Activist Shareholder

An individual or organization that uses their ownership of a firm to bring change and influence the behavior

Author: Elliot Meade
Elliot Meade
Elliot Meade
Private Equity | Investment Banking

Elliot currently works as a Private Equity Associate at Greenridge Investment Partners, a middle market fund based in Austin, TX. He was previously an Analyst in Piper Jaffray's Leveraged Finance group, working across all industry verticals on LBOs, acquisition financings, refinancings, and recapitalizations. Prior to Piper Jaffray, he spent 2 years at Citi in the Leveraged Finance Credit Portfolio group focused on origination and ongoing credit monitoring of outstanding loans and was also a member of the Columbia recruiting committee for the Investment Banking Division for incoming summer and full-time analysts.

Elliot has a Bachelor of Arts in Business Management from Columbia University.

Reviewed By: Sid Arora
Sid Arora
Sid Arora
Investment Banking | Hedge Fund | Private Equity

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Last Updated:October 26, 2023

What Is A Shareholder Activist?

A shareholder activist is either an individual or an organization that owns a portion of a company's shares and uses this ownership to bring about changes within the company. These changes can range from influencing the company's actions to restructuring its management and the way it operates.

Shareholder activism can take different forms. It can be as simple as writing letters to the company, which is a more passive approach. On the other hand, it can be a more determined effort to change the company's strategy, how it's managed, or organizational structure.

The goals of shareholder activism might vary widely. Shareholders might try to change the company's current management, alter internal financial policies, or push the business to alter its environmental standards, for example.

Activism may help to address the principal-agent problem, which occurs when the management (the agents) of publicly listed corporations fails to meet the wishes of the principals (investors) appropriately.

In recent years, investments in shareholder activism have increased, impacting corporate decisions and even mergers.

Hedge funds, often supported by individuals and institutions, are frequently involved in activist investing. They seek to create value in the company and tackle the principal-agent problem.

Key Takeaways

  • Shareholder activists influence firms through various strategies, addressing issues like management inefficiencies and environmental concerns.
  • Activists use methods such as shareholder proposals and proxy wars, encouraging change in companies, particularly in mergers and acquisitions, addressing management inefficiencies and ESG matters.
  • Common, preferred, and debenture holders represent different ownership categories in a company. Shareholders, bondholders, and stakeholders differ in their roles within a corporation, with shareholders having ownership stakes, bondholders lending money for interest, and stakeholders being anyone affected by the company's operations.
  • Activism can lead to positive change, yet it favors major investors and might negatively impact a company’s long-term value. Individual investors can align with institutional activists for influence.
  • Shareholder activism examples include ExxonMobil and Chevron, where activist investors influenced board decisions, showcasing the effectiveness of strategic shareholder engagement.
  • While individual investors face limitations, aligning with larger activist groups allows collective influence, emphasizing the importance of staying informed about shareholder activities' effects on investments.

Shareholder Overview 

Any person or organization that owns shares of a particular corporation is referred to as a shareholder. A shareholder, sometimes known as a stockholder, makes investments in the stock market.

Due to their status as partial business owners, shareholders may also vote on specific issues and may be paid dividends in financially successful times.

How do Shareholders work? Shareholders operate by contributing cash upfront as part of their investment. By investing in a publicly traded company, you can become a shareholder. 

Companies grant shareholders certain voting and decision-making powers in return for their investments.

Although investing in private enterprises to become a shareholder is possible, the key measures are dealing with the business directly rather than through the stock market.

A company may already be publicly traded on the stock market or undergo an IPO to transition from private to public status (IPO).

A shareholder activist works to improve something about or for a publicly traded company using its rights as a shareholder.

1. Economic rights

Investors in corporations do so to profit financially from their investments. Shareholders have a right to a portion of a company's profits through dividends or stock sales.

2. Control rights 

The ability to vote on company issues, such as choosing directors, gives shareholders some control and sway without actually managing the company. Additionally, shareholders frequently receive proxy statements from their brokers via email. 

