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Managerial Activism*

Şenay Ağca

Aslı Togan-Eğrican

August 2019

Abstract We look at managerial activism through collective action in the corporate sector. Activist managers spend considerable resources on lobbying, lawsuits and public statements to pursue pro-business as well as pro-manager issues. While managerial activism is valuable in following pro-business strategies, pro-manager agendas may exacerbate agency problems. We find evidence more towards the pro-business role of managerial activism. Specifically, operating performance improves with managerial activism, and this improvement is observed primarily in firms that are government dependent, produce differentiated products, operate in concentrated industries or have more intangible assets. Corporate governance of firms with activist managers is comparable to other firms. In the overall, managerial activism adds value to firms, especially when information dissemination is more essential due to firm characteristics. JEL classification: G14, G18, G34, G38, D7

Keywords: Corporate Governance, Managerial Activism, Lobbying, CEO compensation. Operating performance

* Authors: Şenay Ağca, George Washington University, sagca@gwu.edu; Aslı Togan-Eğrican, Kadir Has University, asli.togan@khas.edu.tr. We thank the George Washington University Institute for Statistics and Decision Sciences for a summer grant. We are grateful to Oya Altinkilic, Vineet Bhagwat, Nikolay Gantchev, Oğuzhan Karakaş, Ayla Kayhan, Simi Kedia, Mark Klock, Anzhela Knyazeva, Christo Pirinksy, Refik Soyer, Robert Van Order and the participants of the George Washington University Research Days, Koc University and National Science Foundation seminar participants for comments and suggestions.

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1. Introduction

The growth in activist shareholder campaigns has been one of the major trends in corporate

governance and has recently received increased attention in the literature.[1] On the other side of

shareholder activism, managers are also actively involved in promoting policies about their firms,

industries, general business and corporate governance issues. Managers pursue activism and

collaborate together through lobbying efforts, lawsuits or public statements in organizations such

as Business Roundtable and the US Chamber of Commerce, which are among the top political

contributors in the period 1998-2018, spending more than $200 million and $1 billion,

respectively.[2] Given the paramount potential influence of managers on business policies,

managerial activism aspect of modern corporate governance process deserves attention.

In this paper, our motivation is to take a step towards filling this gap by studying managerial

activism through the lens of an important managerial collective action – CEO involvement in

Business Roundtable (BRT, henceforth), an association of chief executive officers of leading U.S.

companies working to influence U.S. public policy on corporate management and governance

among other issues. BRT was established in 1972 and as of 2014, which is the end of our sample

period, it included 206 companies with $7.2 trillion in annual revenues and more than 16 million

employees.3 BRT is considered as a pro-business and pro-manager organization that exert “voice”

through lobbying activities and lawsuits in shaping business policies (Monks (2007) and Domhoff

(2014)). These activist managers, through the BRT platform, have the ability to pursue policies

that benefit the corporate sector, their industry or their firms such as those that involve taxes, trade,

energy and health. 4 BRT, however, also advocates policies that favor managers over shareholders

such as proxy access, shareholder voting and executive compensation.

Therefore, one aspect of managerial activism, promoting pro-business policies, should

improve overall business environment and may further benefit the firms of activist CEOs by

providing these firms access to a powerful platform through which their CEOs can coordinate with

other CEOs and pursue agendas in line with firm interests. BRT is very active in proposing pro-

business policies such as changes in corporate taxes and open trade that have broad implications

as well as those that have more direct effects on certain firms or sectors such as the highway bill

3 www.businessroundtable.org 4 See Appendix 3, Table A3 for pro-business issues BRT lobbied during the period 2008-2014.

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and the reauthorization of the U.S. Export Import Bank (Ex-Im Bank).5 While reducing corporate

taxes have implications for the overall business sector, issues such as the highway bill or

reauthorization of Ex-Im Bank may benefit certain firms or industries more directly.6 Thus, activist

managers in BRT, with a strong lobbying arm and coordination ability with CEOs of major

companies (comprising 27 percent of US stock market capitalization in 2019)7 have the ability to

shape policies that increase competitiveness and create value for their firms as well as for the

overall business sector.

On the other hand, activist managers may act to protect their private benefits and control,

and thus exacerbate agency problems by following pro-manager agendas. This idea traces back to

Berle and Means (1932), which is subsequently developed further by Jensen and Meckling (1976),

Jensen (1983) and others. BRT voiced pro-manager agendas by indicating that corporations are

not democracies8, and by taking stances against rules that give more power to shareholders such

as proxy access rule that BRT struck down in 2011 and say on pay rule that BRT lobbied against

until it is passed into law in 2011.9 They also intensively lobbied on pro-manager issues such as

5 Business Roundtable lobbied for Surface Transportation Reauthorization and Reform Act of 2015 which was approved by the House on November 5, 2015 (http://businessroundtable.org/media/news-releases/business-leaders-applaud-house-passage-highway-bill) This bill opens the road for various highway programs for the next six years and includes provisions to modernize the federal permitting & approval process for projects related to transportation infrastructure. The bill also includes a multi-year reauthorization of the U.S. Ex-Im Bank. The request for the extention of Ex-Im Bank was initiated by BRT in September 2014 (http://businessroundtable.org/resources/brt-calls-reauthorization-us-export-import-bank). 6 For example, the highway bill signed into law in 2015 has implications for the construction and construction equipment sector. Similarly, reauthorization of Ex-Im Bank a priority for BRT has a direct effect on Boeing (whose CEO is a BRT member) since Boeing borrows significantly from Ex-Im bank to fill its orders. See Section 2.1 for more details on these bills. 7 See https://www.businessroundtable.org/business-leaders-from-us-europe-and-japan-express-support-for-revitalized-multilateral-trade-system 8 For example, BRT CEO John J. Castellini indicated that “Unlike democracies, shareholder rights vary based upon the size of their investment, and by definition corporate decision making is not a democratic process.” Testimony of John J. Castellini to the US House Financial Services Committee on “Empowering Shareholders on Executive Compensation: H.R. 1257, The Shareholder Vote on Executive Compensation Act”, March 8, 2007. These issues are further discussed in Section 2.2. 9 BRT filed a lawsuit on SEC’s proxy access rule and the rule was struck down. After the approval of the Dodd-Frank Act in July 2010, the SEC announced on August 25, 2010 the adoption of a rule mandating proxy access at all U.S. public companies to go into effect in the 2011 proxy season. The Business Roundtable and the U.S. Chamber of Commerce filed a complaint on September 29, 2010 alleging that these rules were unlawful under the U.S. Securities laws. On October 4, 2010 SEC unexpectedly decided to delay the ruling on proxy access. On July 22, 2011 the rule was struck down and SEC shelved its efforts. Another example is BRT’s stance on say on pay rule. Say on pay rules provide shareholders with an advisory vote on executive compensation (passed into law as part of Dodd-Frank Act on January 21, 2011), and proxy access rule that facilitates rights of shareholders to nominate directors by including their nominees in the company proxy materials.

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executive compensation and shareholder votes that are central to manager-shareholder conflicts.

For example, around 50% of the finance and banking bills that BRT lobbied during our sample

period 2008-2014 includes pro-manager issues.10 Thus, advocating manager friendly issues

constitutes another component of the managerial activism efforts.

Since managerial activism is pursued for both pro-business and pro-manager purposes, its

overall implications for the corporate sector is an open question. To shed a light on this subject,

we explore managerial activism within the context of corporate governance, executive

compensation and firm performance.

We first look at firm and CEO level determinants of managerial activism. We find that

CEOs who hold a chairman position, who have shorter tenure, CEOs of large companies, and

CEOs of companies that lobby at the firm level are more likely to be BRT members and thus

pursue managerial activism in this platform. The literature mostly indicates that holding CEO and

chairman positions may be related to various agency problems such as compensation inefficiency,

corporate fraud and larger than average acquisition sizes (Grinstein and Hribar (2003), Bebchuk

and Fried (2004), Bebchuck, Cremers and Peyer (2011), Morse, Nanda, and Seru (2011), Graham,

Kim and Leary (2018)). There is, however, also literature suggesting that powerful CEOs may

help companies in industries with high entry barriers (Li, Lu and Phillips, 2018). Shorter tenure

may indicate the riskiness of CEO positions (Brookman and Thistle (2009)). As managers with

shorter tenure do not occupy the position long enough to establish their power, involvement in the

BRT platform may provide these managers further influence as CEOs. Our results show that CEOs

of firms that lobby at the company level choose to be in BRT. Thus firms that are politically active

are more likely to support managerial activism. Lastly, large firms may have more resources to

allocate for managerial activism. However, these firms may also be more prone to agency conflicts

(Demsetz (1983) and Demsetz and Lehn (1985)).

Next, we consider corporate governance characteristics and executive compensation to

explore how managerial activism relates to agency conflicts. If managers are involved in activism

to increase their private benefits and control, then these firms should have more pro-manager

See for example, the comments provided by the Business Roundtable to SEC on say on pay at various times: https://www.sec.gov/rules/final/2011/33-9178.pdf 10 See Table 1 and Appendix 3, Table A4 and Table A5. During the period 2008-2014, BRT spent around $110 million in total lobbying activities among which around $64 million worth of it include issues that are pro-manager. Thus, close to 60 percent of the lobbying expenses by BRT includes pro-manager matters among other issues.

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corporate governance mechanisms and higher CEO compensation. We find that firms with activist

CEOs have similar board size and entrenchment index (measured as Bebchuk, Cohen and Farrell

(2009)) as others in the sample. Thus, managerial rights in companies with activist managers are

comparable to other firms, and do not point towards particular pro-manager structures. Firms with

activist CEOs also have more independent directors on the board, suggesting that these CEOs are

more closely monitored by the board. Overall, corporate governance of firms with activist CEOs

do not indicate particular agency problems that may arise from pro-manager strategies.

When we look at executive compensation, we observe that stock holdings and option

awards of activist CEOs are comparable to other CEOs in the sample, but their salaries and bonuses

are higher. Therefore, while activist CEOs are paid more, their incentive structures through stock

and option holdings are aligned in a similar manner to other CEOs. High salaries and bonuses for

activist CEOs may be consistent with both pro-manager and pro-business role of managerial

activism. On the one hand, high executive compensation may be driven by a pro-manager structure

through which these CEOs keep higher private benefits. On the other hand, higher compensation

may be due to the additional time and resources spent by these CEOs on pro-business activism,

which may be valuable for the firm.

In order to understand whether managerial activism creates value through pro-business

policies or destroys value due to pro-manager policies, we look at firm performance. Activist

managers that serve on BRT may create value for their firms by coordinating with other CEOs

through this platform and by advocating for business policies through lobbying and lawsuits in a

way to benefit their firms. Alternatively, managerial activism may be valuable for the overall

business sector or industry without additional benefits occurring for the firms involved in activism.

In this latter case, managerial activism serves as a public good ((Austen-Smith (1992) and

Halberstam and Lazar (2014)). Lastly, if managerial activism is pursued more for pro-manager

agendas which increases private benefits of managers rather than the long run firm value, then

managerial activism should be detrimental for firm value. The overall net effect of managerial

activism is an empirical question, which we explore by looking at operating performance.

We find that firms with activist CEOs have better operating performance than an average

firm. This improvement is also observed when operating performance is adjusted for industry.

These findings suggest that even though some of the benefits of managerial activism may be shared

across companies in an industry or in the overall business sector, managerial activism creates value

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for the involved firms. Therefore, the ability of activist CEOs to shape business policies through

lobbying, lawsuits and coordination with other CEOs yield additional benefits for firms with

activist CEOs, which is reflected in better operating performance of these firms.

We then look at product market and industry characteristics of firms to understand the

circumstances in which managerial activism improves firm performance. We consider government

dependence, product differentiation, product market competition and information asymmetry.

