Activist shareholder

An activist shareholder is a shareholder that uses an equity stake 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 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] 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

According to research firm Activist Insight, a total of 839 listed companies globally were publicly subjected to activist demands in 2019, down from 946 in 2018.[4] 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[5] and positive attention from investors.[6] Activists have typically engaged in adversarial campaigns, but have also in some cases been able to acquire board seats with a formal proxy context.[7]

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.[8] 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.[9]

Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS),[10] Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA),[11][12][13][14] 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
Replica of an East Indiaman of the Dutch East India Company/United East Indies Company (VOC).
Further information: Dutch East India Company

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).[15][16][17][18][19][20]

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,[21] 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]

Notable investors

Notable activist investors include: Isaac Le Maire (1558–1624),[15] Carl Icahn,[22] Nelson Peltz (Trian),[22] Bill Ackman (Pershing Square),[22] Daniel Loeb (Third Point),[22] Barry Rosenstein,[22], Larry Robbins (Glenview),[23]:19 David Einhorn, Gregg Hymowitz (EnTrust Global),[24] and Christer Gardell (Cevian Capital).

During the 1980s, 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. More recently, activist investor Phillip Goldstein suggested that the role of the activist investor has moved from green mail to one of being a catalyst to unlock value in an underlying security, and says that the public perception of activist investors as "corporate raiders" has dissipated.[25]

In 2019, notable activist investors included Starboard Value, Ancora,[26] Icahn, Elliot Management, and Third Point (Loeb).[23]

Outreach strategies

Activist investors advertise their message out in various ways including postal mail, websites, and social media.[23]

Statistics

As of 2018, there had been an average of 272 activist campaigns per year in the United States, including 47 proxy contests.[23] About 47% of targeted companies were outside of the United States.[27]

Proxy advisory

As of 2020, passive investors such as index funds by Vanguard as well as non-activist but still active management investors such as mutual funds play a significant role in corporate governance. These firms use proxy advisory firms such as Institutional Shareholder Services to receive recommendations on how to vote on shareholder proposals.

Offensive versus defensive

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.

Laws

In the United States, acquisition of over 5% of beneficial ownership in a company with the intention to influence leadership must be accompanied by a Schedule 13D filing; investors who do not intend to become activists may file a Schedule 13G instead.[28]

Proxy access
Main article: Proxy statement § Proxy access

Historically, investors were required to mail separate ballots when trying to nominate someone of their own to the board, but beginning in 2015, proxy access rules began to spread driven by initiatives from major institutional investors, and as of 2018, 71% of S&P 500 companies had a proxy access rule.[29]

Voting

Votes for the board may be "straight" or "cumulative"; in cumulative voting, a shareholder can put all of their votes toward a single candidate, which makes it easier for minority shareholders to elect candidates.[30] There has also been a movement toward "majority" voting, where a candidate must receive the majority of votes.[31] Most large corporations are incorporated in Delaware due to the well-developed Delaware General Corporation Law; in Delaware, cumulative voting is optional, but exceptions exist; for example, a California-based but Delaware-registered corporation may be "pseudo-foreign" under California law and therefore have to comply with California law.[31]

Notable scholarship

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".[32]

Performance

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.[33] 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%.[34]

Research

Shareholder activism directed at both European and American companies has been surging.[35] Numerous studies try to examine firm characteristics that lead to shareholder activism. A seminal work in the field was brought forward by Michael Smith in 1996 in an article published in the Journal of Finance.[36] Researchers also try to understand what makes company a desirable target for an activist investor.[37] Lately, both scholars and practitioners started using machine learning methodologies to predict both targets and activists.[38]

Retail involvement

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.[39] 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.[39] 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.[40]

Various websites have been created to facilitate retail involvement,[41] including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.[39]

Political and labor involvement

Labor unions, including through pension funds such as CalPERS coalitions such as the Change to Win Federation often engage in shareholder proposals.[42] The Shareholder Rights Group is a coalition of shareholder proposal advocates.[43]

