Fight Fire with Fire: How to Level the Playing Field
Explore how shareholder activism is reshaping the very fabric of corporate governance in today's dynamic business landscape.
“Shareholders have the right and obligation to set the parameters of corporate behavior within which management pursues profit.”
Shareholder activism refers to the actions or efforts of shareholders and activist investors to influence the management and governance of a corporation, often driven by the goal of maximizing shareholder value and ensuring sustainable business practices. As stakeholders, shareholders possess certain rights, which when exercised actively can reshape corporate strategies and operations.
A prime example is when Trian Fund Management, led by Nelson Peltz, took an interest in Procter & Gamble, leading to a publicized battle over the company’s strategy. The outcome saw changes in the company’s structure and operations.
Shareholder activism isn’t new. Historically, shareholder activism can trace its origins to the early trading companies where merchants, as shareholders, would voice concerns over the management of voyages and trading routes. The 20th century saw its resurgence, particularly in the 1980s. However, in the modern era, its significance has grown considerably due to:
- Globalization of financial markets.
- Emergence of institutional investors.
- Increasing awareness about sustainable and ethical business practices.
Today, with the advent of technology and easy information flow, even smaller shareholders can collaborate and push for changes.
The Role in Corporate Governance
Shareholder activism’s role in corporate governance is multifaceted:
- Promoting Accountability: Activists ensure that executive compensation is tied to performance and that non-performing management teams are held accountable. After the 2008 financial crisis, there was increased scrutiny on executive compensation. Activists like “Say on Pay” pushed for regulations where shareholders had a voice on executive pay packages, leading to better alignment between performance and pay.
- Ensuring Transparency: Activists can push for clearer financial disclosures and better information on company operations. In the 2010s, Apple Inc. faced scrutiny from shareholders like Greenlight Capital’s David Einhorn, who pushed for clearer disclosures on Apple’s cash utilization strategy.
- Focusing on Sustainability: Modern activism may also include Environmental, Social, and Governance (ESG) issues, advocating for businesses to adopt responsible practices. Recently, Engine No. 1, a relatively small hedge fund, won a battle against ExxonMobil, securing board seats and pushing the oil giant towards sustainable energy solutions.
- Strategic Refinement: Shareholder activists often press companies to reconsider their core business strategies, sometimes suggesting divestitures or mergers. Yahoo, once an internet giant, faced pressure from Starboard Value, leading to its eventual sale to Verizon.
- Enhancing Shareholder Value: Many activist campaigns aim to unlock shareholder value, which might be suppressed due to inefficient operations or suboptimal strategies. Bill Ackman’s Pershing Square Capital targeted companies like Canadian Pacific Railway, leading to operational reforms and stock appreciation.
Tactics Employed by Shareholder Activists
Historically, tactics like proxy fights were the norm. However, today’s shareholder activism is diverse:
- Proxy Fights: Activists can wage a battle to install a new management team or board of directors. Daniel Loeb’s Third Point initiated a proxy battle with Campbell Soup in 2018, which led to board changes and a new CEO.
- Open Letters: Activists often write public letters to the board or management to highlight issues and request changes. Elliott Management’s letter to AT&T’s management in 2019 is a classic example, criticizing its acquisition strategies.
- Litigation: In some cases, activists may resort to legal action to force desired changes. For example, in the early 2010s, hedge fund Jana Partners sued Agrium, a Canadian agribusiness firm, over its board nomination process.
- Shareholder Resolutions: Proposing and lobbying for resolutions during annual general meetings. Climate Action 100+, an investor initiative, has been at the forefront of passing resolutions at company AGMs, pushing for more responsible climate actions.
- Stake Building: Acquiring a significant stake in the company to influence decisions. Activists like Carl Icahn often build significant stakes to influence decisions, as seen in his involvement with companies like Dell.
- Collaborating with Institutional Investors: Building alliances and consensus with large institutional investors can amplify their voice.
- Media Campaigns: Utilizing media to garner public support and put pressure on companies.
Lesser-known Measures and Tactics
While common tactics are well-known, there are some nuanced strategies that are fascinating:
- “Wolf Packs”: A phenomenon where loosely allied investors build stakes simultaneously in the target company without formally acting together, thus avoiding regulatory disclosures. For instance, in 2014, several hedge funds individually built positions in Allergan, benefitting when Valeant Pharmaceuticals made an acquisition offer.
- Shadow Voting: Here, activists informally secure voting rights from other shareholders without owning the shares themselves. While rare, it’s known that in some instances, large mutual funds might signal their voting intentions to activists without publicly declaring it.
- White Squire Defense: This involves selling a minority stake to a friendly party to thwart the efforts of an activist. In the 1980s, Martin Marietta sold a stake to a ‘friendly’ investor to defend against a takeover by Bendix Corporation.
- Backdoor Activism: Engaging privately with the management or board without public declarations. Elliott Management, known for its public campaigns, also engages in quiet, behind-the-scenes discussions with target companies.
- Goldilocks Positioning: Activists acquire a ‘just right’ shareholding—neither too small to be ignored nor too large to appear threatening. This approach is about striking balance. For example, ValueAct Capital is known to build positions that are large enough to command attention but not too aggressive.
- Utilizing Derivatives: Some sophisticated activists use options, swaps, and other derivative products to mask their intent or to achieve certain strategic goals without acquiring the underlying equity directly.
Shareholder activism, with roots that stretch back centuries, remains pivotal in molding the contours of business and corporate governance. Although the archetypal image evokes a standoff between a fierce activist and corporate management, contemporary activism presents a more layered narrative.
The ascendance of passive investing coupled with the deeper participation of institutional investors underscores a transition towards cooperation rather than conflict. While tactics and objectives have broadened over time, the foundational goal endures: amplifying shareholder value and ensuring corporations act in the paramount interest of their stakeholders.
As the voices of shareholders grow more informed and assertive, their influence over corporate governance promises to be even more pronounced.