Affecting Companies' Behavior Towards Sustainability: The Role of Activist Shareholders in Germany

This paper explores how companies respond to conflicting institutional demands. A small and still increasing group of activists, pension funds and other institutional investors tries to move companies to more responsible actions regarding social, environmental, and ethical issues. Shareholder activism for sustainability is one instrument on the financial markets among others to gain attention for such issues, because the financial markets cannot ignore the demand for a sustainable society—even less after the last severe crises. Shareholders are, along with other stakeholders, one part of the organizational environment. In recent years activism or engagement of investors has become even more important for addressing ecological and social sustainability since globalized financial markets and multinational corporations are less affected by national regulations and supervisory efforts. While companies need to gain profit, shareholder activists tackle ecological and social misbehavior within companies and question the purpose and the role of companies within society. Shareholder activism can have different shapes; it includes proposal submission, proxy voting, and direct contact and dialogue with management. All these strategies are used to change corporate behavior.

According to institutional theory, shareholder activism is seen as a legitimation contest for corporations which demands (behavioral or discursive) strategic responses of targeted organizations. Shareholder activism requests company’s legitimation and demand behavioral or discursive changes. Organizations gain the necessary legitimacy of shareholders and the organizational environment by adhering to emerging demands of the organizational environment. The submission of proxy proposals questions the legitimacy of corporate behavior and management decisions. The targeted organization responds to challenging demands in order to maintain their legitimacy.

While many studies try to measure performance effects and the success of activist shareholders, I take a closer look on strategic responses of corporations to multiple demands from their organizational environment: What kind of strategic responses are used by organizations to respond to demands of shareholder activists for sustainability? In order to analyze these strategic responses I conducted twenty interviews with mainly German speaking shareholder activists and Investor Relations (IR) departments of German companies. These interviews were analyzed using computer-assisted qualitative content analysis. The analysis showed a great discrepancy between the different perceptions of shareholders’ influence on companies. While IR departments seem to neglect almost any kind of influence by shareholders, activist shareholders claim at least a certain influence on businesses. In this paper I demonstrate and try to explain the different perceptions on shareholders’ influence. The results reflect the role of the institutional setting of German companies and the still reluctant shareholder culture in Germany on corporate responses to conflicting demands.