and attempts to move the research
beyond the less risky archival and case
designs. Also, only the presence of ac-
tivism, not its extent, was examined.
Future research is necessary to deter-
mine the existence and extent of ac-
tivism among institutional sharehold-
ers, especially if the definition of
institutional investor is broadly inter-
preted. The study is cross-sectional in
nature. There are disadvantages in
using self-report subjective measures,
which have been addressed elsewhere
in the literature and need no further
JOURNAL OF MANAGERIAL ISSUES Vol. XXI Number 2 Summer 2009
elaboration here. The use of alterna-
tive statements to self-type investment
philosophy may also have failed to
capture the distinctions between fi-
nancial and non-financial or total
wealth maximization performance
expectations. The study examined
only institutional investors headquar-
tered in the United States. Institu-
tional investor activism has spread
throughout the world and future re-
search should examine whether the
determinants of activism vary across
specific country contexts.
Also, the data collection took place
before the enactment of the Sarba-
nes-Oxley Act (SOX), which holds
boards and company managers more
accountable for a firm’s perform-
ance. Sarbanes-Oxley’s effect may be
more as a bellweather for accounta-
bility and transparency than as an in-
fluence of activism by itself. Sarbanes-
Oxley has likely created an
environment where institutional in-
vestors are holding managers and di-
rectors more accountable. However,
SOX-mandated corporate govern-
ance mechanisms of board commit-
tees and board independence may ac-
tually reduce certain types of activism.
Hedge fund activism is more deter-
mined by the proxy communication
rules changes at the turn of the cen-
tury than by SOX (Briggs, 2007). The
effects of SOX on activism are an ad-
ditional area for future research.
The continuing popularity of mu-
tual fund investments, the acceler-
ated creation and use of employee
benefit plans, and the successes of ac-
tivist and hedge fund investors will
cause institutional investor ownership
power over corporations to increase.
Voice in the realm of shareholder ac-
tivism, especially relationship invest-
ing, may be a likely response. The ef-
fects of institutional activism on
 DETERMINANTS OF INSTITUTIONAL INVESTOR ACTIVISM 259

corporate governance and firm per- ther, though finer-grained, examina-

formance will continue to merit fur- tion.

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