Most shareholders would agree that accountability and good governance are important for companies.
This article explores the concept of shareholder activism, where investors take an active role in influencing corporate strategy and governance to unlock shareholder value.
We will examine key aspects like activist hedge funds, common activist strategies, the regulatory environment, famous activist investor campaigns, as well as the future road ahead for this approach to finance.
Introduction to Activist Shareholders and Corporate Governance
Exploring the Concept of Shareholder Activism in Corporate Governance
Activist shareholders are investors who acquire significant ownership stakes, usually at least 5%, in publicly traded companies in order to influence change. Their goal is to drive reforms that they believe will increase shareholder value. Common changes activist shareholders push for include divesting underperforming business units, increasing dividends and share buybacks, cutting costs, and changing the strategic direction or leadership of companies.
Activist shareholders play an important role in corporate governance by keeping company management accountable to shareholders. They have the power and financial incentive to challenge decisions that they view as not fully serving shareholder interests. Their involvement can lead to major shakeups, such as replacing board members or forcing a sale of the company.
Types of Shareholder Activism and Activist Hedge Funds
The main categories of activist shareholders are:
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Hedge funds - Hedge funds have become the most high-profile activist investors. Prominent examples are Bill Ackman's Pershing Square and Carl Icahn's Icahn Enterprises.
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Private equity firms - Private equity firms like TPG, Bain Capital, and KKR have engaged in activist investing as an alternative strategy.
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Institutional investors - Asset managers like BlackRock, Vanguard, and State Street wield enormous influence as activist shareholders due to their large ownership positions.
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Company insiders - Directors, executives, and founders who own significant stakes can pressure boards for change as activist shareholders.
While not always viewed favorably, activist hedge funds are usually the most aggressive in pushing for change. They use tactics like proxy contests, media campaigns, and shareholder proposals to sway other investors to their position.
Setting the Agenda: Goals and Importance of Shareholder Activism
The most common goals of activist shareholders are to implement changes that aim to:
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Improve financial returns through higher dividends, share buybacks, divestments of assets, or other means.
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Influence a company's strategic direction, such as refocusing the business model or exploring growth opportunities.
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Reform corporate governance, like replacing underperforming directors or changing executive compensation.
By keeping company leadership accountable and helping unlock value, shareholder activism plays a vital governance role in driving reform for the benefit of all shareholders. However, critics argue some activist investors pursue short-term profits over long-term growth. Overall, shareholder activism has firmly established itself as an important force shaping the agenda at many major public companies.
What is the concept of shareholder activism?
Shareholder activism refers to shareholders using their rights as owners to influence a company's business activities and policies. Activist shareholders pursue this for two main reasons:
- To rectify perceived management errors or poor decisions
- To push for significant changes in company strategy and policies
As owners of a company, shareholders have certain rights and powers, including voting rights. By leveraging these rights, activist investors can pressure companies to make changes by:
- Acquiring large stakes in the company to get voting power
- Putting forth shareholder proposals and using proxy votes
- Nominating new board members aligned with their goals
- Publicly criticizing company leadership and strategy
- Threatening legal action or hostile takeovers
The main argument behind shareholder activism is that it provides accountability and oversight for management while promoting good corporate governance. However, critics argue it can divert company resources and attention away from long-term goals.
Overall, shareholder activism introduces both risks and opportunities for targeted companies. It can be a disruptive force for change, for better or worse depending on the specific situation. The impact on long-term shareholder value is often debated and unclear.
What is an activist approach in finance?
Activist investing involves taking a "hands-on" approach to invest in public companies in order to effect change and unlock shareholder value. Activist investors typically buy large stakes in undervalued or underperforming companies and then leverage their position to push for strategic, operational, financial, or management changes.
Some key things to know about activist investing:
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Activists identify companies they believe have potential that is not being realized. This could be due to inefficient operations, excessive costs, poor leadership, etc.
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They accumulate significant ownership stakes, often 5-10% of the target company's shares. This gives them leverage to pressure management for change.
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Common activist demands involve cutting costs, divesting non-core assets, changing leadership, increasing dividends/buybacks, or even selling the company.
