In some cases, shareholder activism can be relatively passive and include a letter-writing campaign to the company. On the other end of the spectrum, shareholder activists may actively work to change the company’s strategy, leadership, and structure. Shareholder activism can have a wide variety of purposes. Shareholders might attempt to oust the company’s current leadership, change financial policies within the firm, or encourage the company to change its environmental practices, for example.
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.
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.
Types of Shareholder Activists
Institutional Investors
An institutional investor is a company or organization that manages investments. They are often long-term investors and hold the largest share of publicly traded companies. Institutional investors can include pensions, mutual funds, and insurance companies. Because of the large stake they often control in companies, institutional inventors are some of the most frequent shareholder activists.
Hedge Funds
A hedge fund is a type of alternative investment in which high-net-worth individuals pool their money and a fund manager attempts to earn them high returns. Hedge funds are also frequent shareholder activists.
Other Investors
While institutional investors and hedge funds are the most common shareholder activists, they aren’t the only ones. In reality, any shareholder can use their stake in the company, regardless of its size, to try to enact change. In recent years, these types of other investors have taken activist roles in ESG (environmental, social, and governance) matters, including climate change and racial justice.
Pros and Cons of Shareholder Activism
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.
What It Means for Individual Investors
Unlike institutional investors and hedge funds, individual investors have limited opportunities to be shareholder activists. You may be barred from introducing shareholder proposals without owning a certain amount of stock in a company. And, depending on how you invest, you may not even see the proxy ballots allowing you to vote in board member elections.
While well-known shareholder activists and institutional investors may be able to get a meeting with a company’s board chairman or CEO to practice shareholder engagement, that’s likely not the case for small, individual investors. But that doesn’t mean you should ignore shareholder activism altogether. First, individual investors can be successful activists when they join forces with other investors interested in the same cause. In addition, while you may have a difficult time participating in shareholder activism alone, you could still be impacted by the activism of institutional investors and hedge funds. If you have significant funds invested in a single company, it’s important to remain educated on its recent events involving stakeholders, including shareholder activism.
