Definition
Shareholder activism refers to actions taken by equity investors, who use their ownership stake in a corporation to influence its management. These actions often aim at promoting change within the company, such as shifts in corporate governance, financial management, or social and environmental practice. This can be achieved through various means, including proxy votes, shareholder resolutions, litigation, and public campaigns.
Key Takeaways
- Shareholder Activism refers to the approach where shareholders in a corporation leverage their equity stake to influence the company’s decision-making processes and policies. This is based on the understanding that as partial owners, they have the right to effect changes.
- Shareholder Activism can manifest in various forms like policy changes, mergers and acquisitions, or restructuring. These actions are often carried out to maximize the value of shareholders’ investments and more often aim at long-term benefits rather than short-term gains.
- Despite sometimes being seen as disruptive, Shareholder Activism is a vital part of corporate governance. It encourages transparency, accountability, and fosters the long-term sustainability and success of the company. However, it also presents the risk of prioritizing the interest of a small group of investors over the overall well-being of the corporation.
Importance
Shareholder Activism is a crucial finance term as it refers to the use of equity ownership in a corporation to put public or private pressure on its management with the aim of effecting change within the company.
This is significant as it allows shareholders, who are effectively the company’s owners, to influence corporate behavior, decisions, and strategies, leading to enhanced corporate governance and potentially improved business performance.
It can serve as a vital tool for investors to voice concerns, push for changes that add value, and hold management teams accountable.
Therefore, Shareholder Activism plays a crucial role in safeguarding shareholder rights and interests and it encourages responsible and responsive management practices within corporations.
Explanation
Shareholder activism is a way for shareholders, who are partial owners of a corporation, to influence a corporation’s behavior by exercising their rights as owners. The main purpose of shareholder activism typically revolves around improving financial returns and corporate governance, as well as an increasing focus on environmental, social and governance (ESG) parameters.
Shareholders can prompt changes by engaging directly with a company’s management, expressing their concerns and proposing new policies or changes to existing ones. Shareholder activism is often used as a tool to bring about change in companies that may be underperforming, or whose policies may be viewed as inadequate or poorly devised.
Activist shareholders may seek changes in management personnel, reductions in expenses, share buybacks, dividends, changes to the board of directors, or even selling off parts of the company to raise capital. More recently, a growing form of shareholder activism focuses on pushing firms to adopt environmentally friendly strategies or to be more socially responsible.
This is key as corporations are being held to higher standards of social responsibility and environmental sustainability.
Examples of Shareholder Activism
Elliott Management vs. Hyundai Motor Group – In 2018, the US hedge fund Elliott Management challenged Hyundai Motor Group’s plan of reshuffling and rearranging its ownership structure to consolidate the power of the conglomerate’s heir. Elliott had stakes in three Hyundai affiliates and urged other shareholders to reject the plan, claiming it was against the benefit of the shareholders’ wealth. Instead, they proposed a dividend payout and setting up a board committee to improve governance. Ultimately, Hyundai Motor Group withdrew their proposed plan.
Third Point LLC vs. Sony – Back in 2013, US hedge fund Third Point LLC, which held a significant stake in Sony, pushed the Japanese corporation to spin off part of its entertainment business. They believed Sony’s entertainment branch wasn’t as profitable or efficient as it could be and that spinning it off could unlock value for shareholders. While Sony rejected the proposal, it led to significant changes in Sony’s governance, including more transparency in its entertainment division.
Carl Icahn vs. Apple – Billionaire activist investor Carl Icahn’s impact on Apple is another example. In 2013, Icahn acquired a significant amount of Apple’s stock and started lobbying the company to do more share buybacks to return cash to the shareholders. He pressured the company to increase its buyback program from $60 billion to $150 billion. Apple responded by increasing its share repurchase program and dividend by about $30 billion in
FAQ on Shareholder Activism
What does Shareholder Activism mean?
Shareholder activism is a way shareholders can influence a corporation’s behavior by exercising their rights as owners. Activists’ goals vary but they often seek changes in management, acquisitions, divestitures, and decisions impacting the company’s balance sheet.
What are some common methods of Shareholder Activism?
Shareholder activists can use several methods to make their voices heard, including proxy fights, shareholder resolutions, litigation, and public campaigns. These vary in their intensity and the level of commitment required from the activist.
What impact does Shareholder Activism have on a company?
Shareholder activism can significantly impact a company. Activists can drive change within the company, influencing its strategy, operations, and overall direction. However, this can also spark conflicts and distractions if not managed properly.
Does Shareholder Activism benefit the company?
The impact of shareholder activism on a company can be positive or negative, depending on various factors. In some cases, it can lead to increased value for shareholders and improved corporate governance. However, in other cases, it could lead to short-term decision making at the expense of long-term value or result in unnecessary disruptions.
How can a company respond to Shareholder Activism?
Companies typically respond to shareholder activism by engaging with activists to understand their concerns, taking actions that address those concerns, or defending existing practices when necessary. The board and management may also work together to assess the company’s vulnerabilities to activism and develop proactive strategies to address them.
Related Entrepreneurship Terms
- Proxy Fight
- Stakeholder Engagement
- Corporate Governance
- Shareholder Resolutions
- Investor Advocacy
Sources for More Information
- Investopedia – An extensive resource for definitions, explanations, and articles about all aspects of finance including shareholder activism.
- The Harvard Law School Forum on Corporate Governance – A great resource for information related to corporate governance, which includes shareholder activism.
- Bloomberg – A major global provider of financial news and information, including coverage on shareholder activism.
- Reuters – An international news organization providing significant coverage of finance and shareholder activism.