Brokers may still be able to cast a vote on a shareholder's behalf even if they don't vote in elections through a process known as uninstructed voting but only on routine issues.

Types of shareholders 

The shareholder's fund, a clear indicator of the entire amount of funds the firm has and which are genuinely the shareholders' funds, can be found on the balance sheet of every corporation.

The terms shareholder and stockholder refer to the same thing, which is holding a stake in the company through shares of stock when you invest in stocks. There are two main categories of shareholders:

1. Common stockholders 

This class of shareholders holds common stock that entitles them to voting rights and the possibility of dividend payments.

2. Preferred shareholders

This kind of shareholder is relatively uncommon and does not have the same voting privileges. They prioritize dividend payments over common stockholders, which is a significant difference.

3. Debenture holders

Debenture holders are debtors, not owners, of the business. They are not allowed to vote. They get interest payments from the corporation instead of dividends. 

This interest payment is made at a set rate agreed upon by the corporation and the holders of the debentures. Since they are the company's creditors, holders of debentures receive payment first when the business is ended up.

Shareholders vs. Bondholders vs. Stakeholders

Although they sound similar, the terms shareholder and stakeholder are pretty different. A stakeholder is a person who is affected by (or has a "stake" in) a company's operations, as opposed to a shareholder who owns stock in your company. 

However, the Bondholder is the one who financed the company by debt.

1. Shareholders

By purchasing shares of a corporation, shareholders acquire a portion of that business. Because you own stock, you may also be referred to as a stockholder.

2. Bondholders

In exchange for lending money to a corporation, bondholders can purchase corporate bonds, earning interest on their investment. Your principal investment will be returned to you as the bond reaches maturity. 

In contrast to a shareholder, you do not hold any equity in the company and are only entitled to interest on the bond in addition to your principal.

3. Stakeholders

Companies of individuals affected by the operations of the company are stakeholders. Employees, stockholders, clients, and other parties might all be considered stakeholders. 

Stakeholders are everyone interested in the company, as opposed to shareholders who only possess stock in the company.

Ownership of shares, or stakes in a public firm, is something that shareholders may do. If you invest in the stock market, you can do so and may already be a shareholder. 

Like everything else in the stock market, there is the possibility of significant gain and great danger that can result in losses.

The Process of Shareholder Activism

Over the years, shareholder activism has increased in total capital deployed and the number of campaigns mounted. According to the Harvard Law School Forum on Corporate Governance, 2018 was a record year for shareholder activists.

1. Shareholder Participation

One of the most passive kinds of shareholder activism is shareholder involvement. With the help of this form of activism, firm shareholders speak directly with the company's management about their issues and make reform suggestions. 

The corporation may be more attentive to shareholder concerns in the future if they have established a relationship and an open line of communication with management.

2. Shareholder actions

An activist may then employ a shareholder proposal as their next tactic. If their initiatives at shareholder participation don't produce the changes they'd hoped for, shareholders might choose this course.

This method involves the creation of a non-binding resolution by a shareholder urging the corporation to take a particular course of action. 

Other shareholders can vote on the proposal because it is included in the annual proxy statement. Advocates for individual investors and activists frequently use this tactic.

3. Voting-no campaigns

Voting against specific company board members or certain say-on-pay issues is encouraged by activist shareholders by using a "vote no" campaign. 

The "vote no" campaign may not affect the outcome of a vote, but it can let the corporation know that shareholders are unhappy with a few things. Institutional investors like pension funds and insurance firms frequently employ this strategy.

4. Proxy Wars

A proxy struggle or proxy contest is the most aggressive type of shareholder engagement, frequently undertaken by hedge funds. By employing this tactic, shareholder activists try to bring about change within a firm by removing the board's members. 

Proxy battles frequently end in a settlement where the corporation agrees to give up a board seat since they can be costly for the business. Carl Icahn's activist effort against Yahoo in 2008 exemplifies this.

