A shareholder activist takes part in the direct influencing of a corporation’s management finance policy using their stock holding as leverage. This can range from anything to voting on certain topics or protesting outside their headquarters. There are two types of shareholder activists, constructive and destructive. A constructive shareholder activist offers suggestions to improve the long-term value of the company, while a destructive shareholder activist threatens management with removing their support unless they make short-term changes to increase the stock price. Shareholder activists have been around for over 100 years and are a vibrant part of socially responsible investing. It doesn’t seem like it will go away any time soon.
- Why is shareholder activism important?
- When did shareholder activism begin?
- Who are some notable shareholder activists?
- Who is the king of the activists?
- Shareholder activism vs. stockholder activism
- What can be considered shareholder activism?
- Hedge fund vs. activist hedge funds
- How to become an activist fund?
- What is the best way to make money as an activist investor?
- What are the benefits of shareholder activism?
- What is the purpose of shareholder activism?
- Are activist investors good or bad for capitalism?
- Constructive vs. destructive activist investors
- What is activist incursion?
- What are the steps in an activist incursion?
- Shareholder activism in summary
- Caveats and Disclaimers
Why is shareholder activism important?
All corporations have a purpose. Shareholders’ activism is important because it helps ensure that companies remain profitable, and so helps the economy to grow as a whole. If left unchecked, shareholder activists can force managers to make decisions that could be detrimental to the health of the corporation. For example, if a company is performing well but only because they are taking risks that may or may not work out, a destructive activist could demand they stop the risky behavior and return to safer methods. This could cause the company to become complacent and lose its competitive edge. However, constructive shareholder activism is just as important as it ensures that managers do not become complacent by suggesting new ways of making money for lower risk.
When did shareholder activism begin?
In 1608, Isaac Le Maire, a Dutch merchant, led the first recorded shareholder activism when he protested against corruption in the Dutch East India Company. He then began buying shares in the company and eventually was given a board position where he could help implement his changes.
Who are some notable shareholder activists?
20th Century shareholder activists began in the early 1900s when Louis Brandeis and others used their leverage as stockholders to influence corporate management policy, even though they weren’t affiliated with the company. They would take part in lawsuits against the companies which they believed to be acting in bad faith.
Who is the king of the activists?
Carl Icahn is one of the most famous and successful activist investors, having turned his initial $100,000 in capital in 1968 into a net worth of more than $20 billion by 2016. He is probably best known for taking over TWA Airlines in 1985 and then selling it off piece by piece after promising to keep it running as an airline for five years. Some of the most popular companies he has targeted for shareholder activists include Apple, Microsoft and eBay.
Today, Carl Icahn manages more than $30 billion in assets through several funds including Icahn Associates and Icahn Enterprises L.P. He is also known for using his influence over companies to increase the dividends they payout, which is also one of the main goals of shareholders activists.
Shareholder activism vs. stockholder activism
The terms shareholder activism and stockholder activism are often used interchangeably, however, activists usually attempt to change the behavior of corporations through legal means while stockholder activists usually take more drastic actions such as that taken by Carl Icahn when he forced the replacement of the CEO of RJR Nabisco.
What can be considered shareholder activism?
There are many different ways, tools, and techniques that a shareholder activist can use to influence the management of a company. This can range from attending shareholder meetings to spending hours every week following the company to identify opportunities where they could participate in constructive activism. Having small holdings in a large number of companies is one way a person can become a powerful force in shareholder activism. Simply owning a few hundred shares of a company is enough to be able to attend the annual shareholder meeting and ask questions, while holding thousands of shares means that they can vote on certain issues regarding the direction of the company (such as executive pay). A person could also use social media outlets like Twitter or Facebook to start conversations about issues they are passionate about to increase awareness. Furthermore, it is usually more effective to target similar companies that have the same attitude or vision on how to run a company. For example, targeting not only Ford but also General Motors because of their unionized labor force, but leaving Toyota alone because they do not use any unionized labor forces.
