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Shareholder activism is a form ofactivism in whichshareholders useequity stakes in acorporation to put pressure on itsmanagement.[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 ofshareholder value through changes in corporate policy,cost cutting, etc.) to non-financial (disinvestment from particular countries, etc.).[2] Shareholder activists can addressself-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 ofThird Point Management, is notable for his use of sharply written letters directed towards the CEOs of his target companies.
Activism may help to address theprincipal-agent problem where the agents (management) do not adequately respond to the wishes of the principals (investors) ofpublicly 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 onmergers 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] andRelational Investors, LLC.
Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions. In 2005, smallMCI Inc. shareholders created anonline petition to protest the MCI/Verizon merger.
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 forcorporate 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 includedCyrus S. Eaton,Phoenix Securities Corporation,Benjamin Graham,J. Paul Getty, andMalcolm 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 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), andRyan Cohen.[20]
During the 1980s, activist investors such asCarl Icahn andT. 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 investorPhillip 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 includedStarboard Value,Icahn Enterprises,Elliott Investment Management, andThird Point.[17] In 2019, mutual funds such asWellington Management Company had begun to show signs of activism.[22]
Examples of activist investors in Asia includeOasis Management.[23]
Activist investors advertise their message out in various ways including postal mail, websites, and social media.[17]
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]
As of 2020, passive investors such as index funds byVanguard as well as non-activist but stillactive management investors such as mutual funds play a significant role in corporate governance. These firms useproxy advisory firms such asInstitutional Shareholder Services to receive recommendations on how to vote on shareholder proposals.
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
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 initiate aderivative suit to force action by the corporation. Shareholders can also engage in asecurities class action but these are typically not associated with activism.
In the United States, acquisition of over 5% of beneficial ownership in a company with the intention to influence leadership must be accompanied by aSchedule 13D filing; investors who do not intend to become activists may file aSchedule 13G instead.
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]
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 theboard of directors or shareholder proposals). Incumulative 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-developedDelaware 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]
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[30] showed that the mean annual net return of over 40 activist-focusedhedge funds had consistently outperformed the MSCI world index in the years after the2008 financial crisis.[31] 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%.[32]
Shareholder activism directed at both European and American companies has been surging.[33] A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors.[34] Researchers also try to understand what makes company a desirable target for an activist investor.[35] Since the late 2010s scholars and practitioners have started usingmachine learning methodologies to predict both targets and activists.[36]
Any shareholder, including non-institutionalretail investors, may submit a shareholder proposal in the United States, and between 1934 and the mid-1980s these shareholders typically submitted proposals.[37] 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.[37] Institutional shareholders, however, often vote automatically upon the advice ofproxy advisory firms; allowing retail shareholders to vote based upon a guideline ("standing voting instructions") has been proposed to increase their involvement.[38]
Various websites have been created to facilitate retail involvement,[39] including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.[37]
Labor unions, including through pension funds such asCalPERS coalitions such as theStrategic Organizing Center often engage in shareholder proposals.[40] The Shareholder Rights Group is a coalition of shareholder proposal advocates.[41]
Organizations such asthe Interfaith Center on Corporate Responsibility (ICCR),As You Sow andCeres 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.[42]
{{cite web}}: CS1 maint: archived copy as title (link). Retrieved 12 December 2012.| Investment strategy |
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