Activist shareholder

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An activist shareholder is one using an equity stake in a corporation to put public pressure on its management.[1] The goals of activist shareholders range from financial (increase of shareholder value through changes in corporate policy, financing structure, cost cutting, etc.) to non-financial (disinvestment from particular countries, adoption of environmentally friendly policies, etc.).[2] The attraction of shareholder activism lies in its comparative cheapness; a fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking.

Shareholder activism has gained popularity as management compensation at publicly traded companies and cash balances on corporate balance sheets have risen. Not only are the aggregate dollars invested in the activist asset class continuing to grow, but activists are also generating significant positive attention from mainstream media by taking more sophisticated approaches to identifying their platforms and running their campaigns.[3] Once derided as corporate raiders, shareholder activists are now the recipients of admiration for sparking change in corporate boardrooms, leading to corporate boards developing best practices for responding to shareholder activism.[4] Activists increasingly are transitioning from outside agitators to influential insiders. In fact, some well-established activists were able to secure board seats without running a proxy contest in 2015.[5]

Shareholder activists are making their mark on M&A activity as well--a 2015 survey of corporate development leaders found that 60% of respondents saw shareholder activism affecting transaction activity in their industry.[6]

Shareholder activism can take any of several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Daniel Loeb, head of Third Point Management, is notable for his use of sharply written letters directed towards the CEOs of his target companies.

Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS),[7] Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA),[8][9][10][11] and Relational Investors, LLC.

Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions. In 2005, small MCI Inc shareholders created an online petition to protest the MCI Inc/Verizon merger.

History[edit]

The practice of shareholder activism has its roots in the 17th-century Dutch Republic, with pioneering activist shareholders like Isaac Le Maire, a sizeable shareholder of the Dutch East India Company (VOC).[12][13][14][15][16][17]

Notable investors[edit]

During the 1980s, notable activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety and were often perceived as "corporate raiders" for acquiring an equity stake in publicly owned companies, like Icahn's investment in B.F. Goodrich, and then forcing companies to take action to improve value or rid themselves of rebel intruders like Icahn by buying back the raider's investment at a fat premium, often at the expense of the other shareholders.

In an Opalesque.TV interview with notable activist investor Phillip Goldstein of Bulldog Investors, Goldstein describes the role of an activist investor as that of a catalyst unlocking value in an underlying security. He goes on to say that the public perception of activist investors has changed, and this image of "corporate raiders" has dissipated.

Notable activist investors:[18]

A complete list of activist investors can be found on Fintel.[20]

Notable scholarship[edit]

New research published at The University of Oxford revisits the assumption that all shareholder activism is the same, characterizing Bill Ackman's activities with Canadian Pacific Railway as paradigmatic of "engaged activism" – which is longer term in nature with correlated benefits to the real economy, as distinct from shorter term "financial activism".[21]

Performance[edit]

Taking an activist approach to public investing may produce returns in excess of those likely to be achieved passively. A 2012 study by London-based research firm Activist Insight showed that the mean annual net return of over 40 activist-focused hedge funds had consistently outperformed the MSCI world index in the years following the global financial crisis in 2008.[22] Activist investing was the top-performing strategy among hedge funds in 2013, with such firms returning, on average, 16.6% while other hedge funds returned 9.5%.[23]

Socially responsible investing[edit]

Organizations such as the Interfaith Center on Corporate Responsibility (ICCR), As You Sow and Ceres use shareholder resolutions, and other means of pressure, to address issues such as sustainability and human rights.

