Activists in financial markets and the corporate world

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents information how individuals and groups (financial activists) use their influence as shareholders to drive strategic, operational, and governance changes within companies to improve performance, enhance shareholder value, and promote ethical practices.

Introduction

Activism in financial markets and the corporate world refers to the efforts of individuals or institutions (like hedge funds) to influence a company’s behavior. Their objectives can include changes in management, strategy, financial structure, or operational practices. Activists aim to improve company performance, enhance shareholder value, or promote social, environmental, or governance (ESG) objectives.

History

The concept of shareholder activism dates back to the early 20th century, but it gained significant momentum in the 1980s. During this period, activist investors began buying substantial shares in underperforming companies to gain control and enforce changes. For example, Paul Singer and AT&T, where Paul Singer’s Elliott Management took a $3.2 billion stake in AT&T in 2019. Over the decades, activism has evolved, with various methods and strategies being adopted to exert influence on corporate boards and top management.

Types of Activism

There are different types of activism: shareholder activism, Environmental, Social, and Governance (ESG) activism, operational activism, and proxy fights.

Shareholder Activism

Shareholder activism focuses on improving company performance and shareholder returns through changes in governance, strategy, or financial practices.

For example, in the case of Apple in 2015, Carl Icahn’s activism led to increased share buybacks and dividend payments, enhancing shareholder returns.

Environmental, Social, and Governance (ESG) Activism

Environmental, Social, and Governance (ESG) activism aims to promote sustainable and ethical practices within companies, addressing issues like climate change, labor practices, and board diversity.

The most common ESG-related litigation is based on alleged false disclosures in securities filings. Statements in proxy materials about companies’ commitment to diversity could be false and misleading because there is a lack of diversity and/or the companies fail to follow through on promises to increase diversity.

For example, the SEC reached a US$35 million settlement with a gaming company in February 2023 after the company failed to maintain disclosure controls related to workplace misconduct. This settlement came after a wave of shareholders advocated for leadership changes within the company and its board.

Operational Activism

Operational activism involves pushing for changes in the company’s operations, such as cost-cutting measures, divestitures, or restructuring.

For example, in the case of Procter & Gamble (P&G) in 2017, Nelson Peltz’s Trian Partners waged a successful campaign for board representation, leading to significant cost-cutting and strategic refocus.

Proxy Fights

Proxy fights occur when activists seek to gain seats on the company’s board to directly influence decisions.

For example, in the case of Yahoo in 2017, activist pressures from several hedge funds, including Third Point led by Dan Loeb, resulted in major leadership changes and a shift in strategic direction.

Methods and Strategies

To achieve their goals, activists have different methods and strategies: engagement and dialogue with companies, public campaigns, proxy battles, litigation, and shareholder proposals.

Engagement and Dialogue with Companies

Activists may initiate discussions with the top management and the board of companies to induce changes.

Public Campaigns

Activists may use media and public statements to rally support from other shareholders and put pressure on the company.

Proxy Battles

Through proxy battles, activists may gain enough shareholder votes during general meetings to win board seats and implement changes directly.

Litigation

Activists may take legal action to force companies to comply with certain demands.

Shareholder Proposals

Activists may submit proposals to be voted on at the companies’ annual meetings.

Short Selling

Activists may sell borrowed shares of a company with the expectation that the stock price will decline. Activists may release reports highlighting issues such as accounting irregularities or poor governance to justify their short positions.

Notable Activists

Carl Icahn: Known for his aggressive tactics, Icahn has targeted companies like Apple, eBay, and Xerox, pushing for strategic changes to enhance shareholder value.
Bill Ackman: Founder of Pershing Square Capital Management, Ackman has influenced companies like Target and Valeant Pharmaceuticals through high-profile campaigns.
Elliott Management: Led by Paul Singer, Elliott Management has been involved in numerous activism campaigns, including those at AT&T, Twitter, and SAP.
Jim Chanos: Famous for short selling, Chanos is known for his early identification of problems at companies like Enron. His approach often involves detailed research and public reports that bring issues to light.

Impact on Companies

Activist interventions can have significant impact on companies, both positive and negative.

Positive Impact

Activism can lead to improved governance, better financial performance, and enhanced shareholder value.

For instance, the activist campaign by Trian Partners at Procter & Gamble resulted in cost-cutting measures and strategic shifts that boosted profitability.

Negative Impact

On the downside, activism can create instability, distract management, and lead to short-termism.

For example, the intense activist pressure on Yahoo! led to management upheavals and strategic uncertainty.

Impact of Short Selling

Short selling activism can expose weaknesses and unethical practices within companies, leading to regulatory investigations and changes in management. However, it can also lead to significant volatility and negative sentiment in the stock market.

For instance, Jim Chanos’s short selling and public exposure of Enron’s accounting fraud played a crucial role in revealing one of the largest corporate scandals in history

Conclusion

Activists in financial markets and the corporate world play a crucial role in shaping the future of companies. While their methods can be controversial, the influence of activists has led to significant changes in corporate governance and performance. By pushing for accountability, transparency, and strategic improvements, activists continue to be a powerful force in the corporate landscape.

Why should I be interested in this post?

This article provides a comprehensive overview of activism in the corporate world, with clear examples and explanations of key concepts. For management students, understanding and analyzing the corporate world is equally important as being a part of it and making changes in it.

Useful resources

The hedgefund journal Shareholder Activism

Hogan lovells Recent developments in ESG shareholder activism around the world and suggestions for risk mitigation

Fordham law school Yahoo! and Hedge Fund Activism

Harvard Business Review Types of Activist Investors and How to Spot Them

Wikipedia Shareholder activism

About the author

The article was written in June 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).