Shareholder Activism

Shareholder activism is the course of action shareholders take to influence corporate governance by utilizing their ownership privilege. It assists in safeguarding the interest of stakeholders and improving the efficiency of the management. The key strategies employed for it are proxy conflicts, negotiations, public campaigns, shareholder resolutions, and litigation.

It promotes the effective engagement of shareholders in the firm’s decision-making procedure. The participating stakeholders, alias "Shareholder Activists" or "Activist Shareholders, " directs the management's attention to pressing issues so that the firm takes informed decisions. Their concerns regarding the company may be financial or non-financial in nature.

Key Takeaways                                                               

• Shareholder activism is an attempt by the shareholders to influence the firm’s commercial activities through their ownership rights.
• It is practiced for two major purposes, i.e., correcting the management’s mistake and creating major modifications in its policies.
• The approaches to shareholder activism include proxy battles, lawsuits, shareholder resolution, settlement with the administration, and publicity campaigns.
• Shareholder activism seeks to highlight the problems of shareholders and upgrade the company’s policies for betterment.

Shareholder activism is any effort by shareholders to communicate a need for change in a company’s policy or management.  Shareholders take this action based on their rights as owners. It is mostly employed to rectify a corporation’s blunder or cause a crucial transformation of corporate guidelines.

Dissatisfaction with the company's status quo is a major reason for shareholders to resort to such measures. For instance, shareholder activists may prompt businesses with surplus profit to boost dividend dispersal among investors.

The other financial reasons for activism may include cost-cutting, corporate restructuring, executive appointment, remuneration, etc. Besides seeking to change corporate financial policies, shareholders may also appeal to the corporation to look into its social performance like environmental reporting, discrimination, etc.

Note that shareholder activism is a joint action requiring the contribution of internal and external stockholders. It helps them broadly opine their perspective, ensuring instant high-yielding outcomes. It may be in the form of direct appeal to the management or indirect request to a regulatory body or media.

As discussed, shareholder activists try to bring about the required changes in the company by exploiting their authority. For this, they may either capitalize on the present state of control or expand their proprietorship share for amplified effect. 

Shareholder activists often include hedge funds or mutual funds that purchase a substantial stake in target companies intending to reform them and increase the company's shareholder value and, in turn, benefit from their investment.

Constant monitoring by the shareholders keeps the management on its toes and ensures the optimal utilization of the company’s resources through methodical governance.

As a result, the company's performance improves, thereby improving its profitability and enhancing its shareholder value in the long run. Hence, both for the company and its shareholders stand to benefit from shareholder activism.

Moreover, this phenomenon also aids in resolving leadership-shareholder problems to foster a trustworthy and prosperous business environment. Consequently, the corporation’s market position alleviates augmenting its prospects further.

There are numerous forms of shareholder activism:

#1 - Proxy Conflicts

Proxy voting refers to a setting where the shareholder is, deliberately or accidentally, incapable of showing up at the shareholder’s meeting. Thus, the voting power is assigned to a representative who utilizes the authority to bring about the desired changes. 

Shareholders may use proxy votes under the influence of activists to change management or its policies. Proxy conflicts happen when stockholders are unhappy with the firm's operations or policies. 

#2 - Settlement with Organization

It is the easiest method of shareholder activism, entailing negotiation between the organization and stockholders. Both parties share their issues and recommendations for the ongoing condition. Now, it helps them attain a mid-point for logical dispute resolution. 

#3 - Shareholder Resolution

The shareholders submit a formal proposal to vote at the institution’s annual shareholders meeting regarding the current matter at hand. It is a proven strategy to grab many eyeballs and discuss the problem vividly. It may be anything from amendments in the firm’s supervision capability to its professional conduct as a corporate citizen. 

#4 - Publicity Campaigns

The publicity campaigns transpire when the establishment does not pay attention to the shareowner problems. Therefore, they use media to highlight the nuisance or concern via publicity campaigns or public announcements. This, in turn, coerces the management to address the matter in question and ensure a swift conclusion. 

#5 - Lawsuits

Generally, legal actions are taken in case of serious allegations or when no other option is left. Nonetheless, it causes serious financial and mental harm to both parties. Moreover, the judicial proceedings may continue with severe damage to their reputation for a long time. 

Example #1

As per a recent Forbes report, ExxonMobil’s activist shareholder Engine No. 1, a hedge fund, has won two seats on the oil and gas giant’s 12-member board.

Amid growing global concerns regarding climate change, Engine has been pushing Exxon to transition to renewables and low-carbon energy. As a part of its strategy, it suggested four nominees for the Exxon board, of which two have been approved.

With only a minor stake of 0.02% in Exxon, Engine could achieve this feat by gaining the support of Exxon’s other substantial stakeholders like the California State Teachers' Retirement System, U.S. pension fund, and BlackRock.

This change in the board is likely to force Exxon to transform its business by shifting to cleaner energy.  Also, it would encourage other activist investors to engage in shareholder activism to take on big oil companies to address the cause of climate change.

Example #2

Here is a snippet from a Wall Street Journal report. 

With 2.5% shares (nearly $325 million) in Hasbro Inc., Alta Fox Capital Management LLC plans to wage a proxy battle to make desired changes to the toymaker firm. Alta Fox intends to add five directors to Hasbro’s board and suggests a spin-off of Hasbro’s unit housing games like Dungeons & Dragons. . 

Stockholders will vote at Hasbro’s annual meeting to consider the future of director candidates. Alta Fox believes that the step can double Hasbro's market valuation. It's currently valued at $13 billion, possessing brands like Monopoly and Nerf. The toy manufacturer firm has welcomed the move and is quite ecstatic to have new directors on board.