Shareholder Activism

Updated on April 4, 2024
Article byHimani Bhatt
Edited byHimani Bhatt
Reviewed byDheeraj Vaidya, CFA, FRM

Shareholder Activism Definition

Shareholder activism is the course of action shareholders take to influence corporate governance by utilizing their ownership privilege. It assists in safeguarding the interest of stakeholders and improving the efficiency of the management. The key strategies employed for it are proxy conflicts, negotiations, public campaigns, shareholder resolutions, and litigation.

Shareholder Activism

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It promotes the effective engagement of shareholders in the firm’s decision-making procedure. The participating stakeholders, alias “Shareholder Activists” or “Activist Shareholders, ” directs the management’s attention to pressing issues so that the firm takes informed decisions. Their concerns regarding the company may be financial or non-financial in nature.

Key Takeaways

  • Shareholder activism is an attempt by the shareholders to influence the firm’s commercial activities through their ownership rights.
  • It is practiced for two major purposes, i.e., correcting the management’s mistake and creating major modifications in its policies.
  • The approaches to shareholder activism include proxy battles, lawsuits, shareholder resolution, settlement with the administration, and publicity campaigns.
  • Shareholder activism seeks to highlight the problems of shareholders and upgrade the company’s policies for betterment.

 

Shareholder Activism Explained

Shareholder activism is any effort by shareholders to communicate a need for change in a company’s policy or management.  Shareholders take this action based on their rights as owners. It is mostly employed to rectify a corporation’s blunder or cause a crucial transformation of corporate guidelines.

Dissatisfaction with the company’s status quo is a major reason for shareholders to resort to such measures. For instance, shareholder activists may prompt businesses with surplus profit to boost dividend dispersal among investors.

The other financial reasons for activism may include cost-cutting, corporate restructuringRestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc.read more, executive appointment, remuneration, etc. Besides seeking to change corporate financial policies, shareholders may also appeal to the corporation to look into its social performance like environmental reporting, discrimination, etc.

Note that shareholder activism is a joint action requiring the contribution of internal and external stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more. It helps them broadly opine their perspective, ensuring instant high-yielding outcomes. It may be in the form of direct appeal to the management or indirect request to a regulatory body or media.

As discussed, shareholder activists try to bring about the required changes in the company by exploiting their authority. For this, they may either capitalize on the present state of control or expand their proprietorship share for amplified effect. 

Shareholder activists often include hedge funds or mutual funds that purchase a substantial stake in target companies intending to reform them and increase the company’s shareholder valueShareholder ValueShareholder's value is the value that company shareholders receive as dividends and stock price appreciation due to better decision-making by the management that ultimately results in a company's growth in sales and profit.read more and, in turn, benefit from their investment.

Constant monitoring by the shareholders keeps the management on its toes and ensures the optimal utilization of the company’s resources through methodical governance.

As a result, the company’s performance improves, thereby improving its profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more and enhancing its shareholder value in the long run. Hence, both for the company and its shareholders stand to benefit from shareholder activism.

Moreover, this phenomenon also aids in resolving leadership-shareholder problems to foster a trustworthy and prosperous business environment. Consequently, the corporation’s market position alleviates augmenting its prospects further.

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Approaches of Shareholder Activism

There are numerous forms of shareholder activism:

#1 – Proxy Conflicts

Proxy voting refers to a setting where the shareholder is, deliberately or accidentally, incapable of showing up at the shareholder’s meeting. Thus, the voting power is assigned to a representative who utilizes the authority to bring about the desired changes. 

Shareholders may use proxy votesProxy VotesProxy Vote refers to a vote that a Company or individual casts on behalf of the shareholder, after obtaining the required permission, due to the latter’s inability or disinterest to vote for any valid reason. read more under the influence of activists to change management or its policies. Proxy conflicts happen when stockholders are unhappy with the firm’s operations or policies. 

#2 – Settlement with Organization

It is the easiest method of shareholder activism, entailing negotiation between the organization and stockholders. Both parties share their issues and recommendations for the ongoing condition. Now, it helps them attain a mid-point for logical dispute resolution. 