When firms’ futures are more closely tied to government, managerial activism may be particularly

useful in conveying information to government institutions and policy makers so as to provide

input to the decision process. Thus, managerial activism should be beneficial in creating

advantages for these firms. We explore this issue using Belo, Gala and Li (2013) government

dependence measure and find that operating performance improves with managerial activism in

government dependent firms. Next, we look at product market differentiation and product market

competition utilizing Hoberg and Phillips (2010) measures. Policy makers may not be able to

acquire information about differentiated products through more general resources. Therefore,

managerial activism may increase firm value by disseminating more firm specific knowledge to

regulators and policy makers to allow for more informed decision making. Also, in the existence

of a differentiated product, activist managers may generate value that is more specific to their firms

as the benefits may be unique and thus not shared across the overall sector. Our results support

these arguments as we find that operating performance improves with managerial activism in firms

that produce differentiated products. When we look at product market competition, we observe

better operating performance with managerial activism in more concentrated industries. In a highly

concentrated industry, the public good component of activism is reduced as there are fewer number

of firms that make up the predominant part of the industry. Therefore, the benefits of managerial

activism is shared among a smaller number of firms. Finally, we consider information asymmetry

in firms utilizing intangible assets as a proxy. Intangible assets include R&D expenses, patents,

information technology, human resource development and brand development among others,

which have substantial economic importance but are not readily observable. Thus, firms with more

intangible assets have more information asymmetry about their business practices (Aboody and

Lev (2000)). As a result, conveying information to policy makers should be valuable for such firms

to allow for more informed decisions. Supporting this notion, we find that operating performance

improves with managerial activism in firms with more intangible assets.

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Overall, the evidence suggests that when managers spend time and resources in collective

action together with other CEOs in shaping business policies, they create value for their firms.

This finding is mainly in line with the pro-business role of managerial activism. Additionally, the

benefit of managerial activism is more apparent when conveying firm specific information to

policy makers is more valuable due to firm characteristics.

In our analyses, to consider possible endogeneity in examining the relation of managerial

activism with corporate governance, CEO compensation and firm performance, we employ

instrumental variables methodology. We instrument managerial activism, which is an indicator

variable that takes a value of one if a CEO is a member of BRT at a given year, with that CEO’s

earlier business connections to any of the serving BRT members. A CEO that had past employment

relation with a serving BRT member is more likely to be invited to the BRT and thus have the

opportunity to be active through this platform. Indeed, we find a strong relation between being a

BRT member and earlier business ties with a serving BRT CEO. As an alternative approach to

instrumental variables, for robustness, we also match activist CEOs’ firms with other public firms

based on size, industry, growth opportunities, CEO power, tenure and age by employing propensity

score matching. These results are comparable to the baseline findings.

An alternative to managerial activism through BRT platform is firm level lobbying. While

firm level lobbying may be useful for pro-business reasons, it is unlikely to be pursued for pro-

manager issues such as say on pay, proxy access rule or CEO compensation. Further, while BRT

provides a platform for activism that is coordinated with CEOs of major companies and thus has

a strong muscle in following through policies, individual firm lobbying does not have the same

advantages. In our specifications, we control for individual firm lobbying and find that the effect

of managerial activism is distinct from firm level lobbying.

We next look at events related to managerial activism to advance our understanding on the

role of managerial activism in the corporate sector. We look at BRT executive committee

announcements to consider the value of managerial activism. While being a member of BRT is an

indication of managerial activism, serving on the executive committee of this powerful

organization increases the influence of a CEO in determining the activist agenda of BRT. Thus

market reaction to this event reflects how managerial activism is perceived among shareholders.

If shareholders consider managerial activism to be detrimental to firm value due to pro-manager

agendas followed by these managers, then increasing influence of a CEO in the BRT platform

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should be considered adversely in the market. On the other hand, if managerial activism creates

value for the involved firms through pro-business policies, then having more power in BRT

through the executive committee should be considered favorably in the market. We find that there

is a significant positive stock market reaction to BRT executive committee announcements. Over

a 5 day window surrounding these announcements, abnormal stock return for the firms with CEOs

that join the BRT executive committee is 1.2%, indicating substantial positive value associated

with more influential managerial activism.

We also look at a quasi-natural experiment on pro-manager activism by considering the

victory of BRT in its lawsuit against the SEC regarding the proxy access rule on July 22, 2011 as

an unexpected shock (see Becker, Bergstresser, Subramanian (2013), Cohn, Gillan, Hartzell

(2016)), and examine the market reaction to BRT’s striking down this rule by a lawsuit. On August

25, 2010, the SEC approved a proxy access rule aimed at making it easier for shareowners to

nominate their own candidates for director, which was challenged and vacated by the July 22, 2011

ruling of the BRT lawsuit against the SEC. When we look at stock market reaction to this

successful pro-manager activism, we observe that stock market returns of BRT firms fall by around

0.30% at the time of this BRT lawsuit victory. Thus, market recognizes managerial activism

pursued for a pro-manager agenda while in general managerial activism is considered to be

favorable for firm value.

There are considerable resources put forth in the collective action of managers through

lobbying, lawsuits and coordination efforts. In this paper, we show that, on the overall, activist

engagements of managers create value for involved firms, which mainly supports the pro-business

role of managerial activism.

We contribute to the literature on corporate governance on several fronts. Even though

collective action of individuals and corporations has been analyzed in labor economics (Allin

(1953), Botero, Djankov, La Porta, Lopez-De-Silanes, Shleifer (2004)), and in corporate

governance with respect to the resolution of problems among different stakeholders (Becht,

Bolton, Röell (2002), Mulherin (2005)), it has not been analyzed within the context of managerial

activism. Here we approach to this gap in the literature by focusing on the role of managerial

activism through collective action of CEOs in the corporate sector. Our paper further adds to the

existing work on activism that primarily focuses on shareholder activism (Brav, Jiang, Partnoy and

Thomas (2008), Klein and Zur (2009), Gantchev (2013) among others). Instead of shareholder

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activism that is pursued by exerting voice through stock ownership, here we study the collective

activism of managers advocated by lobbying, lawsuits and public statements. Overall, our paper

is on the scant literature on CEO activism. The only other study we are aware of is Chatterji and

Toffel (2017), which has a different aim as the study looks at manager involvement in social issues

by exerting voice. Here, we examine the role of collective action by managers in the corporate

sector by focusing on their involvement in pro-business and pro-manager issues through

coordination in a powerful platform.

The rest of the paper is organized as follows. Section 2 describes Business Roundtable and

membership to this organization. Section 3 is on data and methodology. Sections 4 is on empirical

results and Section 5 concludes.

2. Business Roundtable: Background and Hypotheses

Business Roundtable is an influential association of chief executive officers of major U.S.

companies. It was established in 1972 by the merger of three different organizations, the March

Group, Construction Users Anti-Inflation Roundtable, and the Labor Law Study Committee.

According to its website, “[t]hese groups founded [BRT] on the belief that in a pluralistic society,

the business sector should play an active and effective role in the formation of public policy.”

These companies are large, with more than $7 trillion in annual revenues and more than 15

million employees, and comprise more than a third of the total value of the U.S. stock market.11

Members of BRT include well known prominent firms such as Qualcomm, International Business

Machines (IBM), FedEx Corporation, Comcast, Honeywell International, and Oracle. BRT covers

a wide range of industries from manufacturing, business equipment, healthcare and energy

(Appendix 2, Table A2 provides the industry distribution of BRT members for our sample period

2008-2014).

Business Roundtable is the second most lobbying business association after the U.S.

Chamber of Commerce. According to the data from the Center for Responsive Politics, BRT spent

more than $100 million on lobbying activities during our sample period (Table 1 Panel A).

11 See https://www.businessroundtable.org/about-us and https://www.businessroundtable.org/archive/resources/letter-sec-the-disclosure-effectiveness-initiative

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BRT members currently focus on the following key policy issues by creating task forces

and committees: Corporate governance, education and workforce, energy and environment, health

and retirement, immigration, technology, innovation, trade, smart regulation, diversity and

inclusion, infrastructure, and tax and fiscal policy.12

2.1. Pro-Business Policies

BRT provides their members a powerful platform to exert voice on business policies that

should benefit the business community, their industries and their firms. Some of the major general

issues that BRT lobbied during our sample period are taxes, trade, healthcare, finance and banking

(see Appendix 3, Table A3 for major general lobbying issues of BRT). With a strong lobbying arm

and coordination with other CEOs of major companies, BRT CEOs have the ability to shape

policies to increase competitiveness in the business sector, including their firms and industries.

Pro-business policies that are pursued by BRT managers may have implications for overall

businesses in general and also provide benefits that are specific to their sectors and companies. For

example, BRT’s mission to lower corporate taxes has broad implications to increase

competitiveness of US firms in a global economy.13 Another example, a $305 billion 5-year

highway bill (Fixing America’s Surface Transportation Act) that is signed into law on December

4, 2015 to improve infrastructure is likewise to be useful for the overall business environment and

also have a direct effect on construction and construction equipment sector. The CEO of Caterpillar

(a major construction equipment company and a BRT member), Douglas R. Oberhelman was as a

solid supporter of the bill and voiced his support by citing BRT’s position on this issue.14

Reauthorization of the Export-Import Bank (Ex-Im Bank)15 was also in the BRT agenda, which

12 www.businessroundtable.org accessed on February 14, 2019. 13 “Business Roundtable supports comprehensive tax reform for individuals and all businesses to improve economic growth and provide for a simpler and more efficient tax system… Business Roundtable urges Congress and the Administration to make tax reform a top priority for legislative action... Business Roundtable supports modernization of the corporate tax system, including setting a corporate tax rate at a competitive 25 percent rate and adopting a modern international tax system, financed through broadening of the corporate income tax base and other corporate offsets.” Tax Reform: Advancing America in A Global Economy, Business Roundtable, October 2015. 14 Oberhelman stated that “Because we know the increasing economic cost of lack of infrastructure investment, BRT is urging lawmakers to act, adding our voices to those already calling for a long-term, sustainable solution... As leaders of the largest U.S. companies, BRT members constantly pull multiple levers to stay competitive. When we get it right, we employ more people, buy more supplies from more suppliers, and create prosperity for families and communities” See “Fix our transportation system now” by Doug Oberhelman, Chairman and CEO of Caterpillar, CNBC, 17 Sep 2015. 15 Ex-Im bank is the United States’ export credit agency that guarantees loans taken out by foreign companies to purchase goods exported from United States.

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was signed into law together with the aforementioned highway bill. Again in addition to the general

benefits of the Ex-Im bank in the business sector, the bank provides considerable amount of loans

to Boeing, (14% of Boeing’s orders in 2014 were guaranteed by the Ex-Im bank). Thus Ex-Im

Bank is important for the competitiveness of Boeing as indicated by its CEO, Dennis

Muilenburg. 16 17 Boeing CEO, together with GE and Caterpillar CEOs (all members of BRT)

voiced strong support of the reauthorization of the bank, which was included as a priority for BRT

agenda in 2015.18 Given large resources and time devoted to managerial activism through the BRT

platform, managers should be using these capabilities to increase their firm value. To the extent

that managers act in the best interest of long term firm value (as stated in the corporate governance

principles of BRT)19, the policies promoted by the BRT CEOs should create value for the firms of

these activist CEOs. Thus, managerial activism through BRT should have positive implications in

improving performance. It is also possible that managerial activism through BRT platform serves

as a public good where the actions of BRT benefits the overall business environment. In this case,

in line with Austen-Smith (1992) and Halberstam and Lazar (2014), lobbying is a public good that

helps in educating legislators about policies and their consequences. Thus, the benefits of

managerial activism are shared with other corporations and managerial activism may not generate

firm specific benefits. On the overall, the net effect of pro-business managerial activism on the

corporate sector is an open empirical question.

