Individual or institutional investors who try to gain control of a firm to get seats on the board of directors are known as activist investors. Activist investors’ main goals are to use their clout to effect significant changes in the target firm and unleash shareholder value.
Activist investors frequently go after companies that have clear problems in their management structure and waste money. Either they will contribute value by influencing management decisions or they will replace the entire management team.
TYPES OF ACTIVIST INVESTORS: The following three types of activist investors can be identified.
Institutional Investors: An institutional investor is a corporation or organization that specializes in handling various types of investments. An activist investor like this concentrates on long-term investments and owns the majority of publicly listed firms’ stock. For a longer duration, it includes pensions, mutual funds, and insurance firms. As previously stated, they often dominate companies due to their significant stakes, and the most common investors activist fall into this category.
Hedge Funds: Another sort of activist investor is a hedge fund, which is made up of high-net-worth individuals who pool their resources and have a fund manager handle their investments to earn them significant returns. This form of activist investment may be found all over the place.
Hedge fund activism primarily influences companies’ financial strategy to increase shareholder value and dividends, as a fund manager’s primary objective is to provide investors with above-average returns.
Other Investors: Although institutional and hedge fund activist investors are the most regular and frequent, they are far from the only ones. Regardless of the company’s size or investment volume, any shareholder can speak up for reforms. Many investors have taken an aggressive stance on environmental, social, and governance (ESG) issues in recent years. Climate change and racial justice are two major concerns for such investors.
HOW DO ACTIVIST INVESTORS WORK? Activist investors, in general, have no defined path to follow; they can utilize any approach to influence the management of a publicly-traded company for a change. They frequently employ certain strategies to achieve their goals.
Shareholder Engagement: Activist investors employ shareholder engagement as the least aggressive way for bringing about desired reforms. Shareholders engage with firm management and leadership to discuss and suggest improvements in this type of strategy. They also establish a proactive relationship with the leadership so that, in the future, management will pay heed to their issues promptly and the company will be more receptive to their ideas. As a result, they will be able to simply express their opinions to management at meetings and obtain the needed results.
Shareholder Proposals: If the activist investors’ shareholder engagement strategy fails, they will engage in shareholder proposal engagement. The activist drafts a non-binding resolution directing the company to take a specific course of action in this strategy. The proposal will be included in the annual proxy statement, and other shareholders will be able to vote on it. This method is most commonly used by advocacy groups and retail-investor activists to achieve their goals.
“Vote No” Campaigns: Activist investors use this tactic to persuade other investors to abstain from voting and, in certain cases, to campaign against specific board members. Even if the “vote no” campaign technique fails to affect the outcome, the activist investors send a clear message to the corporation that shareholders are unhappy with the policies. This method is most commonly used by activist investors in institutional investments such as pension funds and insurance firms. Activist investors use this method to put pressure on corporations to focus on their problems.
Proxy Fights: This is the most aggressive technique utilized by activist investors, and it is primarily adopted by hedge funds. Activist investors utilize the proxy war or proxy contest technique to bring changes from the inside and replace board members of corporations. Because this is the most costly option for the firm, it usually leads to a settlement in which the corporation agrees to give you a board seat. Carl Icahn’s activist campaign against Yahoo in 2008 is a well-known recent example of this method.
PROS AND CONS OF SHAREHOLDER ACTIVISM: Activist investors have both advantages and disadvantages. The detail is given here as under:
- Companies don’t always perform effectively in terms of financial performance, ESG deficiencies, and disregarding shareholder value. Activist investors have been a source of pressure on firms to make beneficial changes that benefit shareholders and other stakeholders.
- Shareholder activism forces a corporation to listen to its shareholders. If a corporation is unresponsive to its shareholders and passive attempts are failing to create results, vigorous activism can be a beneficial tactic. Following such a reaction from activist investors, the corporation can concentrate on its issues.
- Activist investors did not always take a pro-activist attitude. They don’t align their goals with those of other investors, and as a result, the entire pressure buildup can only benefit a few investors. In the long run, this could harm the purpose of activism as a whole and jeopardize shareholder trust and confidence.
- Many financial market professionals believe that shareholder activism is detrimental to the company in the long run. They anticipate that hedge funds and activist corporations will see an initial increase in value, but that this will be followed by a decline in the future. This is a particularly difficult position for long-term investors, as they will experience a drop. While a sharp increase may benefit some investors, a long-term collapse may have far-reaching implications and will damage the investments of others.
Bottom Line: In today’s market, activist investors play a critical role in forging strong bonds between management and shareholders. Companies can no longer afford to dismiss inquiries about performance and strategy. Activists’ opinions are heard at all board meetings, regardless of their level of involvement. Directors who use data and information for operations must be aware that activist and institutional investors are scrutinizing their actions. If there are no vested interests involved, investing activism can be a potent tool for increasing shareholder value in the short and long term.