See also[edit]

References[edit]

  1. ^ Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510
  2. ^ Carried Interest: "Activist Investor Definition" [1]. Retrieved 17 July 2015.
  3. ^ Grossman, Richard; Arcano, Stephen. "Navigating Today’s Shareholder Activism Landscape". Transaction Advisors. ISSN 2329-9134. 
  4. ^ Golden, Peter; Richter, Philip; Schwenkel, Robert; Shine, David; Sorkin, John; Weinstein, Gail. "Shareholder Activism in M&A". Transaction Advisors. ISSN 2329-9134. 
  5. ^ Gerber, Marc. "US Corporate Governance: Have We Crossed the Rubicon". Transaction Advisors. ISSN 2329-9134. 
  6. ^ Ruggeri, Chris; Kirschner, Ken; Blanchard, Tony. "Corporate Development Strategy: Thriving in your Business Ecosystem". Transaction Advisors. ISSN 2329-9134. 
  7. ^ Forbes: "Calpers Votes Against Jamie Dimon, Again" [2]. Retrieved June 28, 2013.
  8. ^ Eric, Finseth (2011). "SHAREHOLDER ACTIVISM BY PUBLIC PENSION. FUNDS AND THE RIGHTS OF DISSENTING. EMPLOYEES UNDER THE FIRST AMENDMENT" (PDF). Harvard Journal of Law & Public Policy. 34 (1): 289–366. Retrieved 28 June 2013. [permanent dead link]
  9. ^ ProxyDemocracy.org: "FLORIDA SBA" "Archived copy". Archived from the original on 2013-05-11. Retrieved 2013-06-28.  Retrieved June 28, 2013.
  10. ^ State Board of Administration: "SBA Corporate Governance Principles & Proxy Voting Guidelines" [3][permanent dead link] Retrieved June 28, 2013.
  11. ^ Harvard Law School Forum on Corporate Governance and Financial Regulation: "Florida SBA Supports Proxy Access and Advisory Firm Transparency" [4] Retrieved June 28, 2013.
  12. ^ Frentrop, Paul (2009). The First Known Shareholder Activist: The Colorful Life and Times of Isaac le Maire (1559–1624), in Frentrop/Jonker/Davis 2009, 11–26
  13. ^ Frentrop, Paul; Jonker, Joost; Davis, S. (ed.), (2009). Shareholder Rights at 400: Commemorating Isaac Le Maire and the First Recorded Expression of Investor Advocacy (The Hague: Remix Business Communications, 2009)
  14. ^ Gelderblom, Oscar; De Jong, Abe; Jonker, Joost (2010). Putting Le Maire into Perspective: Business Organization and the Evolution of Corporate Governance in the Dutch Republic, 1590–1610, in J. Koppell, ed., Origins of Shareholder Advocacy. (New York: Palgrave Macmillian)
  15. ^ McRitchie, James (6 Oct 2011). "Will UNFI Go Virtual-Only Again? Not if Shareowners Just Say No". CorpGov.net. Retrieved 28 Dec 2016. 
  16. ^ Mueller, Dennis C. (ed.), (2012). The Oxford Handbook of Capitalism, p. 333. (New York: Oxford University Press)
  17. ^ Hansmann, Henry; Pargendler, Mariana (2013). The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption. (Yale Law Journal, Vol. 123, pp. 100–165, 2014)
  18. ^ Carried Interest: "Activist Investors" [5]. Retrieved 6 May 2015.
  19. ^ "Takeover Bids for Chrysler, GM, Ford" Kirk Kerkorian#Automobile industry. Retrieved July 12, 2012.
  20. ^ "Activist Investors - The Complete List". Fintel.io. Retrieved 15 September 2017. 
  21. ^ Rojas, Claudio. "Eclipse of the Public Corporation Revisited: Concentrated Equity Ownership Theory". The University of Oxford. Retrieved June 27, 2017.  ("A common misconception, that all shareholder activists are focused on short-term returns, is rooted in an antiquated phase in US capital markets history – particularly, the highly opportunistic transactions of 1980’s ‘corporate raiders’. In recent years, however, shareholder activism has noticeably shifted towards longer-term value creation."
  22. ^ Activist Insight: "New Shareholder Activist Index Reveals Rewards of Activist Investing" [6]. Retrieved December 12, 2012.
  23. ^ Wood, John; Dysart, Theodore. "Assessing the Merits of an Activist Investor’s Point of View". Transaction Advisors. ISSN 2329-9134. 

Further reading[edit]