2.2. Pro-Manager Policies

BRT is a group of CEOs from major organizations, with substantial power in promoting

policies through coordination, lobbying and lawsuits. Among the policies followed by these

activist managers, pro-manager issues that potentially increase agency problems. For example,

BRT president, John J. Castellini said that “Unlike democracies, shareholder rights vary based

16 “Pew Analysis Shows More Than 60 Percent of Export-Import Bank Loan Guarantees Benefited Single Company”, PR Newswire, by Pew Charitable Trust, November 9, 2009. “Boeing and Obama sitting in a tree, K-I-S-S-I-N-G” by Timothy P. Carney, Washington Examiner, December 2, 2012. 17 “...The apocalypse scenario that Boeing is spinning has little to do with near-term financing for its customers, but instead focuses on the company’s long-term competitiveness without the financial backstop provided by Ex-Im.” Dennis Muilenburg stated that “This is about long-term global competitiveness. And that’s why we’re so forceful on this topic that it’s important Ex-Im be reauthorized.” See “Boeing strikes back hard at Export-Import bank opponents” by Clay Dillow, Fortune, August 25, 2015. 18 United States Senate Finance Committee Hearing on “Jobs and Economy” of John Engler, President of Business Roundtable, January 22, 2015. 19 Principles of Corporate Governance, Business Roundtable, 2016.

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upon the size of their investment, and by definition corporate decision making is not a democratic

process.” 20 Business Roundtable has been criticized by many as a major contributor to the shift in

power from shareholders to managers, and their CEOs were called as “activists”.21

The lobbying reports of BRT for our sample period 2008-2014 indicate that there is more

than $60 million lobbying spending that include issues which are at the core of manager-

shareholder conflict such as proxy access, executive compensation and proxy voting (Table 1 and

Appendix 3, Tables A4 and A5). This amount is more than half of the total lobbying expense of

BRT, $110 million, during our sample period. In the lobbying reports, corporate governance issues

are filed under the Finance or Banking general issues area. In our sample period, out of 168 reports

filed for finance and banking, 78 of them include pro-manager issues such as proxy voting, CEO

pay and shareholder votes (Table 1 Panel B and Appendix 3, Tables A4 and A5). Thus, close to

half of the reports on finance and banking include pro-manager issues, indicating considerable

resources put forward on this front. Say on pay rules provide shareholders with an advisory vote

on executive compensation (passed into law as part of Dodd-Frank Act on January 21, 2011), and

proxy access rule facilitates rights of shareholders to nominate directors by including their

nominees in company proxy materials (see Appendix 3, Table A4 for top 5 finance and banking

issues and Table A5 for the pro-manager issues lobbied in our sample period). In regard to proxy

access rule, following SEC’s decision to adopt it on August 25, 2010, BRT, together with the US

Chamber of Commerce filed a petition against it. The U.S. Court of Appeals in Washington

vacated this rule on July 22, 2011, which was considered to be unexpected by many (see Becker,

Bergstresser, Subramanian (2013) and Cohn, Gillan, Hartzell (2016) for details), presenting an

important success of managerial activism in shifting power to managers.

Thus, managers may be involved in activism to follow pro-manager agendas. The

collaborative action through BRT membership – managerial activism – may help CEOs change

business policies so as to benefit themselves at a loss for shareholders in line with agency problems

widely cited in the literature (Berle and Means (1932), Jensen and Meckling (1976), Jensen (1986),

and the following studies). If managers get involved in BRT to increase their power and act for

20 Testimony of John J. Castellini to the US House Financial Services Committee on “Empowering Shareholders on Executive Compensation: H.R. 1257, The Shareholder Vote on Executive Compensation Act”, March 8, 2007. 21 See for example, Big Business and Presidential Power from FDR to Reagan by Kim McQuaid, 1982 and Washington’s Business Roundtable Rebounds, Wall Street Journal, July 13, 2004.

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their self-interests rather than that of shareholders, then BRT member firms should be subject to

the perils of agency problems such as weaker corporate governance and lower firm values.

On the other hand, BRT also publishes best corporate governance practices in their

guidelines and have a committee on improving corporate governance practices. In these

guidelines22, BRT cites having more independent directors on the board and CEO compensation

that align with long term value. Thus, while these managers promote policies that increase the

power of managers, they also publish guidelines on better corporate governance. Examining

corporate governance mechanisms and executive compensation of firms with activist CEOs is

useful in shedding a light on the stance of managerial activism in the corporate sector.

3. Data and Methodology

We identify companies that are members of the BRT from publicly available sources,

including BRT’s web site and an archived system of the Internet, which stores snapshots of the

Business Roundtable’s web site at different points in time.23 We also conduct an extensive search

and identify documents where the lists of members are provided. Members of the BRT are

identified through this process for each year between 2008 and 2014.

Firm level financials are obtained from COMPUSTAT. We get corporate governance data

from ISS (RiskMetrics), institutional holdings data from Thomson Reuters 13F Database,

executive compensation data from Execucomp and stock price data from CRSP. We use the

intersection of COMPSUTAT and ISS as our main sample and require that all variables used in

the baseline estimation are available. Prior employment connections of CEOs are from BoardEx.

Firm level lobbying is retrieved from the U.S. Senate Lobbying Disclosure Act database. The

variable definitions and data sources are listed in Appendix 1.

We have 181 firms and 840 firm-year observations with BRT CEOs after merging above

stated datasets. Among these 181 firms, 121 of them have the same BRT CEO during our sample

period, 56 firms have 2 different BRT CEOs and 4 firms have 3 different BRT CEOs. Also, among

these 181 firms, while 87 of them always have BRT CEOs, 94 of them have BRT CEOs as well

as CEOs who are not BRT members during our sample period. Thus, these 94 firms appear both

as BRT member CEO firm-years and not-BRT member CEO firm-years. In our sample, we have

22 Principles of Corporate Governance, Business Roundtable, 2016. 23 See http://archive.org

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1595 non-BRT firms and 8,162 non-BRT firm-year observations. Overall, the sample consists of

9,002 firm-year observations.

Table 2 gives descriptive statistics. As observed, 9 percent of the sample is involved in

managerial activism through the BRT platform. In terms of CEO characteristics, 51 percent of the

sample has a CEO acting as chairman of the board and the average tenure and age of a CEOs is 10

and 56 years, respectively. Founder CEOs represent 10 percent of the sample. Entrenchment index

(Bebchuk, Cohen and Ferrell (2009)), which has a scale from 1 to 6, has a sample mean of 3.6,

which indicates that entrenchment in the sample is in the middle of the scale. An average board

consists of 9 members and around 80% of the members are independent. Institutional holdings are

77 percent. We also look at another measure of governance as provided by KLD Research and

Analytics. This measure is the sum of respective indicators of a company which represent its

strengths minus the sum of indicators of weaknesses in corporate governance area.24 This

governance measure is close to zero suggesting weaknesses and strengths in governance balance

out in the overall sample. Considering CEO compensation, there is more dispersion in stock option

practices of firms in the sample compared to stock holdings or salary and bonus. Regarding firm

characteristics, the sample consists of firms with varying degrees of size, growth opportunities,

leverage and lobbying expenses. In terms of operating performance, ROA is 5% when not adjusted

for industry and is zero if adjusted. These values are 10% and 2% for ROE, respectively.

Table 2 also presents the differences between BRT and non-BRT samples. BRT CEOs are

more likely to be the chairman of the board, have shorter tenure and are less likely to be founders.

The results also indicate that BRT firms are larger and have larger boards. While 74% of the firms

with BRT CEOs are involved in lobbying, this figure is 28% for firms with CEOs not involved in

activism. Lobbying expense amounts are also larger for firms with activist CEOs. Firms with BRT

CEOs have higher ROEs than other firms whereas ROAs are comparable in magnitude between

these two subsamples.

24 KLD provides an annual data environmental, social and governance performance. Here we only focus on the governance subindex of KLD data. In this subindex, strength indicators include limited compensation, ownership, transparency, and political accountability whereas weaknesses include the exact opposite of these indicators such as high compensation and transparency concern. The KLD corporate governance index ranges between -4 and 2 during our sample period.

15

To examine the role of managerial activism, we estimate the following equation:

𝑌𝑌𝑖𝑖,𝑡𝑡 = 𝑎𝑎0 + 𝑏𝑏1(𝑀𝑀𝑎𝑎𝑀𝑀𝑎𝑎𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑎𝑎𝑀𝑀 𝐴𝐴𝐴𝐴𝐴𝐴𝑀𝑀𝐴𝐴𝑀𝑀𝐴𝐴𝐴𝐴)𝑖𝑖,𝑡𝑡 + 𝑏𝑏2𝑋𝑋𝑖𝑖,𝑡𝑡 + 𝐴𝐴𝑡𝑡 + 𝑧𝑧𝑖𝑖 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (1)

In above equation, Y corresponds to dependent variables explored, which are corporate

governance characteristics, CEO compensation and firm performance. Managerial activism is an

indicator that takes a value of 1 if a CEO is a member of BRT and is zero otherwise. The variable

X includes control variables: firm size, growth opportunities, leverage, firm lobbying, CEO-

Chairman duality, CEO tenure and CEO age. In the equation, s refers to time fixed effects and z

refers to industry fixed effects based on Fama-French 12 industries. The indices i and t correspond

to firm i and year t. Standard errors are clustered by industry.

In all estimations, we control for the beginning of period Tobin’s Q, firm size and leverage

as firm level controls, in line with Brav, Jiang, Partnoy and Thomas (2008), Masulis and Reza

(2015) and Cremers, Giambona, Sepe and Wang (2015) among others, as these factors are found

to be among the determinants of corporate governance and operating performance. We control for

firm level lobbying by including the natural logarithm of company lobbying expenses retrieved

from the U.S. Lobbying Disclosure Act Dataset of the U.S. Senate.25 Including firm level lobbying

helps in alleviating the concern that managerial activism may be capturing firm level lobbying.

Since CEO characteristics are particularly relevant in managerial activism, we include CEO age,

tenure and indicator variables for CEO-chairman duality and for founder CEOs. Variable

definitions are in Appendix 1.

When we look at the determinants of managerial activism in Table 3, we find that CEOs

of large firms are more likely to be involved in managerial activism. Since substantial resources

are used in collective managerial activism through BRT such as lobbying and lawsuits, large firms

are more likely to have available resources for such activities. We also find that firms involved in

lobbying at the company level are more likely to have activist managers, suggesting that politically

active firms support managerial activism. Among CEO characteristics, powerful CEOs (measured

as CEO chairman duality) as well as CEOs with shorter tenure are more likely to be members of

BRT. Powerful CEOs may be more inclined to keep their power through activism and coordination

with other CEOs in the BRT platform. CEOs with shorter tenure may involve in managerial

activism to solidify their influence as CEOs. Since these CEOs do not have long tenure, being

25 Firm level lobbying expendistures are matched with the baseline dataset using fuzzy matching and manual screening for company names.

16

involved in BRT gives them more power by providing them a platform to shape business policies

and form alliances with other CEOs.

In the instrumental variables (IV) approach employed in our study, first stage is as follows:

𝑀𝑀𝑎𝑎𝑀𝑀𝑎𝑎𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑎𝑎𝑀𝑀 𝐴𝐴𝐴𝐴𝐴𝐴𝑀𝑀𝐴𝐴𝑀𝑀𝐴𝐴𝐴𝐴𝑖𝑖,𝑡𝑡 = 𝑎𝑎0 + 𝑏𝑏1(𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑀𝑀𝑀𝑀𝑀𝑀𝐴𝐴𝐴𝐴𝑀𝑀𝐵𝐵𝑀𝑀)𝑖𝑖,𝑡𝑡 + 𝐴𝐴𝑡𝑡 + 𝑧𝑧𝑖𝑖 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (2)

In equation (2), BRTConnection is the instrument that takes a value of 1 if the CEO of firm

i has a prior employment connection (before time t) with a CEO serving at the BRT at time t. We

determine business connections between CEOs and BRT members using the BoardEx director

networks database. Prior connections to BRT members should increase the probability of being

invited to the BRT and thus providing these managers the ability to be take a role in collective

activism through this platform. The first stage results are in Panel B of Table 4, Table 5 and in

Table 6. There is a strong relation between managerial activism and prior connections to BRT

members. Thus, the instrument satisfies the relevance criteria. A CEO’s earlier connections to

serving BRT CEOs should not be correlated with factors that drive firm performance, executive

compensation and corporate governance characteristics of that particular firm. The F-statistics on

the excluded instruments in the first stage are all well above the Stock and Yogo (2005) critical

values, indicating that the instrument is strong.

