INSTITUTIONAL INVESTORS - THE RELUCTANT ACTIVISTS

As corporate executives have watched institutional investors acquire an increasing percentage of their companies' shares, many have come to fear a slippery slope of institutional intervention from questions about the wisdom of a merger one minute to advice about plant location the next. Institutional investors, who now own a majority of the voting stock of publicly traded U.S. companies do have an influence on the way these companies are run. And given their influence, institutions are under increasing pressure to become activist shareholders. But according to Robert Pozen, general counsel and managing director of Fidelity Investments, institutional investors are not interested in the day-to-day management of any portfolio company; their goal is to achieve their clients'' financial objectives. In a perfect world, institutions would never intervene in corporate governance because all their portfolio companies would be good performers. Even in this imperfect world, institutions overcome their built-in inertia only if activism passes the cost-benefit test. To decide whether and when to become active, an institutional investor compares the expected costs of a course of action, from a proxy fight to an informal discussion with management, with the expected benefits, which are difficult both to predict and to measure. If corporate executives understood what motivates the decision making of institutional investors, they would realize that institutions are not out to take control of U.S. corporations or to lobby for the German-Japanese model of intense institutional involvement. Given the rigors of the cost-benefit test, activism turns out to be the best strategy in very few cases.