Home > Board Performance, Investor Participation, Voting Rights > Shareholder Activism: acting persons, aims, themes, targets, and behavior

Shareholder Activism: acting persons, aims, themes, targets, and behavior

Shareholder activism is the effort by owners of equity capital to use their shares’ voting power to change the behavior of corporate management. They use to act through Shareholder Proposals.

  1. Shareholder proposals, (which -in the US- any owner of shares valued at $2,000 or more, and held for one year, can introduce at the annual meeting of a publicly held corporation, -one per shareholder and company-); investors vote in person or by proxy. In 2012, at the USA, proposals were submitted by:
    1. Labor or union pension funds, (36%). Most of these cases, proposals have nothing to do with performance, but with union`s agenda. In the USA, though, they are forced to pursue the best for the value of the investment, so they shouldn`t and are not so free, to follow different objectives.
    2. Socially responsible investors, 22%. Religious, or public policy, or political involvement agenda, …the base being the idea that directors have fiduciary duties not only to shareholders, but to other stakeholders.
    3. Institutional unaffiliated investors, (1%). Hedge funds, mutual funds and the like, with guiding stars such as Ackman, Icahn, and others. They are well-known since the 80`s, (Nabisco, and so on), and look for improving shareholder value, to the benefit of all shareholders.
    4. Other normal individual investors, (10%).
    5. Four “gadflies”: Evelyn Davies, John Chevedden, William Steiner, and the Rossi family. 31%.
  1. There is interaction between social activism, the kind that forces companies to enhance corporate governance, (majority voting, declassified boards,…), and activism pursuing shareholder returns. The first one, has enabled the second activists, because their costs and efforts have been reduced. Also, by SEC and NYSE regulation, brokers cannot vote on uncontested elections by their beneficial owners`shares.
  1. The objectives are more or less by thirds, these ones:
    1. Executive compensation: proposals pursue to enhance shareholder control on theses matters. The number is going down, as disclosure has been enforced by regulation.
    2. Social objectives: environmental, social, labor relations, animals and human rights, ….independently of the shareholders interests. Both a and b, are substance-based proposals: a specific theme to be dealt and changed.
    3. Corporate governance: they pursue to differently allocate power among Board, management and shareholders. The number of these process-based proposals is going down, because of a certain success in previous years. Usual topics are:

                                                          i.      Shareholding voting rules: majority vs. plurality and super-majorities; cumulative voting; declassified boards.

                                                             ii.      Independent chairman

iii.      Rules allowing shareholders to act out of General Meeting: special meetings or written consent,

  1. Targets of shareholder activists:
    1. Larger companies.
    2. Company industry: financial services and energy.
    3. Where organized labor is interested, (unions). Retail, telecom and finance, mainly.
  1. How do proposals fare: they normally fail, when substance-based, and succeed when process-based.
  1. Among institutional investors, we can find Hedge Funds. They can be classified for type and style:
    1. Types of Hedge Funds: among equity focused hedge funds, we may distinguish: hedge equity, (hold long and short positions, normally keeping a net long position), market neutral, (try to produce results not correlated with any market), event-driven or macro funds. There are also fixed income funds, etc.
    2. Style: equity hedge, short selling, event-driven, and long-short.
  1. How do hedge funds usually act? Their behavior is determined by certain factors:
    1. Their investor base: the more they rely on super-rich wealth, the more they accept volatility. But more than two-thirds of their funds come from pension funds, endowments, and the kind, too risk-averse for the 80`s hedge fund industry`s behavior.
    2. Leverage: it is at its low in these times.
    3. Rigidity: funds owners require stickiness to the known manager`s strategy, not accepting changes.
    4. Funds allocated to hedge funds have soared from $ 0.5 trillion in 2000 to 2.2 trillion in 2012, so that many second-rate bets are accepted; thus, profitability is not expected to be so high now.
    5. Hedge funds normally charge a 2% management fee plus a 20% on profits. With the current low-level in interest rates, this seems high, so they need to compete with mutual funds, exchange-traded funds and so on.
    6. As for activist funds, $ 57 billion are said to be dedicated to activist strategies.It is interesting to follow some of the main hedge fund managers`strategies, so as to be aware of their acting pattern, for instance Carl Icahn, Bill Ackman, and others.
  1. How do equity hedge funds usually act? It is interesting to follow some of the main hedge fund managers`strategies, so as to be aware of their acting pattern, for instance Carl Icahn, Bill Ackman, and others. The following steps can be identified:
    1. Fund starts purchasing a stake in the company, normally under 10%, for profit disclosure reasons. Share is normally undervalued.
    2. Fund then discloses its stake and agitates for change: strategy, M&A options, and so on. Usually at this moment, fund is already in the money.
    3. It the target company resists to adopt suggested change, the fund manager usually proposes a minority slate of directors, (that with shareholder approval will replace current ones and agitate adopt changes).
    4. Failure is usually followed by new election campaigns, (normally with a full slate of directors now).
    5. Finally, fund manager may decide to cash-out, or to make a bid for the company stock.
    6. If the bid succeeds, funds need to be prepared to manage the company.
    7. A different approach involves using derivatives, (short positions), when discovering a negative feature in a company, (Ackman`s case in Herbalife, when he made the case the company had accounting wrongdoing to cover a Ponzi-kind performance).
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