Shareholder activism

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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 

Contents

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]

See also

Related Research Articles

<span class="mw-page-title-main">Carl Icahn</span> American businessman and financier (born 1936)

Carl Celian Icahn is an American businessman, investor, and philanthropist. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach, Florida. Icahn's business model is to take large stakes in companies that he believes will appreciate from changes to corporate policy. Subsequently, Icahn then pressures management to make the changes that he believes will benefit shareholders, and him. Widely regarded as one of the most successful hedge fund managers of all time and one of the greatest investors on Wall Street, he was one of the first activist shareholders and is credited with making that investment strategy mainstream for hedge funds.

Corporate governance are mechanisms, processes and relations by which corporations are controlled and operated ("governed").

<span class="mw-page-title-main">Due diligence</span> Standard of care before entering into a contract with another party

Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.

Greenmail or greenmailing is a financial maneuver where investors buy enough shares in a target company to threaten a hostile takeover, prompting the target company to buy back the shares at a premium to prevent the takeover.

In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment. Divestiture is an adaptive change and adjustment of a company's ownership and business portfolio made to confront with internal and external changes.

A controlling interest is an ownership interest in a corporation with enough voting stock shares to prevail in any stockholders' motion. A majority of voting shares is always a controlling interest. When a party holds less than the majority of the voting shares, other present circumstances can be considered to determine whether that party is still considered to hold a controlling ownership interest.

An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked companies, insurers, pension funds, sovereign wealth funds, charities, hedge funds, real estate investment trusts, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments. In 2019, the world's top 500 asset managers collectively managed $104.4 trillion in Assets under Management (AuM).

A proxy fight, proxy contest or proxy battle is an unfriendly contest for control over an organization. The event usually occurs when a corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes to install new management for any of a variety of reasons. Shareholders of a public corporation may appoint an agent to attend shareholder meetings and vote on their behalf. That agent is the shareholder's proxy.

A proxy statement is a statement required of a firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting. The firm needs to file a proxy statement, otherwise known as a Form DEF 14A, with the U.S. Securities and Exchange Commission. This statement is useful in assessing how management is paid and potential conflict of interest issues with auditors.

<span class="mw-page-title-main">Socially responsible investing</span> Any investment strategy combining both financial performance and social/ethical impact.

Socially responsible investing (SRI) is any investment strategy which seeks to consider financial return alongside ethical, social or environmental goals. The areas of concern recognized by SRI practitioners are often linked to environmental, social and governance (ESG) topics. Impact investing can be considered a subset of SRI that is generally more proactive and focused on the conscious creation of social or environmental impact through investment. Eco-investing is SRI with a focus on environmentalism.

The Interfaith Center on Corporate Responsibility (ICCR) is an association advocating for corporate social responsibility. Its 300 member organizations comprise faith communities, asset managers, unions, pensions, NGOs and other investors. ICCR members engage hundreds of corporations annually in an effort to foster greater corporate accountability. ICCR's members file shareholder resolutions on issues such as climate change, human rights, corporate governance, financial practices, and other social and environmental concerns. The organization was founded in 1971.

With respect to public companies in the United States, a shareholder resolution is a proposal submitted by shareholders for a vote at the company's annual meeting. Typically, resolutions are opposed by the corporation's management, hence the insistence for a vote. "Voting has long been recognized as one of the primary rights of shareholders." For publicly held corporations in the United States, the submission and handling of resolutions is regulated by the Securities and Exchange Commission (SEC).

<span class="mw-page-title-main">Glass Lewis</span> American proxy advisory services company

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Shareholder rebellion occurs when the owners of a corporation work to throw out management or oppose their decisions. Shareholder rebellion may occur at an annual general meeting or through a proxy battle. Shareholders may also threaten to collapse a firm's stock price through concentrated selling. In 1998, the Rockefeller family led a shareholder revolt against Exxon over its climate change policy. In 2005, Michael Eisner retired after Walt Disney's nephew, Roy Disney, led a shareholder revolt, claiming Eisner was a micromanager who had caused a creative brain drain. In 2010, BP and Shell faced a shareholder revolt over their Canadian tar sands policy.

<span class="mw-page-title-main">Pershing Square Capital Management</span> American hedge fund

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<span class="mw-page-title-main">Institutional Shareholder Services</span> Proxy advisory firm

Institutional Shareholder Services Inc. (ISS) is a proxy advisory firm. Hedge funds, mutual funds and similar organizations that own shares of multiple companies pay ISS to advise regarding share holder votes. As the leading firm in the industry, ISS commands a 48 percent market share as of 2021, with its nearest rival, Glass Lewis, holding a 42 percent market share.

<span class="mw-page-title-main">Institutional Investor Advisory Services</span>

Institutional Investor Advisory Services India Limited is an Indian proxy firm that provides voting recommendations on shareholder resolutions of Indian listed companies.

<span class="mw-page-title-main">Glenview Capital Management</span> Hedge fund in New York, US

Glenview Capital Management is a hedge fund founded in 2000 with approximately $7.7 billion of capital under management as of March 2019. Glenview manages capital for investors through a series of private investment funds. The firm was founded by Larry Robbins, the firm's CEO and portfolio manager, and is based in New York.

<span class="mw-page-title-main">David H. Webber</span>

David H. Webber is the author of The Rise of the Working Class Shareholder: Labor's Last Best Weapon and Associate Dean for Intellectual Life at Boston University School of Law, where he writes about shareholder activism and litigation.

Engine No. 1 is an American activist and impact-focused investment firm. It attracted attention with its campaign to replace four members of ExxonMobil's board of directors despite owning only 0.02% of the company's shares. The firm describes its investment approach as "active ownership", as it prefers to work with management instead of launching activist campaigns.

References

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  3. 1 2 3 4 5 6 7 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
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  16. 1 2 3 4 5 Carried Interest: "Activist Investors" Archived 25 July 2015 at the Wayback Machine . Retrieved 6 May 2015.
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  34. ↑ Logsdon, Jeanne M.; Van Buren, Harry J. (2008). "Justice and Large Corporations". Business & Society. 47 (4): 523–548. doi:10.1177/0007650308316524. S2CID   153607878.
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  36. 1 2 3 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.
  37. ↑ Fisch, Jill E. (2017). "Standing Voting Instructions: Empowering the Excluded Retail Investor". Rochester, NY. SSRN   2972838.{{cite journal}}: Cite journal requires |journal= (help)
  38. ↑ 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.
  39. ↑ 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.
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  41. ↑ "Proxy Preview". As You Sow.

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