Forms of Shareholder Activism

Shareholder activism can take many forms, including simple conversations with management or board members, litigation, proxy fights, publicity campaigns, shareholder resolutions, and more.

1. Investors in Organizations

A business or organization that handles investments is an institutional investor. They frequently control the most significant stake in publicly traded corporations and are long-term investors. 

2. Hedging funds

High-net-worth individuals pool their funds in a hedge fund, a sort of alternative investment in which a fund manager seeks to maximize returns. In addition, activist shareholders frequently come from hedge funds.

3. Different Investors

Although hedge funds and institutional investors are the most prevalent types of shareholder activists, they are not the only ones. Regardless of the company's size, every shareholder can utilize their ownership to try to enact change. 

These other types of investors have become more active in ESG (environmental, social, and governance) issues, such as racial justice and climate change.

Advantages and Disadvantages of Shareholder Activism

While shareholder activism might benefit individual investors, it can also have a negative long-term impact on the company's stock performance.

1. Lead to positive change

A firm can be held accountable, and shareholders can benefit through shareholder activism. Shareholder activism targets companies because of subpar financial performance, ESG problems, and a failure to address shareholder concerns.

Sends a message to the corporation: When a company has been unresponsive to its shareholders, shareholder activism frequently results. Moreover, aggressive activism might grab the company's attention and make them listen if more quiet efforts have failed.

2. Favors major shareholders 

Not all investors can successfully take an active approach. Instead, these tactics are typically used by solid institutional investors and hedge funds. 

Furthermore, although the improvements they recommend may still benefit smaller shareholders, individual investors' objectives may not always correspond with those of hedge fund investors.

3. Not always a good thing 

Long-term shareholder activism may have a negative effect. 

According to research, activist companies frequently see an immediate increase in value following hedge fund activity, followed by a future decline in value. For long-term investors, this may be an issue.

Significance to Individual Investors

Individual investors have fewer opportunities to be shareholder advocates than hedge funds and institutional investors. For example, you might not be allowed to introduce shareholder proposals without holding a specific number of shares of a company's stock.  

Additionally, based on your investment strategy, it's possible that you won't even see the proxy votes that let you participate in board member elections.

Small, individual investors are unlikely to meet with a company's board chairman or CEO to engage in shareholder engagement. In contrast, well-known shareholder activists and institutional investors might be able to.

However, this does not imply that you should completely disregard shareholder activism. First, when individual investors band together with other investors who share their passions, they can become influential activists.

Furthermore, although you might find it challenging to engage in shareholder activism on your own, institutional investors and hedge fund activism may still impact you. 

If you have a sizable investment in a single firm, it's crucial to stay informed about recent stakeholder developments, such as shareholder activism.

Activist Shareholder Real-Life Examples

A new strategy for effecting systemic changes in major firms is shareholder activism. Shareholder activists can change how a giant firm behaves by changing the board of directors, using their partial ownership of the company as leverage.

Here are several examples where activist investors succeeded in changing a company's board of directors:

1. ExxonMobil

The most recent instance of a significant firm being embarrassed by an activist shareholder was Exxon Mobil Corp. Two board members left the company after Engine No. 1, a hedge fund, proposed its candidates to move the business away from fossil fuels.

2. Chevron

Fellow oil giant Chevron also had to bow down to shareholder activism. Most of the company's shareholders turned against the board's decision to approve an activist proposal from a Dutch advocacy group.

3. Hugo Boss

Banks and oil firms aren't the only businesses that must deal with shareholder activism, Hugo Boss. Hugo Boss revealed earlier this year that CEO Mark Langer resigned under pressure from activist investor Bluebell Capital.

4. P&G

Nelson Peltz, a well-known shareholder activist, and Trian Fund Management's CEO was appointed to the post of director in the business after one of the most expensive and attractive corporate proxy lawsuits.

Researched and authored by Charbel Yammine | LinkedIn

Reviewed and Edited by Aditya Salunke | LinkedIn

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