A cure for owner impotence: Analysis of Hermes equity ownership services for strengthening shareholder influence

Kent Harrison S√łgaard

Student thesis: Master thesis


Modern public company ownership is dominated by institutional investors who manage the wealth of millions of individuals saving for retirement. This paper discusses the conflicting interests of investors and savers and why, as shareholders, institutional investors are weak owners. The resulting lax oversight of corporate executives by institutional investors prevents the maximisation of wealth for savers over the long-term. To mitigate the problem of weak company owners, use of a specialist advisory firm as a third party shareholder activist is studied by testing the influence of Hermes Equity Ownership Services (HEOS) on corporate governance, including company environmental policy. Evidence is found that HEOS creates larger changes in the corporate governance structures of companies in tests against a paired sample. This indicates that, on average, HEOS exercises more ownership rights than institutional investors do. HEOS does this by advocating for long-term strategic agendas with corporate executives and the incorporation of environmental information in the investment process. Tests performed on company environmental metrics indicate that HEOS increases the amount of environmental disclosure, which facilitates the evaluation of long-term risks. No evidence is found to support the contention that HEOS reduces the societal costs of environmentally damaging behaviour that are transferred to the millions of individuals represented by institutional investors. This last finding, however, is thought to be largely attributable to the short time frame of the tested data. Subsequently, statistical analyses also reveal the inappropriateness of using rigid models for evaluating the corporate governance structure of individual companies. This result serves to explain the inconsistent results of previous studies that attempt to prove a connection between good corporate governance and increased financial returns.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2011
Number of pages97