#3 – Shareholder Resolution

The shareholders submit a formal proposal to vote at the institution’s annual shareholders meetingShareholders MeetingShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company.read more regarding the current matter at hand. It is a proven strategy to grab many eyeballs and discuss the problem vividly. It may be anything from amendments in the firm’s supervision capability to its professional conduct as a corporate citizen. 

#4 – Publicity Campaigns

The publicity campaigns transpire when the establishment does not pay attention to the shareowner problems. Therefore, they use media to highlight the nuisance or concern via publicity campaigns or public announcements. This, in turn, coerces the management to address the matter in question and ensure a swift conclusion. 

#5 – Lawsuits

Generally, legal actions are taken in case of serious allegations or when no other option is left. Nonetheless, it causes serious financial and mental harm to both parties. Moreover, the judicial proceedings may continue with severe damage to their reputation for a long time. 

Examples

Example #1

As per a recent Forbes report, ExxonMobil’s activist shareholder Engine No. 1, a hedge fund, has won two seats on the oil and gas giant’s 12-member board.

Amid growing global concerns regarding climate change, Engine has been pushing Exxon to transition to renewables and low-carbon energy. As a part of its strategy, it suggested four nomineesNomineesA nominee is an individual or entity that under financial terms gains access to assets and securities, including bank deposits, real property, and stocks, on behalf of the original owner. While serving as a trustee or guardian to safeguard assets in the absence of the actual owner, the designated party gets powers to conduct financial transactions. read more for the Exxon board, of which two have been approved.

With only a minor stake of 0.02% in Exxon, Engine could achieve this feat by gaining the support of Exxon’s other substantial stakeholders Stakeholders A stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read morelike the California State Teachers’ Retirement System, U.S. pension fund, and BlackRock.

This change in the board is likely to force Exxon to transform its business by shifting to cleaner energy.  Also, it would encourage other activist investorsActivist InvestorsAn activist investor is a person who purchases a large stake in a company in order to gain control or a board seat with a view to bring about significant changes in the company to reduce costs, increase sales, improve efficiency, and thus maximize profits and shareholder wealth. Activist investors usually enter a company when the existing management is ineffectively managing the business and there exists a large scope of improvement.read more to engage in shareholder activism to take on big oil companies to address the cause of climate change.

Example #2

Here is a snippet from a Wall Street Journal report

With 2.5% shares (nearly $325 million) in Hasbro Inc., Alta Fox Capital Management LLC plans to wage a proxy battle to make desired changes to the toymaker firm. Alta Fox intends to add five directors to Hasbro’s board and suggests a spin-off of Hasbro’s unit housing games like Dungeons & Dragons. . 

Stockholders will vote at Hasbro’s annual meeting to consider the future of director candidates. Alta Fox believes that the step can double Hasbro’s market valuation. It’s currently valued at $13 billion, possessing brands like Monopoly and Nerf. The toy manufacturer firm has welcomed the move and is quite ecstatic to have new directors on board. 

Frequently Ask Questions (FAQs)

Q#1 – What is the purpose of shareholder activism?

A – Shareholder activism helps address shareholders’ concerns and authorizes them to question the company’s management for its incompetence. This avoids management’s dictatorship and keeps them accountable. In addition, it positively impacts the firm’s value, market performance, and decision-making capabilities.

Q#2 – Is shareholder activism a good or bad concept?

A – This depends upon the shareholders’ agenda behind the endeavor. If they force administrative changes solely for personal growth, it will negatively affect the firm. However, making well-informed decisions and acting as a mentor for the leadership will guarantee unprecedented growth.

Q#3 – How does shareholder activism adds shareholder value?

A – Shareholder activism gives the shareholders a sense of ownership and ensures management accountability. Besides financial issues, they can express their disapproval on environmental, social, and governance (ESG) matters. Needlessly, this unlocks additional value, ensuring a greater return on their investment.

Q#4 – Who is a shareholder activist?

A – Any shareholder who leverages their rights as an owner to affect the conduct of the business is called a “shareholder activist” or “activist shareholder.” The shareholder activist may use defensive (negotiations) and offensive (litigation) tactics to address the matter.

This has been a guide to Shareholder Activism & its definition. Here we discuss shareholder activism and its impact on corporate governance along with examples. You may also have a look at the following economics articles to learn more –

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