We next look at specific events related to managerial activism. We consider 2 events. One

of them is BRT executive committee announcements. Being a member of the BRT executive

committee increases the influence of a CEO considerably in this platform by giving the CEO the

ability to determine the BRT agenda. While exact dates for being a member of BRT are not

publicly available, executive committee changes of BRT are announced to public. We retrieve

these dates from newswires for available dates. The other is a quasi-natural experiment about a

pro-manager lawsuit filed by BRT in which BRT won a victory, which was considered to be a

surprise by many. This event occured on July 22, 2011, when DC Circuit ruled in favor of BRT

and overruled proxy access rule of SEC, which provides shareholder access to proxy statements.

We examine how these events affect firm values by looking at stock market reaction around event

dates. Cumulative abnormal stock returns are calculated using Fama-French 3 factor model,

market model and market adjusted model.

5. Managerial Activism

Activist managers, in our framework, follow both pro-business and pro-manager agendas,

which may be valuable in improving business environment or may be detrimental to firm value by

17

increasing agency problems. Therefore, the overall effect of managerial activism on the corporate

sector deserves attention. We explore these issues by looking at corporate governance, executive

compensation, operating performance as well as by focusing on specific managerial activism

related events.

5.1. Corporate Governance

We examine corporate governance in relation to managerial activism considering several

measures. One of these measures is Bebchuk, Cohen, Ferrell (2009) entrenchment index, which is

on managerial versus shareholder rights. Higher values of this index correspond to more

managerial rights and less shareholder rights. We also look at the size of the board (Jensen (1993),

Yermack (1996) and Coles, Daniel and Naveen (2008)), percent of independent directors on the

board (Rosenstein and Wyatt (1990), Weisbach (1988)), institutional holdings (McConnell and

Servaes (1990), Smith (1996)) and KLD corporate governance index which is a subindex of KLD

Corporate Social Responsibility index.26 The results are in Table 4, Panels A and B with ordinary

least squares and instrumental variables estimations, respectively.

In Panel A of Table 4, firms with activist CEOs mostly follow corporate governance

practices comparable to other firms in the sample. These firms have similar number of independent

directors, board size and KLD corporate governance index as other firms. Also, their entrenchment

index is lower. However, institutional holdings are also lower for these companies, which points

towards potential weak external monitoring for these firms. Institutional investors are useful in

reducing agency costs by imposing their influence in external monitoring (Shleifer and Vishny,

1986; Admati, Pfleiderer, and Zechner, 1994, Fich, Harford and Trash (2015), Ward, Yin and

Zheng (2018) among others).

In Panel B of Table 4, the results with instrumental variables estimations are mostly in line

with those in Panel A except institutional holdings and entrenchment index, which are not

statistically significant in this specification. Here, we continue to find that firms with activist

CEOs have more independent directors on the board. Thus, there is stronger internal monitoring

of activist managers by the board. These results do not indicate particular pro-manager corporate

governance practices of firms with activist managers.

26 KLD’s Corporate Social Responsibility index has been used by many in the literature to measure a company’s social responsibility (See for example, Giuli and Kostovetsky, 2014; Krüger, 2015; and Albuquerque, Durney and Koskinen., 2018).

18

On the overall, the findings indicate that firms with CEOs that are involved in activism

follow corporate governance policies that are aligned with shareholders, and these activist

managers are closely monitored by the board. Therefore, pro-manager policies that appear in the

lobbying bills and lawsuits are not reflected as weak corporate governance mechanisms at the firm

level. On the contrary, in line with the objectives stated by BRT, these firms have more

independent directors on their boards.

5.2 CEO Compensation

We look at managerial activism in relation to CEO compensation focusing on CEO total

compensation, salary and bonus, CEO stock ownership and option awards. While BRT indicates

aligning CEO ownership more closely with long term firm value as one of its objectives27, BRT

also lobbies intensively on issues regarding CEO compensation (Appendix 3, Table A4 and Table

A5). In this regard, it is useful to examine executive compensation of companies with activist

CEOs.

The literature on CEO compensation suggests that the structure of compensation can be

an important factor in explaining CEO incentives (Jensen and Murphy (2010), Bebchuk and Fried

(2003)). The evidence on the relation between CEO stock ownership and firm value is mixed (see

Himmelberg, Hubbard and Palia (1999), Morck, Shleifer and Vishny (1988) and McConnell and

Servaes (1990) among others). With respect to CEO stock ownership, Himmelberg, Hubbard and

Palia (1999) find no relationship between managerial ownership and firm value. Morck, Shleifer

and Vishny (1998) and McConnell and Servaes (1990) on the other hand find a hump-shaped

relation between Tobin’s Q and share ownership. Kim and Lu (2011) show that the relation

between CEO ownership and firm performance depends on the strength of external governance

factors and that high CEO ownership could result in managerial entrenchment. CEO option

holdings are also examined in relation to firm performance (Bertrand, 2009 and Yermack, 1995).

While Yermack (1995) does not find robust evidence of a link between various agency based

27 BRT explains the role of compensation committee in its corporate governance principles as follows. “The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long term value creation strategy.” See https://www.businessroundtable.org/policy-perspectives/corporate-governance/principles-of-corporate-governance

19

compensation theories and CEO options, Mehran (1995) suggests that CEOs whose pay structure

is more equity based (such as options) are more likely to perform better.

In our framework, the relation between managerial activism and CEO compensation is

examined in Table 5 using various measures of compensation. The results indicate that activist

CEOs are paid more in total compensation and in salary and bonus, but their stock holdings and

option awards are comparable to other firms. These findings may be consistent with both pro

manager and pro-business roles of managerial activism. BRT CEOs may be paid more as they

spend more time and effort in promoting the interest of their companies in the powerful BRT

platform and this additional effort may be reflected as additional salary and bonus. The alternative

explanation is that these powerful CEOs get higher compensation which increases their private

benefits in lieu of firm value. We cannot differentiate between these two mechanisms within this

context. In the next section, we look at firm operating performance to further our understanding

on the role of managerial activism in the corporate sector.

5.3. Operating Performance

We look at operating performance of firms with activist CEOs to observe whether

managerial activism creates value for involved firms due to pro-business activism or destroys value

due to pro-manager activism. If activist managers act for their own private interests rather than for

their firms’ interests, then operating performance should deteriorate with managerial activism. On

the other hand, if managers are pursuing activism for the best interest of long term shareholders

by advocating pro-business policies that are important for the competitiveness of their firms, then

firms with activist managers should have better operating performance. Another possibility is that

the benefits of pro-business policies pursued by activist managers are shared across the overall

business sector or industry, which creates a public good. In this case, managerial activism may not

provide additional benefit to the firms of activist CEOs. The net effect of these alternative forces

is examined by focusing on firm operating performance.

We look at return on assets (ROA) and return on equity (ROE) as operating performance

measures in Table 6, Panel A and Panel B with OLS and IV specifications, respectively. In these

panels, Columns 1 and 2 give ROA and ROE Columns 3 and 4 give industry adjusted ROA and

ROE, respectively. Operating performance is adjusted for the industry by subtracting average

industry performance from firm operating performance in each year. This adjustment mitigates

the concern that the findings may be related to developments in a given sector rather than a specific

20

firm. As observed in Table 6, firms involved in managerial activism have better ROE with both

adjusted and unadjusted measures. Thus, firms with activist managers generate better returns for

shareholders. While ROA of firms with activist managers is comparable to other firms in the

sample, their industry adjusted ROA is better than average firm in the sample using instrumental

variables specification, which gives some support to the argument that these firms utilize their

assets more efficiently.

Overall, CEO activism is valuable for the involved firms as manifested in better operating

performance. This finding supports the role of pro-business managerial activism consistent with

the notion that activist managers have the ability to shape business policies and coordinate with

other CEOs in a way that adds value to their firms.

5.3. Product Market and Industry Characteristics

To understand how managerial activism improves firm value, we look at product market and

industry characteristics. Specifically, we examine the relation between managerial activism and

industry adjusted operating performance considering government dependence, product

differentiation, industry concentration and information asymmetry measured by intangible assets.

We report the results on industry adjusted operating performance with instrumental variables

estimation.28 These findings are in Table 7.

Government actions have important consequences for firms that derive a larger portion of

their revenue from the government. Having closer relations with government through lobbying

and coordination with other managers in promoting business policies should be particularly

important for such firms. Thus, we expect the benefits of managerial activism to be more

pronounced for firms that are government dependent. To examine this question, we utilize

government dependence measure from Belo, Gala and Li (2013). This measure determines

industry exposure to government spending shocks using National Income and Products Accounts

(NIPA) tables. We consider firms that are above the 75th percentile of government spending

exposure as government dependent. An indicator variable for government dependence takes a

value of 1 for these firms and is 0 otherwise. Government dependence is then interacted with the

BRT membership variable. In the instrumental variables specification, the additional instrument is

28 The results are comparable when operating performance is not adjusted for industry and when ordinary least squares estimation is employed. These results are available upon request. First stage results are also not reported to conserve space but are available upon request. The F-statistics on the excluded instruments in the first stage are all above the Stock and Yogo (2005) critical values at the 10% level, indicating that the instrument is strong.

21

the interaction of the connection to the BRT firm with the government dependence indicator

((Wooldridge (2012), Chapter 15). The results are in columns (1) and (2) of Table 7. Government

dependent firms have higher return on assets when their CEOs are involved in managerial activism

through the BRT platform. This result points towards the importance of coordination and activism

of CEOs when a firm’s fortunes are more closely tied to government decisions.

Next, we consider product differentiation and industry concentration using measures of

Hoberg and Phillips (2010, 2016). We assign firms that have product similarity less than 25th

percentile as those with differentiated products and create an indicator variable that takes a value

of 1 for these firms. For industry concentration, we assign those that are above 75th percentile as

highly concentrated industries and create an indicator variable of 1 for these firms. These indicator

variables are zero otherwise. The results are in columns (3)-(6) of Table 7. Both ROA and ROE

are higher for firms with activist CEOs in firms with differentiated products. When a company has

differentiated products, there may be more unique information that needs to be conveyed to policy

makers and regulators. Thus, activist CEOs may communicate with policy makers and coordinate

with other CEOs on product specific issues through the BRT platform. We find higher ROA and

ROE in concentrated industries as well. When a firm is operating in a concentrated industry,

benefits of lobbying is more likely to materialize for the involved firms rather than being shared

across a larger group of firms. As a result, investing in managerial activism creates more firm

specific advantages for such firms. Similar argument also holds for differentiated products as the

benefits from activism may be more unique and thus be particularly useful for firms of CEOs

involved in managerial activism.

Finally, we look at intangible assets as a proxy for information asymmetry. Intangible

assets such as R&D, patents and human capital investment are important for firms but do not have

the same visibility as tangible assets. Thus, information transmission through managerial activism

may be more essential for these firms as their operations are not as transparent as those with more

tangible assets. In our analysis, we include an indicator variable that takes a value of 1 for those

with intangible assets above 75th percentile and is zero otherwise. This indicator variable is then

interacted with the BRT membership to examine managerial activism in relation to intangible

assets. The results are in columns (7)-(8) of Table 6. Here, ROE is higher for firms with activist

CEOs when a firm has more intangible assets. Thus, managerial activism is valuable when there

is high information asymmetry due to the characteristics of firm operations. As in government

22

dependence, in specifications that look at product differentiation, industry concentration and

intangible assets, the instruments include the interaction of related variables with the earlier

connection to a BRT member.

Overall, the evidence in this section points to the benefits of managerial activism when

dissemination of information is particularly important such as when firms are government

dependent, have differentiated products or have more intangible assets. Also, managerial activism

is more valuable for involved firms when these benefits are less likely to be shared across a large

number of firms such as with differentiated products or in concentrated industries.

