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Economics

Study Notes

Activist Shareholders

Level:
A Level
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Activist shareholders take stakes in businesses and seek changes in management and objectives to increase their returns

The Growth of "Shareholder Activism"

  • Increasingly we are seeing shareholders who are more proactive in putting executive management under pressure - these are known as activist shareholders.
  • A well-known activist shareholder is Carl Icahn who has made huge returns on taking stakes in businesses such as Netflix and (more recently) Apple. These investors look to put intense pressure on existing management or force through changes to management boards. Some insist on businesses using profits to buy-back shares to increase returns to existing shareholders.
  • At the forefront of this change has been the expansion of hedge funds and a number of wealthy private investors. Latterly, the sovereign wealth funds have appeared on the scene.
  • An activist shareholder uses an equity stake to put pressure on its existing management.
  • The goals of activist shareholders range from financial (e.g. increase of shareholder value through changes in dividend decisions, plans for cost cutting or investment projects etc.) to non-financial (e.g. dis-investment from particular countries with a poor human rights record, or pressuring a business to speed up the adoption of environmentally friendly policies and build a better reputation for ethical behaviour, etc.).
  • Activist shareholders do not have to hold large stakes in a business to make an impact. Even those with relatively small stakes or 3 or 4 per cent can launch publicity campaigns and make direct contact with the senior management.
  • Private equity / hedge funds have been among those most involved in the rise of shareholder activism. They tend to focus on under-performing businesses

Is this new breed of shareholder activists an important voice and counter-balance to the power of entrenched management and willing to stand up to corporate corruption and highlight poor management? Can they help to overcome the principle-agent problem? Or are they aggressive corporate raiders seeking short-term corporate change merely for their own personal gain?

Environmental groups such as Friends of the Earth have latched onto the potential for shareholder activism to impact on businesses especially in the areas of the environmental impact of their business activities.

It remains the case that ownership and control within British industry is dispersed. Typically the largest shareholder in any large business listed on the stock market is likely to own a minority of the shares. Majority ownership by a single shareholder is unusual.

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