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

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]

Notable investors

Notable activist investors include: Isaac Le Maire (1558–1624),^[15] Carl Icahn,^[16] Nelson Peltz (Trian Partners),^[16] Bill Ackman (Pershing Square),^[16] Daniel Loeb (Third Point Management),^[16] Barry Rosenstein,^[16] Larry Robbins (Glenview),^[17]^: 19 David Einhorn, Gregg Hymowitz (EnTrust Global),^[18] Larry Fink (BlackRock),^[19] Christer Gardell (Cevian Capital), and Ryan Cohen.^[20]

During the 1980s, activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety^{[citation needed]} 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.^{[citation needed]} 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.^[21]

In 2019, notable activist investors included Starboard Value, Icahn Enterprises, Elliot Management, and Third Point.^[17] In 2019, mutual funds such as Wellington Management Company had begun to show signs of activism.^[22]

Examples of activist investors in Asia include Oasis Management. ^[23]

Outreach strategies

Activist investors advertise their message out in various ways including postal mail, websites, and social media.^[17]

Statistics

As of 2018, there had been an average of 272 activist campaigns per year in the United States, including 47 proxy contests.^[17] About 47% of targeted companies were outside of the United States.^[24]

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.

Funding

Activist investors are often hedge funds funded by accredited investors and institutions. In 2019, institutions were demanding more upfront explanation of the activist ideas before funding, and in some cases requiring that the funds be placed into special purpose vehicles specifically for the project.^[25] Activist hedge funds, which are hedge funds that "take concentrated positions in the equity of public corporations and actively engage with corporate managers" can address the principal-agent problem and limit self-dealing by providing management with high-powered incentives to increase value.^[26]^: 104

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.

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.^[27]

Voting

Votes for the board may be "straight" or "cumulative". In straight voting (aka statutory voting), shareholders get one vote per share on all ballot questions (e.g., candidates for the board of directors or shareholder proposals). In cumulative voting, a shareholder receives a general vote for however many number of ballot questions there are. The votes can then be all cast for (or against) a single ballot question, which makes it easier for minority shareholders to elect candidates.^[28] There has also been a movement toward "majority" voting, where a candidate must receive the majority of votes.^[29] 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.^[29]

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.^[30] 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%.^[31]

Research

Shareholder activism directed at both European and American companies has been surging.^[32] A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors.^[33] Researchers also try to understand what makes company a desirable target for an activist investor.^[34] Lately,^[when?] both scholars and practitioners started using machine learning methodologies to predict both targets and activists.^[35]

Retail involvement

Any shareholder, including 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.^[36] 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.^[36] 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.^[37]

Various websites have been created to facilitate retail involvement,^[38] including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.^[36]

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.^[39] The Shareholder Rights Group is a coalition of shareholder proposal advocates.^[40]

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.

For an analysis of the hundreds of annual shareholder resolutions, see Proxy Preview.^[41]