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Activist hedge funds take a more aggressive stance than traditional institutional investors in order to force change quickly. They may launch proxy fights, nominate new board members, initiate lawsuits, or publicly critique management.
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The goal is to implement strategic, financial and governance changes that will increase the company's profitability and unlock shareholder value reflected in the stock price.
Activist investing can be controversial but tends to benefit shareholders through improved efficiency, capital allocation, and realization of a company's potential. When executed properly, it forces necessary changes that passive investors typically cannot achieve on their own through basic diversification strategies.
How do activist funds work?
Activist investors purchase minority stakes, usually less than 10%, in public companies in order to influence and enact changes in the company's operations, policies, or strategic direction. Their goal is to unlock shareholder value that they believe is not being realized under current management.
Some key points about how activist funds work:
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They often target companies they view as undervalued, poorly managed, or non-transparent. By implementing changes, they aim to boost the stock price.
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Common demands include divesting underperforming assets, increasing dividends/buybacks, reducing costs, replacing executives, or making other structural/governance changes.
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If unable to persuade management privately at first, activist investors may initiate proxy fights, launch publicity campaigns, or threaten hostile takeovers to force change.
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Specialist hedge funds like Icahn Enterprises and ValueAct focus specifically on activist investing. But other institutional investors like pension funds may also engage in activism periodically.
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Activists rely on in-depth research to build their case. If they cannot compromise with management, they will appeal directly to shareholders to vote for their proposed changes.
So in summary, activist hedge funds acquire minority stakes in companies and use influence, publicity and proxy fights to enact the changes they believe will improve shareholder value. Their goal is to profit from the expected stock price increase resulting from the operational, financial or structural overhaul they demand from management.
What is an activist campaign in finance?
Activist investing refers to when an individual or group acquires a significant minority stake in a public company in order to influence or enact changes within that company. Activist investors typically target companies that they believe are undervalued or underperforming, and push for strategic changes like divesting assets, replacing management, increasing dividends/buybacks, or making operational improvements.
Some key things to know about activist campaigns in finance:
- Activists take minority stakes, usually less than 10% of shares, but enough to leverage influence.
- Common goals are to boost stock price and unlock "hidden value" in the target company.
- Tactics can range from private negotiations to public pressure to proxy fights for board seats.
- Outcomes may include new directors, divestments, increased returns of capital, or an outright sale.
- Activist hedge funds like Elliott Management and Starboard Value are well-known in this space.
So in summary, activist investing aims to profit from turning around struggling companies through shareholder activism and corporate changes. It's a controversial yet impactful force in finance and M&A landscapes today.
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Strategies and Mechanisms of Activist Shareholders
Activist shareholders aim to influence companies to enact changes that they believe will increase shareholder value. They have several strategies and mechanisms at their disposal to drive change once they have acquired a stake in a company.
Proxy Contests and the Battle for the Board of Directors
One common activist strategy is to wage a proxy contest to gain board seats. Activists can nominate a competing slate of director candidates to challenge the company's nominations. By winning board seats, activists gain influence to enact their agenda from within the company.
Examples of activist proxy contests include:
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In 2022, Nelson Peltz's Trian Fund Management launched a proxy fight to win a board seat at Walt Disney Co. Peltz aims to push Disney to cut costs and improve direct-to-consumer streaming profits.
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In 2021, Engine No. 1 successfully elected three new directors to ExxonMobil's board to push the oil giant to invest more in clean energy and align with global climate goals.
Leveraging Shareholder Proposals at Annual Meetings
Activists often utilize shareholder proposals to drive change by submitting binding bylaw amendments or non-binding recommendations that shareholders vote on at annual meetings.
Examples of common shareholder proposals from activists include:
- Requesting increased share buybacks and dividends to return more capital to shareholders
- Requiring independent board chairman role separation from the CEO
- Pushing companies to report on climate change risks and sustainability initiatives
While most proposals are non-binding, they can pressure boards to implement changes if they receive strong shareholder support.
Negotiations and Pressure: Engaging with Targeted Companies
Beyond formal proxy contests and proposals, activist investors actively engage with targeted companies by:
- Privately negotiating with management to enact governance reforms, divestments of underperforming assets, leadership changes, and shifts in strategic direction
- Waging public pressure campaigns through media interviews and letters to rally both retail and institutional investor support for their agenda
For example, activist Bill Ackman publicly pressured Chipotle for months before it agreed to add four of his suggested directors to the board in 2016.