5.4. Managerial Activism Related Events

Managerial activism should add value to a firm when its activist manager follows pro-

business agendas in exerting voice and coordinating with other CEOs through the BRT platform.

So far, our evidence is mostly in line with the pro-business role of managerial activism as observed

in improved operating performance and aligned corporate governance structures. Yet, we also find

higher compensation for activist managers. Here, to advance our understanding further, we look

at two events, one that gives more influence to CEOs in shaping activist agendas in the BRT

platform and the other that shifts power from shareholders to managers and thus increases potential

agency conflicts in the firm.

BRT is a powerful platform where managers coordinate among each other and advocate

business policies through lobbying, lawsuits and public statements. While being a member of this

organization is valuable for a CEO in following activist agendas, selection to the executive

committee of this organization gives more influence to CEOs in spearheading this activism. Hence,

examining market reaction to BRT executive committee announcements is useful in understanding

how managerial activism is perceived in the market: valuable due to pro-business role or

detrimental due to pro-manager role. The reaction may also be muted if the market does not

consider this to be an important event. The results on stock market reaction to BRT executive

committee announcements are in Panel A of Table 8. The BRT executive committee

announcements are retrieved from newswires, which are given in Appendix 4, Table A6. The

evidence in Panel A of Table 8 shows that selection to the executive committee of BRT increases

firm value. Abnormal stock return of these firms at the day of announcement is around 0.3% and

within 5 day window it is around 1.3%.

23

Overall, the evidence points towards the value of managerial activism for the corporate

sector. When a CEO has more influence in shaping activist agendas in the BRT through the

executive committee, policies and lobbying efforts may be geared to be more in line with the needs

and characteristics of these CEOs’ firms. Thus, pro-business agendas of BRT may increase firm

values particularly for firms represented in the BRT executive committee.

A. A Pro-Manager Event

We consider a quasi-natural experiment in examining managerial activism that conflicts

shareholder power. After the approval of the Dodd-Frank Act in July 2010, the SEC announced

the adoption of a Final Rule 14a-11 mandating proxy access at all U.S. public companies to go

into effect in the 2011 proxy season (August 25, 2010).30 However, the Business Roundtable and

the U.S. Chamber of Commerce filed a complaint on September 29, 2010 alleging that these rules

were unlawful under the U.S. Securities laws. On October 4, 2010 SEC unexpectedly decided to

delay the ruling on proxy access. On July 22, 2011 the rule was struck down and SEC shelved its

efforts. The success of the BRT in this lawsuit was unexpected as discussed in detail in Becker,

Bergstresser, Subramanian (2013) and Cohn, Gillan, Hartzell (2016).

We consider the success of BRT in the lawsuit on July 22, 2011 as a successful pro-

manager activism that shifts power from shareholders to managers, and thus weakens corporate

governance. This event allows us to examine the effects of pro-manager activism through an

unexpected shock. We look at how firms with BRT CEOs reacted to this news. The results are in

Table 8, Panel B. On the day of BRT’s victory, stock returns of these firms dropped by around

0.3%. Thus, shareholders pay attention to managerial activism with pro-manager agendas that

work against shareholders.31

5.5 Robustness: Matched Sample

For robustness, we use propensity score matching as an alternative method to instrumental

variables in mitigating endogeneity concerns. To form a matched sample, we follow a similar

30 The SEC initially proposed a shareholder proxy access rule in 2003. Under this rule, shareholders would gain the right to place one or more nominees on a company’s proxy statements if one of these two events were triggered: (1) more than 35 percent of votes had been cast for one or more directors; or (2) a majority vote was received for a shareholder access proposal, proposed by a shareholder group that had held at least one percent of company’s shares for at least one year. By 2005, SEC issued a series of no-action letters permitting companies to omit shareholder proposals based on the proposed rule (Becker, Bergstresser, Subramanian (2013), Cohn, Gillan, Hartzell (2016)). 31 We also look at the time that BRT filed lawsuit (September 29, 2010). Since this event was expected, it does not constitute a natural experiment. We do not observe any stock market reaction as the expectation of this lawsuit should be already incorporated in the markets.

24

methodology as in Brav, Jiang, Partnoy, and Thomas (2008) and Campello, Graham and Harvey

(2010). Within the sample that does not engage in BRT (non BRT) sample, we seek companies

similar in size, industry and growth opportunities, and also have similar CEO characteristics (CEO-

chairman structure, tenure and age). We exclude firms from control sample if a CEO was a member

of the BRT for a year or longer. For each year, we run a propensity score matching model for BRT

membership using size, Fama-French 12 industry indicators and beginning of period Tobin’s q,

CEO age, tenure and CEO-chairman indicator as independent variables. We use 3 nearest

neighbors to the match and satisfy common support assumption to increase matching accuracy.

The common support assumption removes BRT firms for which there is no good match. This

process follows Heckman, Ichimura and Todd (1998), which is employed in Campbello, Graham

and Harvey (2010), Li and Zhao (2006) and Drucker and Puri (2005). We run specification in

Equation (1) using the matched sample.

The results with matched sample are given in Table 9, which are mainly comparable to the

baseline findings. Corporate governance practices of firms with activist managers are similar to

other firms. Activist CEOs have higher total compensation and salary and bonus but similar stock

holdings and option awards to other CEOs in the sample. Firms with activist CEOs have better

operating performance measured as ROE. On the overall, while activist CEOs are paid more,

managerial activism improves operating performance and does not indicate any particular pro-

manager corporate governance structure. These findings support the baseline results and are in line

with the pro-business role of managerial activism.

6. Conclusion

Shareholder activism is going through its golden era and received increased attention in the

literature recently. The other side of this issue, managerial activism, on the other hand, is yet to

be examined. We focus on this important and overlooked mechanism by identifying an

organization of high profile CEOs within the U.S. that engage in managerial activism through

collaborative action at the Business Roundtable.

Managerial activism may be pursued by CEOs for pro-business policies that may create

value in these firms or for pro-manager policies that may increase private benefits and control of

these managers. We find results more in line with the pro-business role of managerial activism.

Specifically, firm performance improves with managerial activism. This improvement is observed

primarily for firms with differentiated products, intangible assets and for firms that operate in

25

concentrated industries and that are government dependent. Thus, the value of managerial

activism is more apparent when there is more unique information to be conveyed about a firm or

when the benefits of activism are more likely to be firm specific. We also find that activist CEOs

have higher total compensation and salary and bonus but similar stock and option holdings as other

CEOs. Furthermore, corporate governance mechanisms of firms involved in managerial activism

do not suggest any particular agency problems. There are more independent directors on the boards

of firms with activist CEOs, indicating closer internal monitoring of activist managers.

We also consider two events in relation to managerial activism. By exploiting a quasi-

natural experiment when Business Roundtable unexpectedly won a lawsuit against the SEC on

proxy access rule, which is a pro-manager policy that decreases the power of shareholders, we find

that shareholders pay attention to pro-manager activism and reacts negatively to such activism in

the market. We also look at market reaction to BRT executive committee announcements, which

increases the influence of CEOs in managerial activism through the BRT platform, and find

positive stock market reaction to these announcements. Thus, managerial activism is considered

to be valuable for the firms of involved CEOs. While on the overall, managerial activism increases

firm value, more in line with the pro-business role of managerial activism, market also pays

attention to specific pro-manager activisms that shift power from shareholders to managers and

reacts unfavorably to such cases.

All in all, managerial activism plays an important role in the corporate sector with a strong

lobbying arm and coordination ability across CEOs. Our results are a step forward in understanding

the role of managerial activism, which suggest that activist managers create value for their firms.

The benefits are more apparent when the coordination between government and the firm is

important due to product and industry characteristics or when the benefits of activism is likely to

be more firm specific such as in government dependent firms, firms that produce differentiated

products, have more intangible assets or operate in concentrated industries.

26

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30

Table 1

Lobbying Activities and Managerial Activism This table provides total lobbying expenses (Panel A) and total number of reports filed (Panel B) by Business Roundtable for each year for the period 2008 - 2014. The data is retrieved from the Center for Responsive Politics. Total Lobbying is the total lobbying expenditures reported by Business Roundtable for each year. Total number of reports is the sum of the number of all reports filed within each issue (including finance and banking issues) for each year. All lobbying bills are considered to include pro-business issues and therefore total lobbying is the same as total pro-business lobbying. Pro-manager lobbying is the total lobbying expenditure by the Business Roundtable in which the lobbying report includes pro-manager issues (details of these issues are in Appendix 3 Table A5). The number of pro-manager issues cited in the reports are given in Panel B.

Panel A Lobbying Expenses (in million dollars)

Year Pro-Manager Lobbying% Pro-Manager Lobbying to

Total Lobbying2008 13.7 86%2009 12.9 81%2010 12.1 87%2011 9.0 61%2012 0.6 4%2013 0.4 2%2014 15.4 86%Total 64.1 58%

16.44715.34318.0475110.1475

13.81615.91915.869

Total Lobbying (Pro-Business)

14.706

Panel BLobbying Reports

YearTotal Number of Reports

(Pro-Business)Reports Citing Finance and

Banking Issues (Pro-Business)Reports Citing Pro-

Manager Issues% Pro-Manager Reports

to Total Reports% Pro-Manager Reports to Finance-Banking Reports

2008 53 17 12 23% 71%2009 51 22 15 29% 68%2010 53 26 16 30% 62%2011 53 28 11 21% 39%2012 58 27 8 14% 30%2013 62 25 6 10% 24%2014 67 23 10 15% 43%Total 397 168 78 20% 46%

31

Table 2 Descriptive Statistics

This table provides sample descriptive statistics for the period 2008-2014. The statistics are shown for CEO characteristics including indicator variables for CEO as a member of BRT, earlier business connections of CEO to a BRT member, CEO-Chairman dual role, CEO as a founder as well as CEO age and tenure. Corporate governance characteristics are board size, percent of independent directors with respect to total directors, entrenchment index (Bebchuk et. al. 2009), KLD corporate governance subindex and institutional holdings. CEO compensation variables are total compensation, salary and bonus, percentage of stock ownership and stock options. All compensation variables except percentage of stock ownership are in natural logarithm. Firm Characteristics are firm size, Tobin's Q, leverage, firm lobbying expenditure and an indicator variable that takes a value of 1 if the firm is lobbying and is zero otherwise, return on assets and return on equity (both unadjusted and adjusted for industry), intangible assets, government dependence, industry concentration and product differentiation measured as in Hoberg and Phillips (2010, 2016). All firm characteristics (except industry concentration, product market differentiation and government dependence variables) are winsorized at 1 percent. Means are also reported for subsample of firms with CEOs that are member of the BRT and that are not member of the BRT. Variable Definitions are described in Appendix 1.

