A shareholder activist is an individual or organization that uses their ownership in a company to effect change.
How Does a Shareholder Activist Work?
Shareholder activism can encompass any type of activity that shareholders use to influence change in a publicly traded company. However, there are some strategies that are more commonly employed:
Engagement with Shareholders
Engagement with shareholders is one of the less aggressive forms of activity that a shareholder activist can take. Using this type of activism, shareholders in the company engage with its leadership to discuss their concerns and suggest changes. Shareholders may also proactively communicate with management to establish a relationship and open dialogue, so that when they face issues in the future, the company might be more willing to listen.
Shareholder Proposals
Shareholder proposals are a strategy that activists can use if engagement with shareholders doesn’t lead to the changes they hoped for. Using this strategy, a shareholder drafts a non-binding resolution encouraging the company to take a specific action. The proposal appears on the annual proxy statement, allowing other shareholders the opportunity to vote on it. This strategy is often used by retail shareholders and investor advocacy groups.
Vote No Campaigns
Using a “Vote No” campaign, activist shareholders encourage other shareholders to abstain from voting or to vote against board members or certain compensation-related issues. Even if a “Vote No” campaign does not affect the outcome of the vote, it can send a message to the company that shareholders are dissatisfied with certain factors. This strategy is often employed by institutional investors such as pension funds and insurance companies.
Proxy Fights
The most aggressive strategy used by shareholder activists, and often employed by hedge funds, is proxy fights. Using this strategy, shareholder activists attempt to replace members of the company’s board of directors to effect change from within. Since proxy fights can be costly for the company, they often result in a settlement where the company agrees to relinquish a board seat. This was the case in the activist campaign led by Carl Icahn 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 typically hold significant stakes in publicly traded companies. Institutional investors can include pension funds, mutual funds, and insurance companies. Due to the large stakes they hold in companies, institutional investors are among the most frequent shareholder activists.
Hedge Funds
A hedge fund is a type of alternative investment where high-net-worth individuals pool their money together and a fund manager seeks to achieve high returns for them. Hedge funds are also among the most frequent shareholder activists.
Other Investors
Although institutional investors and hedge funds are the most common shareholder activists, they are not the only ones. In fact, any shareholder can use their stake in the company, regardless of size, to try to effect change. In recent years, these other investors have taken on activist roles on ESG (environmental, social, and governance) issues, including climate change and racial justice.
Advantages and Disadvantages of Shareholder Activism
Advantages
Shareholder activism can lead to positive change: Companies often become targets of shareholder activism due to poor financial performance, ESG shortcomings, and neglect of shareholder concerns. Shareholder activism can create accountability for the company and positive change for shareholders.
It can send a message to the company: Shareholder activism often occurs when the company is unresponsive to its shareholders. If softer efforts are not effective, aggressive activism may capture the company’s attention and compel it to listen.
Disadvantages
It can be preferred
Large Investors: Not every investor can successfully take an activist stance. Typically, strong institutional investors and hedge funds are the ones who use these strategies. While the changes they push for may 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 shown that following hedge fund activism, target companies often experience an immediate spike in value, followed by a decline in the future. This can be a problem for long-term investors.
What Does This Mean for Individual Investors?
Unlike institutional investors and hedge funds, individual investors have limited opportunities to be activist shareholders. You may be restricted from submitting shareholder proposals without owning a certain amount of shares in the company. Depending on how you invest, you may not even see the proxy cards that allow you to vote in board member elections.
However, this does not mean that shareholder activism should be completely ignored. First, individual investors can be successful as activists when joining forces with other investors interested in the same issue. Additionally, while you may find it difficult to engage in shareholder activism on your own, you may be affected by a number of institutional investors and hedge funds. If you have a significant amount of money invested in a single company, it is important to stay informed about its recent stakeholder-related events, including shareholder activism.
Source: https://www.thebalancemoney.com/what-is-a-shareholder-activist-5197640
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