Socially responsible investing

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

References
  1. Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510
  2. "Activist Investor Definition". Carried Interest. Retrieved 17 July 2015.
  3. Wright, Robert E.; Sylla, Richard (2011), Koppell, Jonathan G S (ed.), "Corporate Governance and Stockholder/Stakeholder Activism in the United States, 1790–1860: New Data and Perspectives", Origins of Shareholder Advocacy, Palgrave Macmillan US, pp. 231–251, doi:10.1057/9780230116665_11, ISBN 978-1-349-29072-7, retrieved 2020-03-18
  4. "The Activist Investing Annual Review 2020". www.activistinsight.com.
  5. Grossman, Richard; Arcano, Stephen. "Navigating Today's Shareholder Activism Landscape". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2014-11-08.
  6. Golden, Peter; Richter, Philip; Schwenkel, Robert; Shine, David; Sorkin, John; Weinstein, Gail. "Shareholder Activism in M&A". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2014-11-09.
  7. Gerber, Marc. "US Corporate Governance: Have We Crossed the Rubicon". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2016-06-05.
  8. Ruggeri, Chris; Kirschner, Ken; Blanchard, Tony. "Corporate Development Strategy: Thriving in your Business Ecosystem". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2017-02-02.
  9. Cundill, Gary (2017). "Non-financial shareholder activism: a process model for influencing corporate environmental and social performance". International Journal of Management Reviews. 20 (2): 606–626. doi:10.1111/ijmr.12157.
  10. Forbes: "Calpers Votes Against Jamie Dimon, Again" "Archived copy". Archived from the original on 2016-03-04. Retrieved 2017-08-23.CS1 maint: archived copy as title (link). Retrieved June 28, 2013.
  11. 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. Archived from the original (PDF) on 15 May 2013. Retrieved 28 June 2013.
  12. ProxyDemocracy.org: "FLORIDA SBA" "Archived copy". Archived from the original on 2013-05-11. Retrieved 2013-06-28.CS1 maint: archived copy as title (link) Retrieved June 28, 2013.
  13. State Board of Administration: "SBA Corporate Governance Principles & Proxy Voting Guidelines" Retrieved June 28, 2013.
  14. Harvard Law School Forum on Corporate Governance and Financial Regulation: "Florida SBA Supports Proxy Access and Advisory Firm Transparency" "Archived copy". Archived from the original on 2014-08-01. Retrieved 2013-06-28.CS1 maint: archived copy as title (link) Retrieved June 28, 2013.
  15. 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
  16. 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)
  17. 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 Macmillan)
  18. McRitchie, James (6 Oct 2011). "Will UNFI Go Virtual-Only Again? Not if Shareowners Just Say No". CorpGov.net. Archived from the original on 2016-06-25. Retrieved 28 Dec 2016.
  19. Mueller, Dennis C. (ed.), (2012). The Oxford Handbook of Capitalism, p. 333. (New York: Oxford University Press)
  20. 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)
  21. Dunlavy, Colleen A. (2007-02-21). "Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights". Rochester, NY. Cite journal requires |journal= (help)
  22. Carried Interest: "Activist Investors". Retrieved 6 May 2015.
  23. "Review and Analysis of 2018 U.S. Shareholder Activism" (PDF). Sullivan & Cromwell. Archived (PDF) from the original on 2019-12-29. Retrieved 2020-02-28. Lay summary.
  24. Chung, Juliet; Benoit, David (14 July 2017). "The Man Behind Activist Investors' Biggest Bets". WSJ. Retrieved 17 May 2020.
  25. "Phil Goldstein: The Bulldog's passion for value investing". Opalesque TV. 21 Jan 2011. Retrieved 15 Jul 2018.
  26. "Ancora gets its activism together". Crain's Cleveland Business. 2019-04-21. Retrieved 2020-02-29.
  27. "The Activist Investing Annual Review 2019". Schulte Roth & Zabel. Archived (PDF) from the original on 2019-05-09.
  28. Reiff, Nathan. "13F Instead of 13D: Activists Make Smaller Purchases". Investopedia. Retrieved 2019-06-03.
  29. Gregory, Holly J.; Grapsas, Rebecca; Holl, Claire; LLP, Sidley Austin; on. "The Latest on Proxy Access". corpgov.law.harvard.edu. Retrieved 2019-08-29.
  30. Coyle, John F. (2016-01-25). "Altering Rules, Cumulative Voting, and Venture Capital". Rochester, NY. Cite journal requires |journal= (help)
  31. "Majority Voting for Directors | Insights". jonesday.com. Retrieved 2020-03-19.
  32. Rojas, Claudio. "Eclipse of the Public Corporation Revisited: Concentrated Equity Ownership Theory". The University of Oxford. Archived from the original on July 28, 2017. 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."
  33. Activist Insight: "New Shareholder Activist Index Reveals Rewards of Activist Investing" "Archived copy" (PDF). Archived (PDF) from the original on 2015-06-23. Retrieved 2012-12-12.CS1 maint: archived copy as title (link). Retrieved December 12, 2012.
  34. Wood, John; Dysart, Theodore. "Assessing the Merits of an Activist Investor's Point of View". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2015-07-23.
  35. "20 Places You Should be Sharing Your Content". 2018-06-14.
  36. Smith, Michael P. (1996). "Shareholder Activism by Institutional Investors: Evidence from CalPERS". The Journal of Finance. 51: 227–252. doi:10.1111/j.1540-6261.1996.tb05208.x.
  37. Logsdon, Jeanne M.; Van Buren, Harry J. (2008). "Justice and Large Corporations". Business & Society. 47 (4): 523–548. doi:10.1177/0007650308316524.
  38. "Shareholder Activism: Wir sagen voraus wen es trifft!".
  39. Miller, Robin (2016-05-01). "Shareholder Advocacy In Corporate Elections: Case Studies In Proxy Voting Websites For Retail Investors". International Development, Community and Environment (IDCE).
  40. Fisch, Jill E. (2017). "Standing Voting Instructions: Empowering the Excluded Retail Investor". Rochester, NY. Cite journal requires |journal= (help)
  41. Levick, Richard (2011-04-25). "The Floodgates Are Open: Shareholder Activists Intensify Social Media Utilization". Forbes. Retrieved 2020-03-19.
  42. Morgenson, Gretchen (2017-03-24). "Want Change? Shareholders Have a Tool for That". The New York Times. ISSN 0362-4331. Retrieved 2020-03-19.
  43. "SEC rulemaking threatens to disrupt ESG investment ecosystem and undermine shareholder rights". Responsible Investor. Retrieved 2020-03-19.

Further reading
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