Shareholder activism plays a pivotal role in the evolution of corporate America’s public companies. In fact, the listed companies that shareholders targeted in
2013 “had an average market capitalization of $10 billion.”
That’s some serious power when it comes to influencing major corporations in the United States.
But what does shareholder activism really mean? To put it simply, shareholder activism occurs when an individual (or an entity) uses their equity stake in a corporation to put pressure on the company to make specific changes.
Potential Goals of Shareholder Activism
The modifications these “activists” seek can vary in degree and in the hostility of their delivery.
On the relatively lighter end of requests, activists might urge companies to adopt environmentally friendly policy changes. On the moderate side of financial reform, they might seek compensation reviews or a cost-cutting analysis. And on the most extreme side of shareholder influence, activists could seek a complete board of directors overhaul—a proverbial “wiping of the slate” at the highest level of corporate leadership.
In addition, shareholder activism can come in various forms: litigation, proxy battles, publicity movements, shareholder resolutions, simple negotiations with management or board members, and more. For an in depth analysis on the types of shareholder activism, check out this report from PwC.
Those of you who serve on a board of directors might be thinking, “This shareholder activism sounds more like a nuisance than anything else,” and there are people who would agree with that summation. Others, however, have argued the opposite: that “activist campaigns, on average, generate a sustained increase in shareholder returns.”
Those very same researchers at McKinsey & Co. also found that collaborative settlements between corporations and activists saw the best shareholder returns in the three years following the resolution, which perhaps makes the argument for collaboration above all.
What Factors Lead to Increased Shareholder Activism?
So what usually triggers shareholder activism? Once again, the answer varies. In the past, high executive compensation has been pinpointed as a potential spark for activism, though recent research does not reflect that suggestion. Instead, other issues have moved to the forefront of activists’ attentions: a company’s underperformance relative to its competitors, a board with a stale composition and a lack of industry specific knowledge, and a general air of mismanagement within a company.
One writer for Fortune has designated the banking sector as the next big target for activists—citing its recent instability and vulnerabilities as the precursors.
Instances of shareholder activism are best examined on a case-by-case basis. As some corporations begin to embrace dialogue with activists, others spend a great deal of capital and effort in order to reject their requests or even to prevent them from making any requests at all.
Regardless of personal opinions on its ultimate benefit or lack thereof, the growth of shareholder activism has undeniably complicated the role of the corporate director—calling for an even greater awareness of shareholder interests.