Mean Median Std.Dev 25th Percentile 75th Percentile BRT Non-BRTCEO CharacteristicsManagerial Activism 0.09 0.00 0.29 0.00 0.00 1.00 0.00Connection to Activist Manager 0.02 0.00 0.13 0.00 0.00 0.07 0.01CEO-Chairman 0.51 1.00 0.50 0.00 1.00 0.73 0.49CEO Age 56.35 56.00 7.10 52.00 61.00 56.46 56.34CEO Tenure 10.32 8.00 9.05 4.00 14.00 7.69 10.59CEO Founder 0.10 0.00 0.30 0.00 0.00 0.01 0.11

Corporate Governance CharacteristicsE-Index 3.63 4.00 1.25 3.00 5.00 3.53 3.64Institutional Ownership 0.77 0.78 0.17 0.66 0.88 0.71 0.77Board Size 9.39 9.00 2.37 8.00 11.00 11.27 9.20Independent Directors 0.79 0.80 0.11 0.71 0.89 0.85 0.78Corporate Governance KLD -0.30 0.00 0.73 -1.00 0.00 -0.27 -0.30

CEO CompensationTotal Compensation 8.27 8.35 1.11 7.68 8.93 9.30 8.16Salary and Bonus 6.68 6.75 1.15 6.44 7.00 7.24 6.63Stock Ownership (%) 2.10 5.05 0.55 0.15 1.68 0.52 2.27Stock Options 3.95 5.70 3.59 0.00 7.26 5.64 3.78

Firm CharacteristicsSize 8.08 7.96 1.64 6.85 9.12 10.24 7.85Tobin's Q 1.79 1.44 1.10 1.11 2.04 1.60 1.81Long Term Debt/Assets 0.19 0.16 0.17 0.03 0.29 0.20 0.18Firm Lobbying - Log(Amount) 4.11 0.00 6.08 0.00 11.41 10.53 3.45Firm Lobbying - Indicator 0.32 0.00 0.47 0.00 1.00 0.74 0.28Return on Assets (ROA) 0.05 0.05 0.09 0.02 0.09 0.06 0.05Return on Equity (ROE) 0.10 0.11 0.25 0.05 0.17 0.17 0.09Industry Adjusted ROA 0.00 0.00 0.07 -0.03 0.03 0.00 0.00Industry Adjusted ROE 0.02 0.01 0.29 -0.06 0.12 0.07 0.01Intangible Assets 0.72 0.84 0.28 0.59 0.94 0.72 0.72Industry concentration 0.20 0.14 0.18 0.08 0.25 0.21 0.20Product market differentiation 4.84 2.11 8.31 1.33 4.12 3.46 4.98Government dependence 0.13 0.11 0.11 0.06 0.19 0.14 0.13

Mean

32

Table 3

Determinants of Managerial Activism

This table reports the determinants of managerial activism as measured by CEO membership in the Business Roundtable (BRT). The results are based on OLS estimations. Dependent variable is managerial activism, which is an indicator variable that takes the value of 1 when a CEO is a member of the BRT and is zero otherwise. Variable definitions are in Appendix 1. All estimations include Fama-French 12 industry and year fixed effects. Standard errors are clustered by industry. ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively.

33

Table 4 Corporate Governance

This table presents results on corporate governance in relation to managerial activism. Panel A summarizes OLS estimation results and Panel B provides first and second stage results of instrumental variables estimation. Instrument is an indicator that takes a value of 1 for BRT non-member CEOs who have earlier business connections to serving BRT CEOs, and is zero otherwise. Managerial activism variable takes a value of 1 for CEOs that are members of BRT and is zero otherwise. Control variables are the natural logarithm of total assets, beginning of period Tobin's q, long-term debt to assets, firm lobbying expense (in natural logarithm), CEO age, CEO-Chairman duality indicator, CEO Tenure and CEO Founder indicator. In Panel A, Column 1 looks at entrenchment measured using the entrenchment index of Bebchuk et. al. (2009) (E-Index). Column 2 is on institutional ownership and Column 3 is on board size. Column 4 looks at board independence and Column 5 examines corporate governance using KLD corporate governance subindex. In Panel B, after the first stage results of instrumental variables are reported, corporate governance variables are given in Columns 1-4 for all variables except KLD corporate governance index. The results on KLD index is in column 5 where first stage is provided before the second stage results. Variable definitions are in Appendix 1. All estimations include Fama French 12 industry and year fixed effects. Standard errors are clustered by industry. Robust t-statistics and z-statistics are reported in parentheses in Panels A and B, respectively. ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively. Panel B also provides Cragg-Donald-Wald F statistic.

34

Table 4 - continued

35

Table 5 CEO Compensation

This table presents results on CEO compensation in relation to managerial activism. Panel A summarizes OLS estimation results and Panel B provides first and second stages of instrumental variables estimations. Instrument is an indicator that takes a value of 1 for BRT non-member CEOs who have earlier business connections to serving BRT CEOs, and is zero otherwise. Managerial activism variable takes a value of 1 for CEOs that are members of BRT and is zero otherwise. Control variables are the natural logarithm of total assets, beginning of period Tobin's q, long-term debt to assets, firm lobbying expense (in natural logarithm), CEO age, CEO-Chairman duality indicator, CEO Tenure and CEO Founder indicator. In Panel A, Column 1 is on total compensation. Column 2 reports salary and bonus. Columns 3 and 4 are CEO stock holdings as a percentage of total holdings and option awards. In Panel B, first stage of instrumental variables estimations are reported first, and Columns 1-4 are CEO compensation variables. All compensation variables except CEO stock ownership as percentage of total stock are in natural logarithm. Variable definitions are in Appendix 1. All estimations include Fama French 12 industry and year fixed effects. Standard errors are clustered by industry. Robust t-statistics (z-statistics) are reported in parentheses under Panel A (Panel B). ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively. Panel B also provides Cragg-Donald-Wald F statistic.

(1) (2) (4) (5)VARIABLES Total compensation Bonus and Salary % Stock ownership Option awards

Managerial Activism 0.156 0.221* 0.140 0.198(1.475) (2.190) (0.929) (0.743)

Size 0.342*** 0.109** -0.503*** 0.522***(10.828) (2.839) (-14.039) (8.919)

Tobin's Q 0.099** -0.042 -0.055 0.242*(2.675) (-1.372) (-0.813) (1.802)

Long Term Debt/Assets 0.553* 0.124 -1.347** 0.027(2.005) (0.823) (-2.357) (0.066)

Firm Lobbying 0.009 0.005 0.009 0.033**(1.461) (1.316) (0.548) (2.284)

CEO Age 0.000 0.006 0.009 -0.014(0.067) (1.013) (0.417) (-1.323)

CEO Chairman 0.137*** 0.078 0.670*** 0.277(6.204) (1.392) (3.369) (1.632)

CEO Tenure -0.012** -0.002 0.172*** -0.044***(-2.749) (-0.334) (7.718) (-3.953)

CEO Founder -0.102* -0.307* 3.367*** -0.196(-2.091) (-1.976) (3.616) (-0.607)

Observations 9,002 9,002 9,002 9,002R-squared 0.344 0.084 0.299 0.164

Panel A: OLS

36

Table 5 - continued

First Stage (1) (2) (3) (4)VARIABLES BR Member Total compensation Bonus and Salary % Stock ownership Option awards

Connection to Activist Mngr 0.162**(2.399)

Managerial Activism 1.388** 1.565* -1.861 2.980(2.081) (1.908) (-1.074) (1.300)

Size 0.072*** 0.252*** 0.011 -0.357** 0.318*(7.657) (4.098) (0.170) (-2.546) (1.666)

Tobin's Q -0.003 0.103*** -0.038 -0.061 0.249**(-0.437) (3.293) (-1.339) (-0.960) (2.080)

Long Term Debt/Assets -0.104 0.678*** 0.260 -1.550*** 0.308(-1.430) (2.705) (1.429) (-2.920) (0.903)

Firm Lobbying 0.007*** 0.000 -0.004 0.023 0.014(4.292) (0.066) (-0.543) (0.840) (0.778)

CEO Age -0.001** 0.002 0.007 0.007 -0.011(-1.990) (0.640) (1.345) (0.344) (-1.233)

CEO Chairman 0.058*** 0.065** -0.001 0.787*** 0.115(11.563) (2.376) (-0.012) (3.558) (0.595)

CEO Tenure -0.002** -0.010** -0.000 0.168*** -0.040***(-2.510) (-2.120) (-0.001) (7.685) (-3.035)

CEO Founder -0.012 -0.087* -0.290* 3.342*** -0.162(-1.308) (-1.676) (-1.936) (3.844) (-0.521)

Observations 9,002 9,002 9,002 9,002 9,002R-squared 0.266 -0.002 0.289 0.126IV-F stat 61.76

Panel B: Instrumental Variables

37

Table 6 Operating Performance

This table reports the relationship between firm performance and managerial activism. Panel A gives OLS estimation results and Panel B provides first and second stages of instrumental variables estimation. Instrument is an indicator that takes a value of 1 for BRT non-member CEOs who have earlier business connections to serving BRT CEOs, and is zero otherwise. Managerial activism variable takes a value of 1 for CEOs that are members of BRT and is zero otherwise. Control variables are the natural logarithm of total assets, beginning of period Tobin's q, long-term debt to assets, firm lobbying expense (in natural logarithm), CEO age, CEO-Chairman duality indicator, CEO Tenure and CEO Founder indicator. Columns 1 and 2 report results on return on asset (ROA) and return on equity (ROE). In columns 3 and 4, ROA and ROE are adjusted for industry by subtracting the industry mean values of these measures from the firm level values. Variable definitions are in Appendix 1. All estimations include Fama French 12 industry and year fixed effects. Standard errors are clustered by industry. Robust t-statistics and z-statistics are reported in parentheses in Panels A and B, respectively. ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively. Panel B also provides Cragg-Donald-Wald F statistic.

(1) (2) (3) (4)VARIABLES ROA ROE Ind. Adj. ROA Ind. Adj. ROE

Managerial Activism -0.001 0.035*** -0.000 0.036**(-0.101) (3.168) (-0.015) (2.660)

Size 0.006 0.021** 0.005 0.021**(1.395) (2.278) (1.380) (2.390)

Tobin's Q 0.041*** 0.062*** 0.039*** 0.062***(8.684) (8.247) (10.778) (8.310)

Long Term Debt/Assets -0.060* -0.074 -0.052** -0.055(-2.182) (-1.325) (-2.202) (-0.901)

Firm Lobbying -0.000 -0.000 -0.000 -0.000(-0.864) (-0.051) (-0.880) (-0.169)

CEO Age -0.000 -0.000 -0.000 -0.000(-0.400) (-0.504) (-0.088) (-0.709)

CEO Chairman 0.002 -0.000 0.002 0.002(0.984) (-0.042) (0.856) (0.312)

CEO Tenure 0.000 0.000 0.000 0.000(1.166) (0.774) (1.226) (0.475)

CEO Founder -0.012 -0.019 -0.012 -0.014(-1.371) (-1.304) (-1.506) (-0.849)

Observations 9,002 9,002 9,002 9,002R-squared 0.312 0.106 0.323 0.127Robust t-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Panel A: OLS

38

Table 6 – continued

First Stage (1) (2) (3) (4)VARIABLES BR Member ROA ROE Ind. Adj. ROA Ind. Adj. ROE

Connection to Activist Mngr 0.162**(2.399)

Managerial Activism 0.039 0.321*** 0.044* 0.376***(1.540) (2.684) (1.814) (2.683)

Size 0.072*** 0.003 -0.000 0.002 -0.004(7.657) (0.801) (-0.024) (0.593) (-0.216)

Tobin's Q -0.003 0.041*** 0.063*** 0.040*** 0.063***(-0.437) (9.248) (9.178) (11.603) (8.999)

Long Term Debt/Assets -0.104 -0.056** -0.045 -0.047** -0.020(-1.430) (-2.291) (-1.041) (-2.314) (-0.432)

Firm Lobbying 0.007*** -0.001 -0.002** -0.001 -0.003***(4.292) (-1.452) (-2.385) (-1.633) (-2.732)

CEO Age -0.001** -0.000 0.000 0.000 0.000(-1.990) (-0.056) (0.122) (0.336) (0.079)

CEO Chairman 0.058*** 0.000 -0.017** -0.001 -0.018*(11.563) (0.054) (-2.201) (-0.193) (-1.870)

CEO Tenure -0.002** 0.000 0.001 0.000 0.001(-2.510) (1.330) (1.423) (1.435) (1.194)

CEO Founder -0.012 -0.011 -0.015 -0.012 -0.010(-1.308) (-1.425) (-1.117) (-1.565) (-0.616)

Observations 9,002 9,002 9,002 9,002 9,002R-squared 0.299 0.022 0.300 0.038IV F stat 61.76Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1

Panel B: Instrumental Variables

39

Table 7 Product Market Characteristics

This table reports results on firm performance in relation to managerial activism considering product market characteristics. Product market characteristics considered are government dependence, product differentiation, industry concentration and intangible assets. Government dependence is calculated as in Belo, Gala and Li (2013), which determines industry exposure to government spending shocks using National Income and Products Accounts (NIPA) tables. Product differentiation and industry concentration are calculated using measures from Hoberg and Phillips (2010, 2016). Firms that are above the 75th percentile of government spending exposure, industry concentration and intangible assets are considered as high government dependence, high industry concentration and high intangible assets. For product differentiation, we use 25th percentile of product similarity measure of Hoberg and Phillips (2010) and those below the 25th percentile as high product differentiation. For these variables, indicator variables take a value of 1 if they are in the assigned category and are zero otherwise. Variable definitions are in Appendix 1. Results are reported for the instrumental variables estimations. Instruments are an indicator that takes a value of 1 for BRT non-member CEOs who have earlier business connections to serving BRT CEOs, and is zero otherwise, and the interaction of this instrument with the product market category indicators stated above. Managerial activism variable takes a value of 1 for CEOs that are members of BRT and is zero otherwise. Control variables are the natural logarithm of total assets, beginning of period Tobin's q, long-term debt to assets, firm lobbying expense (in natural logarithm), CEO age, CEO-Chairman duality indicator, CEO Tenure and CEO Founder indicator. All estimations include Fama French 12 industry and year fixed effects. Standard errors are clustered by industry. Cragg-Donald-Wald F statistic is reported. Robust t-statistics are in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively.