Ultimately activists employ a range of strategies from behind-the-scenes negotiations to full-blown proxy battles in order to influence corporate policies and unlock shareholder value. Their mechanisms leverage shareholder voting power to drive changes from within targeted companies.
Shareholder Activism: Advantages and Disadvantages
Advantages of Shareholder Activism: Accountability and Shareholder Value
Shareholder activism can provide valuable oversight and accountability for corporate management teams. By taking significant stakes in companies, activist investors have leverage to push for changes aimed at unlocking shareholder value. Common proposals include divesting underperforming business units, increasing dividends and share buybacks, reducing excess costs, or replacing ineffective leaders.
If successful, activist campaigns can lead to improved profit margins, better capital allocation, higher returns of cash to shareholders, and increased stock prices over time. Famed activist investors like Carl Icahn, Bill Ackman, Nelson Peltz and others have delivered billions in value creation from their interventions. Their detailed industry knowledge and financial expertise often identify value-creation opportunities that incumbent management overlooked or ignored.
The Disadvantages: Short-Term Gains vs. Long-Term Strategy
However, shareholder activism also carries risks. Activists typically have relatively short investment horizons, looking to make quick returns over a 2-4 year period. This can incentivize cuts to long-term investments in R&D, capital expenditures, and human capital in favor of short-term financial engineering.
Additionally, activists usually lack specialized operational expertise within an industry. While they bring financial and governance insights, their proposals may overlook nuances critical to the company's competitive positioning over decades. This had led to criticism that activists pursue short-sighted gains over prudent long-term growth strategies.
Are Activist Investors Good or Bad? Balancing Competing Considerations
On balance, shareholder activism plays a useful role in keeping complacent management teams accountable. The threat of activist intervention helps ensure executives pursue better strategies, operations, and capital allocation - rather than wasting resources or pursuing empire building.
However, each activist proposal requires detailed scrutiny on its individual merits. Company boards should carefully weigh short-term financial payoffs against potential long-term consequences to strategy and industry positioning. Each situation calls for balancing the upside of accountability and shareholder alignment with the downside of emphasizing immediate payouts over sustained value creation.
Regulatory Environment and Activist Shareholders
Activist investors have become major players in corporate governance and oversight. Their aggressive tactics to push companies for change have led to increased regulatory scrutiny and debate around balancing transparency with overly burdensome regulations.
Summary of Schedule 13D and Schedule 13G Filing Obligations
When an activist investor acquires 5% or more of a public company's shares, they must file either a Schedule 13D or 13G form with the SEC. This discloses their ownership stake and any plans or proposals to influence the company's operations or strategic direction.
Key aspects of 13D and 13G filings:
- Schedule 13D is more detailed, outlining the investor's intent and plans for influencing the company. It must be filed within 10 days of crossing the 5% ownership threshold.
- Schedule 13G is a more passive investment. It simply discloses ownership over 5% but without intent to actively influence the company. It has a 45-day deadline.
- Failing to properly file Schedule 13D or 13G exposes investors to penalties from the SEC.
By increasing transparency around activist holdings and strategic plans, these filings aim to protect shareholders from covert activist campaigns.
The Impact of New Filing Regulations on Activist Investors
In 2022, the SEC shortened the 13D filing deadline from 10 days to 1 business day. This aims to close a perceived "transparency gap" where activists secretly build stakes through derivatives before publicly announcing their demands.
Proponents argue this increased transparency protects companies and shareholders by:
- Enabling earlier conversations with activist investors
- Reducing opportunities for "wolf pack" collusion
- Curbing abusive tactics like ambush attacks on company leadership
However, some investors argue the accelerated deadline is overly burdensome:
- It pressures activists to develop plans prematurely before fully engaging with management. This risks less informed, hostile campaigns.
- Meeting a 1-day deadline for complex filings creates compliance risks, especially for smaller funds.
- It could discourage constructive activism that enhances shareholder value.
