Shareholder activism
Shareholder activism is a form of activism in which shareholders use equity stakes in a corporation to put pressure on its management.[1] 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. The goals of shareholder activism range from financial (increase of shareholder value through changes in corporate policy, cost cutting, etc.) to non-financial (disinvestment from particular countries, etc.).[2] Shareholder activists can address self-dealing by corporate insiders, although large stockholders can also engage in self-dealing to themselves at the expense of smaller minority shareholders.[3]: 241
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.
Activism may help to address the principal-agent problem where the management (agents) do not adequately respond to the wishes of the principals (investors) of publicly traded companies. In the 2010s, investments in the activist asset class grew, with activists receiving coverage by the media[4] and positive attention from investors.[5] Activists have typically engaged in adversarial campaigns, but have also in some cases been able to acquire board seats with a formal proxy context.[6]
Shareholder activists are making their mark on mergers and acquisitions as well – a 2015 survey of corporate development leaders found that 60% of respondents saw shareholder activism affecting transaction activity in their industry.[7] Increasingly, however, the non-financial form of shareholder activism is affecting companies in a range of sectors. Shareholders, often with a comparatively small stake in a company, are seeking to influence the company's environmental and social performance.[8]
Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS),[9] Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA),[10][11][12][13] 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/Verizon merger.
History[edit]
Corporations in 18th-century Europe were privileged and relatively uncommon, but in the United States became much more common, starting with 300 in the 1790s and expanding by around 26,000 between 1790 and the 1860s, resulting in about 15 times the corporations in Great Britain by 1830.[3] These early corporations contained various provisions for corporate governance, including restricted charters, bylaws, prudent-mean voting rules,[14] dividend payments, and press coverage.[3]
From 1900 to 1950, about 1.22 "offensive" activist initiatives occurred per year, with more occurring in the 1940s and 1950s.[3] Notable investors included Cyrus S. Eaton, Phoenix Securities Corporation, Benjamin Graham, J. Paul Getty, and Malcolm Chace.[3] Activism was likely limited by the lack of ownership dispersion, meaning that many corporations had large shareholders with sizable blocks (10 to 20% of total shares) who already exerted significant control over the corporation.[3]
Offensive versus defensive[edit]
Shareholder activism can be categorized as "offensive" or "defensive"; in the latter case, an existing shareholder attempts to correct some deficiency, while offensive activists build a position with the intention to agitate for change.[3]: 256 Shareholders can also initiative a derivative suit to force action by the corporation. Shareholders can also engage in a securities class action but these are typically not associated with activism.
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 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.[29] 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%.[30]
Research[edit]
Shareholder activism directed at both European and American companies has been surging.[31] A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors.[32] Researchers also try to understand what makes company a desirable target for an activist investor.[33] Lately, both scholars and practitioners started using machine learning methodologies to predict both targets and activists.[34]
Retail involvement[edit]
Any shareholder, including a non-institutional retail investors, may submit a shareholder proposal in the United States, and between 1934 and the mid-1980s these shareholders typically submitted proposals.[35] One estimate placed institutional owners at 68% of shares and retail at 32% of shares, but 98% of institutional owners vote and only 28% of retail owners vote.[35] Institutional shareholders, however, often vote automatically upon the advice of proxy advisory firms; allowing retail shareholders to vote based upon a guideline ("standing voting instructions") has been proposed to increase their involvement.[36]
Various websites have been created to facilitate retail involvement,[37] including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.[35]