40

Table 8 Stock Market Reaction to BRT Events

The cumulative abnormal returns (CARs) for firms that are members of Business Roundtable (BRT) are provided for two events. Panel A examines the BRT Executive Committee announcements during the sample period 2008-2014. Panel B looks at the time BRT won the lawsuit against SEC on July 22, 2011 regarding proxy access rule. CARs are based on Fama French 3 factor model, market model and market adjusted model. CARs are calculated for 6 different event windows. The symbols *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.

Panel A: BRT Executive Committee Announcement

FF-3 factor Market Model Market-Adjusted Model

Day 0 0.30%* 0.29%* 0.29%* (1.960) (1.816) (1.656)

(-1,1) 0.76%*** 0.95%*** 0.93%*** (2.621) (2.508) (2.628)

(-1,2) 1.16%*** 1.33%*** 1.25%*** (3.713) (3.081) (2.620)

(-2,2) 1.29%*** 1.38%*** 1.45%*** (2.918) (3.424) (3.061)

(-3,3) 0.32% 0.58% 0.77% (0.244) (0.987) (1.586)

(-5,5) -0.38% -0.02% 0.13% (-1.084) (-0.357) (0.794)

Panel B: Proxy Access Rule (July 22, 2011)

FF-3 factor Market Model Market-Adjusted Model

Day 0 -0.28%** -0.28%** -0.26%** (-2.457) (-2.687) (-2.458)

(-1,1) -0.26%* -0.29% -0.18% (-1.701) (-1.512) (-1.085)

(-1,2) -0.45%** -0.49%** -0.37% (-2.250) (-2.061) (-1.632)

(-2,2) -0.31%* -0.36% -0.22% (-1.761) (-1.441) (-0.972)

(-3,3) -0.85%** -0.90%** -0.77%** (-2.565) (-2.521) (-2.241)

(-5,5) -1.42%*** -1.44%*** -1.32%*** (-3.122) (-3.180) (-3.025)

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Table 9 Robustness using Matched Sample

This table reports the results on corporate governance (Panel A), CEO compensation (Panel B) and and operating firm performance (Panel C) in relation to managerial activism using matched sample. A propensity score matching is used to match firms with activist CEOs (CEOs that are involved in the Business Roundtable) with other firms using firm size, beginning of period Tobin's q, industry, CEO-chairman duality indicator, CEO tenure and CEO age. Managerial activism indicator takes a value of one for CEOs that are members of BRT and is 0 for others. Control variables are the natural logarithm of total assets, beginning of period Tobin's q, long-term debt to assets, CEO age, CEO Chairman indicator, CEO Tenure and CEO Founder indicator. Panel A is on corporate governance. In this Panel, Column 1 looks at entrenchment, measured using the entrenchment index of Bebchuk et. al. (2009). Column 2 is on institutional ownership, Column 3 is on board size, Column 4 is on board independence and Column 5 examines corporate governance using KLD corporate governance subindex. Panel B is on CEO Compensation. In this panel, column 1 measures total compensation, column 2 is on bonus and salary, and columns 3 and 4 are on stock ownership and options awards, respectively. Compensation variables except stock ownership are in natural logarithms. Panel C is on operating performance. In this panel, Columns 1 and 2 reports results on return on asset (ROA) and return on equity (ROE), and in columns 3 and 4, ROA and ROE are adjusted for industry by subtracting the industry mean values of these measures from the firm level values. Variable definitions are in Appendix 1. All estimations include Fama French 12 industry and year fixed effects. Standard errors are clustered by industry. Robust t-statistics are reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10%, respectively.

(1) (2) (3) (4) (5)E-Index Inst'l Own. Board Size Board Indep. Corp. Govn.

Managerial Activism 0.0817 -0.006 0.185 0.008 0.041(0.789) (-0.496) (0.728) (1.182) (0.635)

Size -0.270*** -0.042*** 0.746*** 0.010** 0.002(-5.748) (-9.672) (8.404) (2.847) (0.065)

Tobin's Q -0.131** -0.016** -0.067 0.001 0.008(-2.240) (-2.203) (-0.667) (0.251) (0.182)

Long Term Debt/Assets -0.0816 0.095** -0.437 0.011 -0.297(-0.264) (2.576) (-0.633) (0.487) (-1.059)

Firm Lobbying 0.0125 0.001 -0.007 0.001* -0.000(1.405) (0.897) (-0.457) (2.194) (-0.034)

CEO Age -0.00197 -0.002** 0.022* -0.001 -0.003(-0.225) (-2.653) (1.840) (-0.839) (-0.886)

CEO Chairman 0.129 0.007 -0.343** 0.048*** 0.009(1.555) (0.915) (-2.548) (5.114) (0.139)

CEO Tenure -0.00412 0.001 0.010 -0.003*** 0.003(-0.434) (1.250) (0.858) (-4.245) (0.815)

CEO Founder 0.0471 -0.008 -0.693 0.005 -0.132(0.153) (-0.305) (-1.461) (0.231) (-1.094)

Observations 1,899 1,899 1,899 1,899 1,574R-squared 0.168 0.351 0.298 0.159 0.137

Panel A: Corporate Governance

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Table 9 - continued

(1) (2) (3) (4)Total compensation Bonus and Salary % Stock ownership Option awards

Managerial Activism 0.381** 0.346* -0.393 0.594**(3.070) (1.943) (-1.578) (2.771)

Size 0.157** -0.038 0.093 0.124(2.381) (-0.357) (0.619) (0.846)

Tobin's Q -0.099 -0.283 0.290 0.058(-0.497) (-1.413) (1.039) (0.233)

Long Term Debt/Assets 0.266 -0.056 0.391 -0.648(0.582) (-0.143) (0.543) (-0.486)

Firm Lobbying 0.008 0.005 -0.023 0.052**(1.249) (0.587) (-1.074) (2.820)

CEO Age -0.000 0.011 0.003 -0.030(-0.039) (1.476) (0.111) (-1.117)

CEO Chairman 0.253* 0.196 -0.156 0.590(1.885) (1.389) (-0.927) (1.672)

CEO Tenure -0.018 -0.011 0.147*** -0.036**(-1.791) (-1.498) (4.725) (-2.351)

CEO Founder 0.176 -0.863 4.558** 0.601(0.377) (-1.513) (2.646) (0.508)

Observations 1,899 1,899 1,899 1,899R-squared 0.148 0.110 0.329 0.105

Panel B: CEO Compensation

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Table 9 - continued

(1) (2) (3) (4)VARIABLES ROA ROE Ind. Adj. ROA Ind. Adj. ROE

Managerial Activism 0.004 0.033** 0.00458 0.031**(1.053) (2.524) (1.208) (2.462)

Size 0.002 0.020*** 0.00251 0.022***(0.823) (4.119) (0.886) (3.608)

Tobin's Q 0.051*** 0.093*** 0.0481*** 0.088***(13.119) (5.847) (14.95) (5.013)

Long Term Debt/Assets -0.059** -0.032 -0.0577** -0.003(-2.765) (-0.285) (-2.923) (-0.030)

Firm Lobbying -0.000* -0.001 -0.000515* -0.001(-2.140) (-1.003) (-2.189) (-0.738)

CEO Age 0.001*** 0.002 0.000611** 0.001(3.346) (1.605) (2.781) (1.210)

CEO Chairman -0.002 0.006 -0.000706 0.001(-0.381) (0.305) (-0.153) (0.044)

CEO Tenure -0.000 0.000 -2.70e-05 0.001(-0.164) (0.383) (-0.105) (0.734)

CEO Founder -0.013 -0.049 -0.0157 -0.058(-0.929) (-1.100) (-1.203) (-1.350)

Observations 1,899 1,899 1,899 1,899R-squared 0.475 0.130 0.432 0.142

Panel C: Operating Performance

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Appendix 1

Table A1 – Variable Definitions Variable Definition

Board Size The total number of directors of a company within a given year. Source: RiskMetrics.

CEO Chairman Duality

Indicator variable that takes a value of 1 if the CEO is also the Chairman of the board. Source: RiskMetrics

CEO Founder An indicator variable equal to one if a CEO was the CEO five years prior to the IPO date reported by Compustat or the first date when the firm appears in CRSP, and 0 otherwise as in as in Li, Lu, Phillips (2014).Source: Compustat, CRSP, ISS.

CEO Option Awards

Natural logarithm of the value of option-related awards (e.g. options, stock appreciation rights, and other instruments with option-like features). Valuation is based upon the value of options that vested during the year as detailed in FAS123R. The reported value is the cost recorded by the company on its income statement as well as any amounts that were capitalized on the balance sheet for the fiscal year. Source: Execucomp.

CEO Salary and Bonus

Natural logarithim of total current compensation of CEO (Salary + Bonus). Source: Execucomp.

CEO Stock Ownership Percentage of total shares owned by CEO. Source: Execucomp

CEO Tenure Number of years CEO occupies the CEO position. Source: RiskMetrics Connection to Activist Manager

An indicator variable which takes a value of one1 if the CEO of firm i at time t has a prior employment connection (before time t) with a CEO serving at the BRT at time t and 0 otherwise. Source: Boardex.

Corporate Governance Index - KLD

An index variable developed by adding indicator variables of 1s for respective strengths and adding indicator variables of -1s for weaknesses. Strength indicators include limited compensation, ownership strength, transparency strength, and political accountability strength whereas concerns include the exact opposite of these indicators such as high compensation and transparency concern. Source: KLD Database.

E-index

The sum of indicators for classified board, limits to shareholder bylaw amendments, poison pill, golden parachute and supermajority requirements for mergers and charter amendments (based on Bebchuck, Cohen, Ferrell, 2009). Source: RiskMetrics

Firm Lobbying - Amount

Natural logarithm of total lobbying expenseexpenditure for each year. Source: US Senate Lobbying Disclosure Act Dataset.

Firm Lobbying - Indicator

An indicator variable that takes a value of 1 if a firm is lobbying in a given year and 0 otherwise.

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Table A1 – Variable Definitions (Cont’d) Variable Definition

Government Dependence

Industry exposure to government spending index created by Belo, Gala and Li (2013), which determines industry exposure to government spending shocks using National Income and Products Accounts (NIPA) tables.

Industry adjusted ROA

Net income (t)/ Book Value of Assets (t-1) - mean of industry ROA for that specific year. Industries are formed based on Fama French 12 industry groups. Source: Compustat.

Industry Adjusted ROE

Net income/common ordinary equity (total) - mean of industry ROE for that specific year. Industries are formed based on Fama French 12 industry groups. Source: Compustat.

Industry Concentration

Industry concentration measure (tnic3hhi) of Hoberg and Phillips (2016). The Herfindahl Hirschman Index industry concentration measure is calculated using the sum of squared market shares calculated based on firm sales. This measure is based on Text Based Industry Network (TNIC) classification and is retrieved from annual reports using web crawling and text parsing algorithms.

