What is a Shareholder Activist?

What is a Shareholder Activist?

A shareholder activist is a person who attempts to use their rights as a shareholder of a publicly-traded corporation to bring about change within or for the corporation.

Shareholder activists are shareholders of companies who bring about change within or for a corporation.

These changes span a vast range, from environmental concerns to governance to profit distribution to the internal culture and business model of a company.

Shareholder Activist Explained

A business may be a target for shareholder activism if it reports high costs, suffers mismanagement, or if a shareholder believes that a company could become more profitable if it is run as a private company. For an investor to launch a successful campaign, they do not need to hold a majority stake in the target company. Instead, they can acquire 10% or less of the outstanding shares to have a voice on the board.

Investor types that typically choose to act as shareholder activists include hedge funds, private equity firms, and high-net-worth individuals. Such individuals buy shares of less effective or mismanaged companies from the open market to increase their stake to a level that gives them control or a board seat.

How Shareholder Activism Works

Broadly speaking, shareholder activism can include any type of activity that a shareholder might use to influence change in a publicly traded corporation. But there are a few specific strategies they most often employ.

Shareholder Engagement

Shareholder engagement is one of the least aggressive forms that shareholder activism can take. Using this type of activism, shareholders in the company engage one-on-one with the company’s leadership to discuss their concerns and suggest changes.

Shareholders might also proactively reach out to management to create a relationship and open dialogue so that when they have concerns in the future, the company might be more receptive.

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Shareholder Proposals

The next strategy an activist might use is a shareholder proposal. Shareholders might go this route if their attempts at shareholder engagement didn’t result in the changes they’d hoped.

Using this strategy, a shareholder drafts a non-binding resolution encouraging the company to pursue a specific course of action. The proposal appears on the annual proxy statement, giving other shareholders the opportunity to vote on it. This strategy is often employed by retail-investor activists and advocacy groups.

“Vote No” Campaigns

Using a “vote no” campaign, activist shareholders encourage other shareholders to withhold votes or vote against certain corporate board members or certain say-on-pay matters.

Even if the “vote no” campaign doesn’t change the outcome of a vote, it can send a message to the company that shareholders are dissatisfied with certain factors. This tactic is often used by institutional investors like pension funds and insurance companies.

Proxy Fights

The most aggressive form of shareholder activism, often used by hedge funds, is a proxy fight or proxy contest. Using this strategy, shareholder activists attempt to replace a company’s board members in order to enact change from the inside.

 Because proxy fights can be expensive for the company, they often result in a settlement where the firm agrees to give up a board seat. That was the case in Carl Icahn’s activist campaign against Yahoo in 2008.

Use of Shareholder Activism

Over the years, shareholder activism has increased in total capital deployed as well as the number of campaigns mounted. According to the Harvard Law School Forum on Corporate Governance, 2018 was a record year for shareholder activists.

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Approximately $65 billion in capital was deployed throughout the year, with an increase in initiated campaigns to 250, and an increase in the number of investors from 110 in 2017 to 130 in 2018.

Pros and Cons of Shareholder Activism

Pros

  • Can result in positive change
  • Sends a message to the company

Cons

  • Favors large investors
  • Not always positive

Pros Explained

  • Can result in positive change: Companies often become the targets of shareholder activism due to poor financial performance, ESG shortcomings, and ignoring shareholder concerns. Shareholder activism can create accountability for the company and positive change for the shareholders.
  • Sends a message to the company: Shareholder activism often results when a company has been unresponsive to its shareholders. If more passive efforts haven’t been effective, then aggressive activism can get the company’s attention and force them to listen.

Cons Explained

  • Favors large investors: Not just any investors can successfully take an activist stance. Instead, it’s usually powerful institutional investors and hedge funds that employ these strategies. And while the changes they push for can still benefit smaller shareholders, the interests of individual investors may not always align with those of hedge fund investors.
  • Not always positive: Shareholder activism can have a negative impact in the long run. Research has found that in the aftermath of activism by hedge funds, activist companies often experience an immediate rise in value, followed by a decrease in the future. This can be problematic for long-term investors.

Examples of Shareholder Activists

Carl Icahn is one of the financial industry’s most notable activist shareholders, along with his work as a businessman, traditional investor, and philanthropist. In the 1980s, Mr. Icahn developed a strong reputation as a “corporate raider.”

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This stemmed from his hostile takeover of TWA airline in 1985, among other milestones. Along with Texaco and American Airlines, TWA was one of the nation’s largest airlines at the time. Mr. Icahn successfully took over the company, steering it away from the brink of bankruptcy over a multi-year period.

Similarly, Bill Ackman considers himself an activist investor (although some would deem him primarily a contrarian investor). One of Ackman’s most high-profile positions was his short position and issuance of an enormous public relations campaign against the company Herbalife in 2012.

In contrast with Mr. Icahn and Mr. Ackman, many hedge funds have been recently pushing for change, related to their partners’ environmental, social, and governance (ESG) concerns. Trian Partners, Blue Harbour Group, Red Mountain Capital Partners, and ValueAct Capital are among the top funds that have prioritized ESG in various forms.

Some of these funds are being pushed by their own investors, who seek to own firms that demonstrate a commitment to corporate social responsibility. This responsibility can take the form of environmental concerns such as climate change or governance concerns, such as boardroom diversity.

For example, the NYC Pension Fund began a Boardroom Accountability Project about board diversity that requires companies to disclose the race, gender, and skills of their directors.