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Global Governance Advisors

Shareholder Activism - An Overview

Posted by Linaeya Horn-Muller on Jun 3, 2019 9:00:00 AM
Linaeya Horn-Muller
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There’s a slight spring in your step as you saunter to the door after a grueling, but productive 3.5-hour AGM. For the time being, your reality is a harmonious world in which your company’s board of directors and shareholders are in sync and the mystic rivers of communication are flowing openly. This world is built upon a foundation of trust - trust that shareholders’ give to their board of directors, because they hope that the board is doing what they can to protect their financial interests. Despite a universal standard of trust, every once in a while, a breach may cause a shareholder (or two) to go rogue. Rogue, activist shareholders may attempt to use their influence to bring change for or within the company. 

For the most part, shareholders are unable to directly change policies or actions within the boardroom or within the company. That said, they do have the power to influence the board and management by voting and using other activist strategies. It’s imperative to proceed with caution. This influence and shareholder activism has proven to be effective, but it can also take a negative toll on the company.

Shareholder Activism – History

The 1980s birthed a group of activists known as “corporate raiders.” These raiders set out to break up companies and pooled their own resources to purchase a significant number of shares and then used proxy contests to control the board.

A decade later, the 90s, activists focused heavily on management. They sought to oust existing senior management teams, push financial restructuring and increase the companies efficiency and effectiveness.

Since then, there has been a significant increase in shareholder activism, with shareholders adding capital allocation strategy to their list of concerns. Social media has also worked to stir the pot and give shareholders a public voice, and a way for investors to assess the perceptions of other investors before deciding to stop tweeting and start voting. 

Signs of Shareholder Activism

No company is exempt from facing shareholder activism. The following are two instances in which activism is more likely to occur:

  1. When the company has a low market value (in relation to book value) but has solid brand power, is profitable and has a larger cash reserve than their own norms and norms of their competition. An instance like this causes confusion for shareholders about the reason for the size of the reserve.
  2. Any situation in which institutional investors control the outstanding voting stock and the board isn’t upholding boardroom best practices. Shareholder dissatisfaction is a huge reason for shareholder activism.

Shareholder Activism Strategies

There are a number of ways that shareholders can engage in activism. Actions may be mild, like negotiating with management, or aggressive, like hiring a lawyer and taking the board to court. The following is a brief overview of common strategies: 

  • Proposing resolutions – this occurs when shareholders submit proposal for votes at AGMs. This can generate negative public attention, which is why management would prefer to avoid this.
  • Proxy voting – shareholders get the chance to vote at the AGM. They are allowed to vote in absentia if they can not attend in person. Activist shareholders may work to promote change in management through voting.
  • Hedge fund activism – hedge funds are comprised of investors who use borrowed money to invest, with a goal of realizing large capital gains. Investors may use this aggressive strategy in order to influence boards and management.
  • Mass media (social media) – Any negative publicity, whether on the news or on Twitter, is a cause for concern for management and may pressure them enough to listen to shareholders and to make changes.
  • Litigation – An initiation of legal action against management is the worst-case scenario for an organization.
  • Negotiating directly with management – Since shareholder activism is increasing, organizations are starting to lean towards a proactive stance when dealing with shareholders. Organizations find that an open-door policy, and initiating negotiations, work wonders and promote an increase in communication and loyalty.

Closing Thoughts

Voila! Your overview of shareholder activism is complete. The first step in avoiding (or combating) shareholder activism is understanding its history and the strategies that activists take when they are dissatisfied. Feel free to browse through the rest of our blog (how about checking out Learning From Past Mistakes: Tips to Avoid a Proxy Fight for more). 

Topics: GGA, Shareholder Activism, Overview