Institutional Ownership

Total institutional ownership as a percent of total shares outstanding. Source: Thomson 13F Database.

Intangible Assets 1-(Plant, Property and Equipment/Total Assets). Source: Compustat.

Long Term Debt/Assets Long Term debt (t)/Total Assets (t). Source: Compustat.

Managerial Activism

An indicator variable equal to 1 if a CEO is a member of Business Roundtable during a given year and zero otherwise.

Percent of Independent Directors

The percent of directors that are marked as independent (as a percent of total board size). Source: RiskMetrics.

Product Market Differentiation

Product differentiation measure (tnic3tsimm) by Hoberg and Phillips (2010). High product differentiation is defined as below 25th percentile of product similarity measure.

Return on Assets (ROA) Net income (t)/ Book Value of Assets (t-1). Source: Compustat.

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Table A1 – Variable Definitions (Cont’d)

Variable Definition

Return on Equity (ROE) Net income/common ordinary equity (total). Source: Compustat.

Size Natural logarithm of total assets. Source: Compustat

Tobin’s Q Beginning of period Market value of assets/Book value of assets. Market value of assets is defined as book value of assets + market value of equity - book value of equity. Source: Compustat.

Total CEO Compensation Natural logarithm of tdc1 where tdc1=salary+bonus+restricted stock + stock options + l.t. incentive payouts + others. Source: Execucomp.

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Appendix 2 Industry Composition by Fama French 12 Industry Classification

Table A2 – Industry Composition

Industry Distribution - Fama-French 12 Industries Industry

Code Industry Name Percentage 1 Consumer Non Durables -- Food, Tobacco, Textiles, Apparel, Leather, Toys 5.81 2 Consumer Durables -- Cars, TVs, Furniture, Household Appliances 2.43 3 Manufacturing -- Machinery, Trucks, Planes, Off Furn, Paper, Com Printing 11.54 4 Oil, Gas, and Coal Extraction and Products 4.18 5 Chemicals and Allied Products 3.12 6 Business Equipment -- Computers, Software, and Electronic Equipment 17.12 7 Telephone and Television Transmission 1.56 8 Utilities 4.56 9 Wholesale, Retail, and Some Services (Laundries, Repair Shops) 10.86

10 Healthcare, Medical Equipment, and Drugs 7.35 11 Money Finance 19.76

12 Other -- Mines, Construction, Building Material, Transportation, Hotels, Business Services, Entertainment 11.71

Total 100

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Appendix 3 Lobbying Issues – Business Roundtable

Table A3

Top 5 General Issues Lobbied Based on the Number of Lobbying Reports Filed

Year Issue Number of Reports 2008 Taxes/Trade 26 2008 Health Issues 23 2008 Education 14 2008 Finance/ Environment & Superfund/Energy & Nuclear Power 12 2008 Banking/Medicare-Medicaid 8 2009 Taxes 26 2009 Health Issues 25 2009 Environment & Superfund 17 2009 Energy & Nuclear Power 16 2009 Finance 14 2010 Taxes 26 2010 Health Issues 21 2010 Finance 18 2010 Energy & Nuclear Power 17 2010 Trade 15 2011 Taxes 25 2011 Finance 20 2011 Trade 18 2011 Energy & Nuclear Power 17 2011 Health Issues 16 2012 Taxes 27 2012 Finance/Energy & Nuclear Power 17 2012 Health Issues/Trade 16 2012 Banking 14 2012 Computers & Information Tech 12 2013 Taxes 28 2013 Trade 20 2013 Finance 19 2013 Energy & Nuclear Power/ Health Issues 17 2013 Homeland Security 12 2014 Taxes 28 2014 Trade 24 2014 Immigration 19 2014 Health Issues/Energy & Nuclear Power 18 2014 Finance 16

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Appendix 3 - continued

Table A4 Top 5 Finance and Banking Issues Based on Lobbying Reports Filed

Year Issue Number of Reports Filed

2008 Shareholder vote on executive compensation 12 2008 Proxy access issues/ SEC proposal on proxy rules 8 2008 Emergency economic stabilization act 6 2008 SEC proposal on shareholder resolutions 3 2008 Alternative minimum tax relief act 2

2009 Shareholder Bill of Rights Act of 2009 9 2009 Shareholder Empowerment act 9 2009 OTC derivatives markets Act and derivatives related issues 5 2009 Corporate governance issues regarding SEC regulations on broker vote in

certain elections and on proxy access 3 2009 A bill to provide shareholders with enhanced authority over the nomination,

election, and compensation of public company executives. 3

2010 Restoring American Financial Stability act of 2010 14 2010 Dodd Frank Wall Street Reform and Consumer Protection Act 10 2010 Shareholder Bill of Rights act of 2009 12 2010 Financial institution compensation fairness act of 2009 5 2010 Issues related to executive compensation shareholder votes and proxy access 5

2011 Dodd Frank Wall Street Reform and Consumer Protection Act 16 2011 Rule No: 7 derivatives legislation related 8 2011 Business risk mitigation and price stabilization act of 2011 6 2011 Issues relating to executive compensation shareholder votes 4 2011 Treatment of erisa plans under the swaps and and derivatives provisions 4

2012 H.R. 2779, To exempt inter-affiliate swaps from certain regulatory

requirements put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act 12

2012 Business risk mitigation and price stabilization act of 2011 11 2012 Volker Rule 5 2012 To repeal a provision of the Dodd-Frank Wall Street Reform and Consumer

Protection Act prohibiting any Federal bailout of swap dealers or participants; 5

2012 Proposals regarding the treatment of ERISA plans under the swaps and derivatives provisions of P.L. 111-203, Dodd-Frank Wall Street Reform and Consumer Protection Act. 4 H.R. 1062- Burdensome Data Collection Relief Act 4

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Table A4 - Continued

Year Issue Number of Reports Filed

2013 Business risk mitigation and price stabilization act of 2011 12 2013 Exemption for inter-affiliate swaps from certain regulatory requirements 6 2013 A bill to provide end user exemptions from certain provisions of the

Commodity Exchange Act and the Securities Exchange Act of 1934. 6 2013 Issues relating to executive compensation, shareholder votes and proxy

access. 4 2013 Proposals regarding the treatment of ERISA plans under the swaps and

derivatives provisions of P.L. 111-203, Dodd-Frank Wall Street Reform and Consumer Protection Act. 4

2014 S.888 A bill to provide end user exemptions from certain provisions of the Commodity Exchange Act and the Securities Exchange Act of 1934 14

2014 677. Business risk mitigation and price stabilization act of 2011 11 2014 Issues relating to proxy advisory firms 7 2014 Shareholder communications 6 2014 Issues relating to the SECs proposed CEO Pay Ratio 4

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Appendix 3 - continued

Table A5 Pro-Manager Issues cited in Business Roundtable Lobbying Reports

2008 H.R. 1257, Shareholder Vote on Executive Compensation Act; all provisions S. 1181, Shareholder Vote on Executive Compensation Act; all provisions SEC Proposal on Proxy Rules 14a-8; all provisions Proxy Access Issues Executive Compensation Issues 2009 H.R. 2861, Shareholder Empowerment Act of 2009; all provisions S. 1074, Shareholder Bill of Rights Act of 2009; all provisions H.R. 3269, To amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions; all provisions Proxy access issues. Issues relating to executive compensation Issues relating to shareholder votes H.R. 3817, the Investor Protection Act of 2009, including the Waters/Peters amendment granting authority to the SEC to issue rules on proxy access Corporate governance legislation, including executive compensation - HR 3269 Financial reregulation, including corporate governance and compensation issues - S 1074, A bill to provide shareholders with enhanced authority over the nomination, election, and compensation of public company executives 2010 H.R. 2861, Shareholder Empowerment Act of 2009; all provisions S. 1074, Shareholder Bill of Rights Act of 2009; all provisions PL 111-203, The Restoring American Financial Stability Act of 2010; provisions relating to implementation, derivatives and corporate governance H.R. 3269, Corporate and Financial Institution Compensation Fairness Act of 2009; all provisions Corporate governance issues H.R. 3817, the Investor Protection Act of 2009, including the Waters/Peters amendment granting authority to the SEC to issue rules on proxy access. Issues relating to proxy access Issues relating to executive compensation Issues relating to shareholder votes Financial services regulation, including compensation issues - HR 4173

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2011 PL 111-203, The Restoring American Financial Stability Act of 2010; provisions relating to implementation, derivatives and corporate governance H.R. 1062, Burdensome Data Collection Relief Act; all provisions Issues relating to proxy access Issues relating to executive compensation Issues relating to shareholder votes SEC proxy proposals - Administrative actions re this issue. Corporate governance issues, including international accounting standards, proxy process, and labor issues Issues related to clawback provisions Issues related to whistle-blower protections 2012 Issues relating to proxy access Issues relating to executive compensation Issues relating to shareholder votes Issues related to clawback provisions Issues related to whistle-blower protections Corporate governance issues, including international accounting standards, proxy process, and labor issues Burdensome Data Collection Relief Act. S. 888 2013 Issues relating to proxy access Issues relating to executive compensation Issues relating to shareholder votes Issues relating to shareholder communications Issues relating to CEO Pay Ratio rule Issues related to clawback provisions Issues related to whistle-blower protections Corporate governance issues, including international accounting standards, proxy process, and labor issues Burdensome Data Collection Relief Act. S. 888 2014 Issues relating to proxy advisory firms Issues relating to shareholder communications Issues relating to the SECs proposed CEO Pay Ratio rule Issues relating to executive compensation Issues relating to shareholder votes Burdensome Data Collection Relief Act. S. 888

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Appendix 4 – Table A6

BRT Executive Committee Member Announcements

Company CEO Announcement to Join BRT

Executive Committee The McGraw-Hill Companies Harold McGraw Ill 8/9/06 Accenture William D. Green 2/8/08 Eastman Kodak Company Antonio Perez 6/3/09 Verizon Communications Ivan G Seidenberg 6/11/09 Eaton corporation Alexander M. Cutler 6/25/09 American Electric Power Company Michael G Morris 11/5/09 MasterCard Worldwide Ajay Banga 11/9/10 Procter & Gamble Company Robert A. McDonald 6/16/11 Boeing Company W. James McNerney Jr. 6/16/11 Honeywell International, Inc. David M. Cote 6/16/11 Dow Chemical Company Andrew N. Liveris 6/16/11 Caterpillar Inc. Douglas R. Oberhelman 10/10/11 Exxon Mobil Corporation Rex W. Tillerson 10/10/11 AT&T Inc . Randall L. Stephenson 3/22/12 Xerox Corporation Ursula M. Burns 3/19/14

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Appendix 5 – Table A7 Descriptive Statistics for the Matched Sample

This table provides descriptive statistics for the matched sample between 2008 and 2014. The statistics are shown for CEO characteristics including whether the CEO is a member of BRT or not, whether the CEO had a connection to a BRT member, and the CEO's tenure, status of CEO-Chairman dual role and whether the current CEO was also the Founder; Corporate governance characteristics including the board size and the percent of independent directors and two different measures of entrenchment using the E-Index and the KLD Corporate Governance subindex; CEO compensation including total compensation and salary and bonus, which are measured as natural logarithm of these variables, and stock ownership and stock options; and Firm Characteristics including size, Tobin's Q, leverage, firm lobbying amount and an indicator that takes a value of 1 if there is lobbying and 0 otherwise, return on assets and return on equity, both unadjusted and adjusted for industry, intangible assets, government dependence, industry concentration and product differentiation measured as in Hoberg and Phillips (2010, 2016). All Firm characteristics (except Industry concentration, product market differentiation and government dependence variables) are winsorized at 1 percent. Separate sample means are also reported for firms with CEOs that are member of the BRT and that are not member of the BRT. A propensity score matching is used to match firms with activist CEOs (CEOs that are involved in the Business Roundtable) with other firms using size, beginning of period Tobin's q, industry, CEO-chairman duality indicator, CEO tenure and CEO age. Variable Definitions are described in Appendix I.

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