The impact of these new regulations continues to play out as activists and companies adapt.
Debating the Future of Activist Shareholder Regulation
Ongoing debates around further regulating activist shareholders include:
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Lowering 13D reporting thresholds below 5%: Some argue for lowering thresholds to 3% or 1% to close perceived "hidden ownership" loopholes. However, others argue this creates excessive administrative burdens.
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Defining "wolf packs": Activists sometimes secretly act in concert with other funds, known as "wolf packs," to build stakes quickly. Stricter rules around defining and disclosing wolf packs are being considered.
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Increased oversight of side agreements: Side deals between activists and other shareholders raise governance concerns. Expanding disclosure rules around these agreements continues to be discussed.
Balancing transparency to protect shareholders while avoiding cumbersome over-regulation remains a challenge in shaping the regulatory environment around activist hedge funds. The landscape continues to rapidly evolve.
Case Studies: Famous Activist Investors and Their Campaigns
This section provides context through some famous historical examples of shareholder activism targeting major companies.
Carl Icahn's Strategic Moves: From Hostile Takeover Attempts to Board Representation
Carl Icahn is one of the most well-known activist investors, using shareholder activism for decades to push for changes at major companies. In 2013, Icahn began acquiring shares in eBay, eventually building up a 2.15% stake. He pushed for eBay to spin off its PayPal division, arguing it would unlock value for shareholders.
After a prolonged fight including a proxy contest, Icahn and eBay struck a deal in 2014. Icahn agreed to cease his demands to split PayPal, while eBay gave Icahn the right to appoint two new directors to its board. This allowed Icahn to have a voice and influence strategic decisions going forward.
Nelson Peltz's Influence on Corporate Strategy and Executive Compensation
Nelson Peltz's Trian Fund Management has targeted various consumer and industrial companies over the years. In 2015, Trian disclosed a $2.5 billion stake in DuPont, seeking better margins and more disciplined capital allocation. After a proxy fight, Peltz and two other Trian nominees joined DuPont's board.
In the following years, DuPont went through major changes including executive shakeups, cost cuts, and a merger with Dow Chemical. However, Trian exited its investment in early 2019 after DuPont's stock lagged the broader market. Critics argued the board seats and influence did not translate to sufficient long-term change.
Bill Ackman's Contrarian Bets and Shareholder Activism ESG Focus
Bill Ackman has made several bold and controversial bets through his hedge fund Pershing Square Capital Management. He pushes for buybacks, cost cuts, and other moves to boost margins and stock prices. However, Ackman has also focused on ESG issues as part of his brand of activism.
For example, in 2018 Ackman revealed a $1 billion stake in Starbucks. He supported Starbucks' commitments on sustainability, ethics and social impact while simultaneously arguing the stock was undervalued. After Starbucks announced earnings growth and plans for buybacks, Ackman exited at a profit. Critics debate whether enough long-term, structural changes occurred at Starbucks as a result of Ackman’s activist campaign.
The Road Ahead for Shareholder Activism
Shareholder activism plays an important role in corporate governance by providing oversight and accountability for company management. Looking ahead, several key trends will shape the future of activist investing:
Shareholder Activism ESG: The Rising Importance of Environmental, Social, and Governance Concerns
Activist investors are increasingly factoring ESG criteria into their investment decisions and demands for change. Issues like climate change risks, diversity and inclusion, and ethical business practices are becoming pivotal points of engagement. Companies with poor ESG track records are likely to face greater activist attention aimed at improving sustainability and social responsibility.
Activist Investors: Rankings by Total Managed AUM and Shifting Appetites
Many activist hedge funds are moving down market into smaller cap companies, where there is more room for operational improvements and balance sheet optimization. Larger caps have become more efficient, while smaller companies remain ripe for activist interventions. This shift can be seen in the latest rankings of top activists by AUM.
From Wall Street to Main Street: International Expansion of Activist Strategies
The activist playbook formulated in the U.S. is gaining traction abroad as funds export their strategies to Canada, Europe, and Asia. These markets have more activism opportunities compared to the mature U.S. landscape. Already, prominent activists like Bill Ackman and Nelson Peltz have run successful international campaigns. More are likely to follow suit.
