SILVER LINING EMOLUMENTS

Democrat investment effect spooks corporate raiders

Having Democratic lawmakers as shareholders discourages financial activists from targeting a company

University of Texas at Austin

Stock investments by politicians have long drawn public scrutiny. Under a 2012 law, members of the U.S. Congress must disclose transactions over a $1,000 threshold. Early in the COVID-19 pandemic, lawmakers on both sides of the aisle were criticized for trading in everything from remote work technologies to telemedicine.

But less attention has been paid to what companies might gain from having politicians as shareholders. New research from Texas McCombs finds one indirect benefit: It might insulate companies from activist investors such as Carl Icahn or Nelson Peltz, who press for changes in their operations to drive up stock prices.

Timothy Werner, professor of business, government, and society, found that having shareholders who are Democratic members of Congress tends to discourage such investors.

Typically, he says, “An activist investor’s main strategy is to come into a firm, cut costs, and effect changes in the hopes of quickly driving up shareholder value or stock price. Then, they sell and exit the firm.”

Often, their cuts include corporate social responsibility (CSR) or environmental, social, and governance (ESG) programs. Democratic politicians are more likely to be concerned about such initiatives, whether because of their own ideological bents or because they want to appear associated with companies that support such causes.

Activist investors can find out whether Democratic politicos are shareholders from public investment disclosures, as well as websites and social media feeds that track politicians’ investments. They’ll tend to steer away from such companies, Werner theorized, to avoid public battles with Democrats, who are more likely to fight cuts to CSR and ESG.

“If you look nationwide, if you look at the most recent presidential campaign, there’s been a real emergence of a partisan divide around corporate social responsibility and ESG,” Werner says.

To test his theory, with co-authors Mark DesJardine of Dartmouth College and Wei Shi of the University of Miami, Werner looked at data on politicians’ investments in S&P 1500 companies from 2004 to 2018. He correlated them with challenges to those companies by activist investors.

The researchers found:

• Having even one Democratic politician as a shareholder decreased the likelihood of an activist challenge 10%.
• The presence of a highly prominent Democrat reduced these chances further.
• So did the presence of a more Democratic-leaning board of directors.

The research did not find an effect from having Republican politicians as shareholders, Werner says, because they tend to be less interested in regulating businesses and less likely to scare off financial activists.

His findings don’t mean that companies should court individual lawmakers to invest, he says. That would invite ethical concerns and public scrutiny. It’s safer to stick with traditional relationship-building efforts, such as lobbying.

Is the Democratic deterrence effect helpful for average investors? Werner says it depends on their financial and ideological goals. Some don’t want to dissuade activist investors, because they can encourage fiscal discipline and boost stock prices in the short run.

But an investor who cares about CSR and ESG may welcome the effect, he says. “If someone’s thinking about the social and environmental performance as well, and they’re willing to make a trade-off in terms of financial gain, they might be happy to see these folks deterred.”

”Shareholder Activism and the Deterrence Effect of Democratic Politician Shareholders” is published inOrganization Science.

Story by Suzi Morales

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Journal

Organization Science

DOI

10.1287/orsc.2023.17495 

Article Title

Shareholder Activism and the Deterrence Effect of Democratic Politician Shareholders