Public interventions of activist shareholders in publicly traded companies attract considerable press coverage for their often aggressive and controversial actions to change a company’s governance or operations. Activist investors, such as Carl Icahn or Bill Ackman, use their equity stake in a company to either influence the running of a business directly or put public pressure on its management to achieve their goals. These investors either invest their own capital or use their hedge funds to amplify their influence with other investors’ money. Their objectives range from changes in the firm’s financing structure or cost cutting to non-financial objectives which sometimes include the adoption of socially or environmentally friendly policies.
Shareholder activism covers a broad spectrum of activities, including public threats of selling the stake in the target company, private discussions with company boards, public “name-and-shame” press campaigns to influence the board, shareholder resolutions at extraordinary general meetings and campaigns to replace the company’s directors [see reference 1 below]. Hedge funds sometimes collaborate with other activist investors to achieve their goals, particularly when their action is directed against other current or future shareholder, such as in mergers and takeovers.
Historically, most initiatives by activist shareholders have been launched in the United States. The United Kingdom is slowly catching up with the global trend but is seeing a friendlier approach than activism in the US. At the time of the Cadbury Report on corporate governance in 1992, considerable attention was paid to institutional shareholders, who were encouraged to play a more active role in the companies in which they invest. Recent years have seen substantial swings in overall activity. In the first half of 2016, activist investors launched 75 campaigns compared with 81 campaigns in the first half of 2015. The highest growth was recorded between 2011 when funds mounted 53 campaigns in the first half and 2012 when there were 71 in the first six months. A precise estimate of investors’ activity level is difficult to obtain as shareholder activism easily escapes an attempt to be precisely defined.
In many ways activists resemble ordinary shareholders who take an interest in the running of the company. A publicly traded company is usually run by the directors, and shareholders in companies with dispersed ownership rarely have the resources and impact at general meetings to substantially challenge directors. Some features of UK governance, such as proxy voting and one-tiered boards further strengthen the power of directors and, when these have substantial share holdings, they can effectively impede monitoring by other shareholders. Large or well-connected shareholders, however, can put pressure on management to take various actions. They may force management to spin off parts of the business, merge or refrain from merging with another company (as seen in the interventions by hedge fund TCI in the plans of Deutsche Börse to acquire the London Stock Exchange), limit directors’ remuneration or implement corporate social responsibility policies.
In most cases, investor intervention is aimed at solving corporate governance problems to increase the efficiency of a company. In other words, investors try to force management to act in the shareholders’ best interest. For this reason, investor activism is often seen as beneficial for the economy. Proponents argue that vigilant shareholders play the role of fire alarms, and their mere presence can alleviate boardroom complacency. When companies perform poorly, activists can use their financial resources to play the role of fire brigades that quickly turn the company around and return it onto a growth path. On the other hand, opponents say that activists disrupt companies by threatening to damage their reputation through populist rants and media campaigns in order to quickly turn a profit and run. Their strategies can be similar to those of some private equity funds that drain a firm’s cash and increase its debt to pay themselves substantial dividends. In some cases, organised labour is said to use shareholder activism tactics as a tool to affect corporate policies.
The empirical evidence on the benefits of shareholder activism has been mixed. Academic studies in the United States started in the late 1990s and initially produced less encouraging results. The evidence indicates that shareholder activism can prompt small changes in target firms' governance structures but has little impact on share values and earnings. A later study by Brav, Jiang, Thomas and Partnoy showed that the stock market’s reaction to the announcement of hedge-fund activism had been declining through 2007. However, a more recent study by Krishnan, Partnoy and Thomas shows that that the market has reacted more favourably to activism in recent years. They find an average positive share price reaction over a six-year period of around 6%. However, the social impact of activist investors that may be driven by an agenda to develop communities or to improve social justice or sustainability is much harder to estimate.
You can find more information on shareholder activism and corporate governance in the Open University module B859 Financial strategy: valuation, governance and ethics, which is part of the MSc in Finance qualification.
- European Corporate Governance Institution http://www.ecgi.org/activism
- Gillian, S., and Starks, L. T., 2007, The Evolution of Shareholder Activism in the United States. Journal of Applied Corporate Finance, 19(1), 55–7, Available at http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6622.2007.00125.x/abstract and https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=959670
- Burgess, K., 2016, Confrontational activism rare in the UK. Financial Times, 3 January 2016, https://www.ft.com/content/d39997a0-a3f2-11e5-8218-6b8ff73aae15
- Reuters, 5 Jul 2016, Activist hedge funds dial it back in first half of 2016, http://www.reuters.com/article/us-hedgefunds-activists-idUSKCN0ZL1KL
- Goergen, M., and Renneboog, L., 2001, Strong managers and passive institutional investors in the United Kingdom. In: Barca, F., and Becht, M. (eds), The Control of Corporate Europe, Oxford University Press
- Reuters, 27 May 2016, Hedge fund TCI backs Deutsche Boerse-LSE merger, http://uk.reuters.com/article/uk-lse-m-a-deutsche-boerse-idUKKCN0YI1Z5
- U.S. Chamber of Commerce, 1 May 2013, https://www.uschamber.com/press-release/us-chamber-study-shows-no-benefit-investors-union-backed-shareholder-activism
- Karpoff, J. M., 2001, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings. Working Paper, Available at SSRN: https://ssrn.com/abstract=885365
- Brav, A., Jiang, W., Partnoy, F., and Thomas, R., 2008, Hedge Fund Activism, Corporate Governance, and Firm Performance. Journal of Finance 63(4), 1729–1775, Available at https://faculty.fuqua.duke.edu/~brav/RESEARCH/papers_files/BravJiangPartnoyThomas2008.pdf
- Krishnan, C. N. V., Partnoy, F., and Thomas, R. S., 2016, The Second Wave of Hedge Fund Activism: The Importance of Reputation, Clout, and Expertise. Vanderbilt Law and Economics Research Paper No. 15-9; Journal of Corporate Finance 40, 296-314, Available at SSRN: https://ssrn.com/abstract=2589992