References

^ Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510 Archived 20 May 2020 at the Wayback Machine
^ "Activist Investor Definition". Carried Interest. Archived from the original on 25 June 2019. Retrieved 17 July 2015.
^ ^a ^b ^c ^d ^e ^f ^g 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
^ Grossman, Richard; Arcano, Stephen. "Navigating Today's Shareholder Activism Landscape". Transaction Advisors. ISSN 2329-9134. Archived from the original on 8 November 2014.
^ 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 9 November 2014.
^ Gerber, Marc. "US Corporate Governance: Have We Crossed the Rubicon". Transaction Advisors. ISSN 2329-9134. Archived from the original on 5 June 2016.
^ Ruggeri, Chris; Kirschner, Ken; Blanchard, Tony. "Corporate Development Strategy: Thriving in your Business Ecosystem". Transaction Advisors. ISSN 2329-9134. Archived from the original on 2 February 2017.
^ 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. hdl:1826/12686. S2CID 148727396.
^ Forbes: "Calpers Votes Against Jamie Dimon, Again" "Calpers Votes Against Jamie Dimon, Again". Forbes. Archived from the original on 4 March 2016. Retrieved 23 August 2017.. Retrieved 28 June 2013.
^ 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.
^ ProxyDemocracy.org: "FLORIDA SBA" "ProxyDemocracy | Florida SBA". Archived from the original on 11 May 2013. Retrieved 28 June 2013. Retrieved 28 June 2013.
^ State Board of Administration: "SBA Corporate Governance Principles & Proxy Voting Guidelines" [1]^{[permanent dead link‍]} Retrieved 28 June 2013.
^ Harvard Law School Forum on Corporate Governance and Financial Regulation: "Florida SBA Supports Proxy Access and Advisory Firm Transparency" "Florida SBA Supports Proxy Access and Advisory Firm Transparency". April 2011. Archived from the original on 1 August 2014. Retrieved 28 June 2013. Retrieved 28 June 2013.
^ Dunlavy, Colleen A. (21 February 2007). "Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights". Washington and Lee Law Review. 63. Rochester, NY: 1347. SSRN 964377.
^ 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
^ ^a ^b ^c ^d ^e Carried Interest: "Activist Investors" Archived 25 July 2015 at the Wayback Machine. Retrieved 6 May 2015.
^ ^a ^b ^c ^d "Review and Analysis of 2018 U.S. Shareholder Activism" (PDF). Sullivan & Cromwell. Archived (PDF) from the original on 29 December 2019. Retrieved 28 February 2020.
^ Chung, Juliet; Benoit, David (14 July 2017). "The Man Behind Activist Investors' Biggest Bets". WSJ. Archived from the original on 17 July 2020. Retrieved 17 May 2020.
^ https://www.youtube.com/watch?v=eTDdDgr-xYo
^ Trentmann, Nina; Maurer, Mark (24 February 2021). "GameStop CFO Was Forced Out as Activist Investor Pushes New Strategy". WSJ. Retrieved 19 March 2021.
^ "Phil Goldstein: The Bulldog's passion for value investing". Opalesque TV. 21 January 2011. Archived from the original on 6 July 2018. Retrieved 15 July 2018.
^ "Mutual funds start to put their mouth where their money is". Reuters. 15 March 2019. Archived from the original on 31 May 2019. Retrieved 7 September 2020.
^ Barnes, Oliver (October 15, 2023). "Activist Oasis stands to net £40mn profit from Wagamama owner sale". www.ft.com. Retrieved 2024-01-21.
^ "The Activist Investing Annual Review 2019". Schulte Roth & Zabel. Archived (PDF) from the original on 9 May 2019.
^ "Karmic reckoning? Investors in activist hedge funds agitate for change". Reuters. 30 July 2019. Archived from the original on 7 July 2020. Retrieved 6 July 2020.
^ Hirst, Scott; Bebchuk, Lucian; Cohen, Alma (1 July 2017). "The Agency Problems of Institutional Investors". Journal of Economic Perspectives. 31 (3): 89. doi:10.1257/jep.31.3.89. Archived from the original on 6 November 2020. Retrieved 5 November 2020.
^ Gregory, Holly J.; Grapsas, Rebecca; Holl, Claire; LLP, Sidley Austin; on (February 2019). "The Latest on Proxy Access". corpgov.law.harvard.edu. Archived from the original on 29 August 2019. Retrieved 29 August 2019.
^ Coyle, John F. (25 January 2016). "Altering Rules, Cumulative Voting, and Venture Capital". Rochester, NY. SSRN 2719849. {{cite journal}}: Cite journal requires |journal= (help)
^ ^a ^b "Majority Voting for Directors | Insights". jonesday.com. Archived from the original on 19 March 2020. Retrieved 19 March 2020.
^ Activist Insight: "New Shareholder Activist Index Reveals Rewards of Activist Investing" "Archived copy" (PDF). Archived (PDF) from the original on 23 June 2015. Retrieved 12 December 2012.{{cite web}}: CS1 maint: archived copy as title (link). Retrieved 12 December 2012.
^ 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 23 July 2015.
^ "20 Places You Should be Sharing Your Content". 14 June 2018. Archived from the original on 16 November 2018. Retrieved 15 November 2018.
^ 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.
^ Logsdon, Jeanne M.; Van Buren, Harry J. (2008). "Justice and Large Corporations". Business & Society. 47 (4): 523–548. doi:10.1177/0007650308316524. S2CID 153607878.
^ "Shareholder Activism: Wir sagen voraus wen es trifft!". Archived from the original on 16 November 2018. Retrieved 15 November 2018.
^ ^a ^b ^c Miller, Robin (1 May 2016). "Shareholder Advocacy In Corporate Elections: Case Studies In Proxy Voting Websites For Retail Investors". International Development, Community and Environment (IDCE). Archived from the original on 19 March 2020. Retrieved 19 March 2020.
^ Fisch, Jill E. (2017). "Standing Voting Instructions: Empowering the Excluded Retail Investor". Rochester, NY. SSRN 2972838. {{cite journal}}: Cite journal requires |journal= (help)
^ Levick, Richard (25 April 2011). "The Floodgates Are Open: Shareholder Activists Intensify Social Media Utilization". Forbes. Archived from the original on 19 March 2020. Retrieved 19 March 2020.
^ Morgenson, Gretchen (24 March 2017). "Want Change? Shareholders Have a Tool for That". The New York Times. ISSN 0362-4331. Archived from the original on 19 March 2020. Retrieved 19 March 2020.
^ "SEC rulemaking threatens to disrupt ESG investment ecosystem and undermine shareholder rights". Responsible Investor. 7 January 2020. Archived from the original on 19 March 2020. Retrieved 19 March 2020.
^ "Proxy Preview". As You Sow.