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Hedge fund vs. activist hedge funds
While often used interchangeably, there is a difference between a hedge fund and an activist fund. Hedge funds typically make money by hedging against losses while activist funds use shareholder activism to their advantage. In other words, an activist hedge fund is an entity that uses shareholder activism to increase its profits. For example, by using their influence as a large stockholder to lobby the company for changes they believe will make the company more profitable. An activist fund typically purchases large amounts of shares in companies or index funds with poor management and lobbies them to change their practices which are believed to be less profitable for shareholders. For example, by lobbying the board of directors at Wells Fargo to increase their dividend payments, even though it might take away funding that could be used elsewhere in the company (such as capital expenditures).
How to become an activist fund?
While anyone with enough money or shares in a company can become an activist shareholder, it is best if the person has knowledge about business practices and how companies operate. It is better for someone who knows how a board of directors works or what are considered best practices when running a fund or any other type of organization.
What is the best way to make money as an activist investor?
While hedge funds make money by investing their assets, one of the ways that make the most sense for shareholder activism is to purchase stocks in companies with poor management or low dividends and then use your influence as a major stockholder to ask them to increase their dividend payments. If they are unable or unwilling to do so, it can be beneficial for the activist shareholder to sell their shares in the company.
What are the benefits of shareholder activism?
There are several benefits to shareholder activism that make it easier for an activist investor to justify selling or purchasing shares in a company, depending on the goals of the investor. It can help bring to light issues that are not being addressed. Furthermore, it has been shown that companies have increased their dividend payments after being targeted by activists because they are worried about how much influence the activist fund has over the board of directors.
What is the purpose of shareholder activism?
There are several reasons why shareholder activism is useful to motivate companies to pay higher dividends. For example, it can make an activist fund more profitable by increasing its assets (thereby having more influence) and exposing issues that cannot be solved through other means, such as talking to a company’s managers or board of directors.
Are activist investors good or bad for capitalism?
Some people believe that activist investors should not run hedge funds because they do not contribute to companies, make the management team feel threatened, or unfairly influence them. However, others believe that shareholder activists can be beneficial for capitalism by making sure that companies are being managed properly and are fulfilling their obligations to shareholders.
Constructive vs. destructive activist investors
The main difference between these two types of shareholder activists is how they use their influence over a company’s board of directors or managers. For example, most activists are not vindictive or manipulative but instead try to help companies by bringing attention to issues that might go unnoticed otherwise. Furthermore, most hedge funds are run by supportive activist investors with experience in finance who have no desire to get rid of the management team or pursue any other form of malice.
On the other hand, destructive shareholder activism can be harmful to companies because it is often driven by vindictive intentions and intended to punish uncooperative managers. Furthermore, most hedge funds that engage in this type of activism do not have experience working in finance and instead use money from investors to pursue their own goals, such as increasing their assets under management.
What is activist incursion?
An activist incursion is when shareholders target a company for the first time. For example, an activist hedge fund might just start purchasing shares in a particular company without having any previous contact with that business or its managers. At the same time, the management team might not know who they are up against since they have no influence over them and have never heard of their funds before.
What are the steps in an activist incursion?
Activist investors may have several different reasons for launching an incursion into a company’s stock, including wanting to increase its dividends or improve its share price. For example, when Carl Icahn started buying up shares in Apple during the first quarter of 2016, he planned on pushing the company to use its large cash reserves for increased shareholder value.
Shareholder activism in summary
Shareholder activism is just one step toward making sure that companies are being run effectively and efficiently for investors, which can help contribute to a stronger economy, through higher earnings for businesses and more money in the pockets of investors when they are paid higher dividends.
Caveats and Disclaimers
We have covered many topics in this article and want to be clear that any reference to, or mention of shareholders, investing, value, famous investors, asset class, noun, carried interest, co-founder, company’s share price, Wall Street Journal, pension funds, other shareholders, Pershing square, increase board seats, carl icahn, exchange commission, protest, political, company, companies, word, management, time warner, founder, country, society, example, investments, funds, world, words, person, directors, support, politics, stake, practice, business, research, opposition, protests, practices, scholars, co, president, news, protesting, filing, generally, corporation, recently, advocating, literature, environmental, interest, securities, laws, fund or the past performance in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading.
Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SMEs and Investment professionals focusing on ESG principles. Their primary goal is to help middle-market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning, and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, UK, Europe, and the global community. If you want to get started, don’t forget to Get the Checklist! ✅