Shareholder activism is an ever more complex and multi-faceted phenomenon. If the ambition of shareholder activism is to cause change through disruption—or at least confront the status quo—then activist investors are increasingly hitting the target. Companies such as Target, Apple, Canadian Pacific Railways, Dell, Herbalife, Procter and Gamble, eBay, Yahoo, Amgen, and J. C. Penney have already been transformed to some degree owing to encounters with activist shareholders. Theoretically, this sounds like a good thing—more accountability to investors.
The activist shareholders have achieved success in those cases because of a emergent refinement in their modus operandi. Ten years ago they were seen as troublesome mavericks. Having typically acquired 5% to 10% of a company’s stock, they tended to hone in on a single corporate governance issue, such as poison pills, staggered board structures, or, most notably, management incompetence. By contrast, today’s activists constitute a trustworthy, objective asset class, taking a stance on a wide variety of strategic issues in their target companies.
Activist investors have recurrently played a crucial role in interactions between corporations and markets. In the wake of the 2008 financial crisis, activists are playing a growing role in countering corporate inertia and chubbiness, in driving M&A activity, and most crucially in unlocking value-for themselves, for the companies in which they have invested, and for the economy. As hedge funds and activist shareholders gained greater power and credibility, some companies have even become more receptive to dissident shareholder proposals. Activist shareholders are deploying multifaceted campaigns, focusing on core concerns like operations and governance. Companies have found that an activist campaign can be costly for management, both in direct expenses and in the significant time and attention diverted from running the business.
The new activists have dramatically upped the pressure on corporate executives and boards. They buy stocks they view as undervalued and pressure management to do things they believe will raise the value, such as giving more cash back to shareholders or shedding divisions that they think are driving down the stock price. With increasing frequency they get deeply involved in governance— demanding board seats, replacing CEOs, and advocating specific business strategies.
Shareholder activism once the province of a handful of high profile names has been expanded by hedge funds with a dedicated focus on activism. Activists have become more disciplined, informed, and balanced in their style. Increasingly they are waging discreet, private campaigns to force boards to acknowledge their ability to bring fresh ideas and stimulate performance. Other, more passive shareholders tend to welcome a powerful and rational new voice speaking on their behalf. It is, after all, every board’s duty to represent all its shareholders.
Activists do have good ideas. They are extremely analytical, they’re very sharp, very rational people. And often, they have a pretty positive story to be told that should be at least paid attention to. Activists often have valid reasons for pressing companies for change and urges executives to react more collaboratively when confronted.
Activists are having a profound effect across American boardrooms. Today’s activists are ushering in a more open style of corporate culture. Where real power used to dwell solely with the chairman and CEO (two distinct roles still too often filled by just one person), it is now becoming more devolved. New checks and balances are providing stronger advocacy for a broad set of stakeholders. Also, as investment capital is reallocated, executives will focus more closely on performance, even long after activists have sold their stake.
Prominent Shareholder Activist Investors
Recommended reading: ‘The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success’ by William N. Thorndike has created a buzz among the activist community for laying out in plain language what the activists are often arguing for.