Shareholder activism relates to the actions of prominent shareholders urging the company to take a specific course of action. These suggestions are usually performed by a specialist hedge fund. An activist (shareholder) is a shareholder who uses their ownership stake in a publicly traded corporation to pressurize management into considering alternative ways of doing business and bring about change.
The goals of activist shareholders generally include financial issues such as
- increase of shareholder value through changes in corporate policy
- asset disposals / spinoff / divestiture
- financing structure – dividends, buy backs
- management change
- cost cutting
Shareholder Activism in Operation
Previously operating under the guise of corporate raiders, shareholder activism has now evolved into a position of respect and admiration for initiating corporate change. Activists increasingly are transitioning from outside agitators to influential insiders. Merger Arbitrageurs and traders must be careful not to jump the gun and assume activist involvement will lead to a full blown takeover offer. Although this may ultimately be the case, there are other options open to the activist other than a merger or acquisition.
However, they maintain their power of destruction. This comes from short-term campaigns. When shareholder activists demand a return of capital from existing resources they may push for an immediate payout in the form of dividends or a share buyback. Activism may trigger an instant positive share-price reaction with little or no regard for the potential side effects for the wider organization or its employees. As a result, predetermined investments in research or innovation may suffer.
Shareholder Activist Examples
Carl Icahn is perhaps the embodiment of the evolution noted previously. Icahn developed a reputation as a “corporate raider.” This originally stemmed from his hostile takeover of TWA airline in 1985. In addition to this, he is now known as an activist shareholder, a businessman, a traditional investor, and philanthropist. We refer to Carl Icahn in our article Event Driven Investment Strategies.
For further reading on this subject we recommend Barbarians in the Boardroom: Activist Investors and the battle for control of the world’s most powerful companies by Owen Walker
