Allie Grace Garnett is a content marketing professional with a lifelong passion for the written word. She is a Harvard Business School graduate with a professional background in investment finance and engineering.
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Before joining Britannica, Doug spent nearly six years managing content marketing projects for a dozen clients, including The Ticker Tape, TD Ameritrade’s market news and financial education site for retail investors. He has been a CAIA charter holder since 2006, and also held a Series 3 license during his years as a derivatives specialist.
Doug previously served as Regional Director for the Chicago region of PRMIA, the Professional Risk Managers’ International Association, and he also served as editor of Intelligent Risk, PRMIA’s quarterly member newsletter. He holds a BS from the University of Illinois at Urbana-Champaign and an MBA from Illinois Institute of Technology, Stuart School of Business.
How do activist investors gain influence in a company?
Activist investors usually gain influence by purchasing enough shares to build important voting power. Common shareholders can elect board members and vote on other company matters. With sufficient shareholder support, activists may win board seats for themselves or their chosen representatives, giving them direct influence over strategy and major decisions. They may also work with institutional investors, since a coalition of a company’s largest investors can hold substantial voting power.
What tactics do activist investors use to push for change?
Activist investors can submit proposals for shareholder votes and organize other shareholders to vote by proxy. In a proxy fight, the activist and the management team each campaign for shareholder proxy votes. Activists may also bring legal challenges against management decisions, run public campaigns to build support, or seek board seats. If they gain enough voting power and board seats, they may be able to force a partial or total change in the management team.
What happens when an investor takes an active role in steering the direction of a publicly traded company? Activist investors typically gain influence by amassing a significant number of shares in a target company. They are characterized by a drive to reform public companies to their liking.
The ability of activist investors to increase share prices—or “unlock shareholder value,” in investment lingo—may vary, but many activist investors excel at igniting controversy and antagonizing the board of directors. But whether they take a confrontational or cooperative approach, their ultimate goal is to persuade the company to make changes they believe will benefit shareholders.
Key Points
Activist investors gain corporate influence by amassing shares in a company.
Activists usually focus on reforms aimed at boosting the company’s value.
Grabbing board seats and forcing votes are among the top activist investor tactics.
What are activist investors?
Activist investors are shareholders who use their equity stakes in a company to push for changes in its management, strategy, or operations, often with the goal of increasing shareholder value. The companies targeted by activist investors are typically publicly traded, enabling activists to acquire significant equity stakes simply by purchasing shares.
Common stock vs. preferred stock: Who gets to vote?
Companies with underperforming leadership or assets are common targets of activist investors. Activist investors are perhaps best known for using hostile tactics to drive company reforms, but some activists are friendly, preferring a cooperative style of working with management teams.
As an investor, an activist may be a generalist or have relevant sector-specific expertise. Activists typically employ a heavily research-driven approach, conducting a thorough analysis of a given company to develop their reform strategy.
Activist investors may be individuals, but they’re typically backed by a hedge fund or other investment vehicle. The fund may be focused specifically on activism, investing in a diversified portfolio of companies targeted for reform.
8 tactics of activist investors
How do activists drive change, even when it’s unwanted by a company’s management team? The first step is typically purchasing enough shares to amass influential voting power. Activists can use that voting power directly, plus employ other tactics to achieve their desired outcomes.
Here are eight strategies commonly used by activist investors:
1. Attain one or more board seats. With sufficient voting power, activists can vote themselves or chosen representatives onto a company’s board of directors, gaining direct influence over the company’s strategy and other key decisions.
2. Submit shareholder proposals. Activists commonly submit proposals for votes at shareholder meetings. An activist’s proposal may or may not be welcomed by the company’s management team.
3. Organize proxy votes. It’s one thing to get a proposal on the ballot; it’s quite another to get it approved, especially if the board is against it. That’s why, in conjunction with submitting a shareholder proposal, an activist investor may organize other shareholders to vote by proxy. Using a proxy strategy enables activists to try to leverage the voting power of other stock owners—institutional fund managers who control millions of shares, as well as individual shareholders—either by persuading them to vote for the activist’s proposals or by delegating their voting authority to the activist.
4. Engage in proxy fights. Activists wishing to control more voting power may wage active campaigns to secure proxy votes, in which the management team and activist investor both battle for a greater portion of proxy votes from shareholders.
5. Engage with institutional investors. Activists may seek to grow their influence by aligning with a company’s institutional investors. A coalition of the company’s largest investors can hold substantial voting power.
6. Initiate legal challenges. An activist investor may choose to leverage the judiciary system as part of their reform strategy. Legal processes may be an effective tool to challenge decisions or actions by a company’s management team.
7. Run public campaigns. Media coverage can be a powerful lever for activist investors. An activist may organize a high-profile campaign to call attention to and build support for their reform initiatives.
8. Gain corporate control. With enough voting power and board seats, an activist investor may be positioned to force a partial or total change in a company’s management team.
Soft influence vs. hard power
Many activist investors use a mix of soft influence tactics (like building coalitions) and hard power moves (like forcing shareholder votes) to achieve their target outcomes.
What motivates investor activists
Activist investors seek to reform a target company in ways that cause the share price to rise. The specific changes that activists perceive as necessary can vary widely by the company and the activist.
Here are some of the ways that an activist might be motivated to reform a company:
Strategy. An activist may push for a merger, acquisition, divestiture, operational changes, or outright corporate restructuring. The activist may also push for strategic realignment for better market positioning.
Capital structure. An activist may try to improve the stability of cash flows, or they might advocate for debt reduction, cost-cutting measures, or risk management practices.
Financial engineering strategies. An activist may recommend changing the dividend policy, or increasing (or decreasing) share buyback programs.
Management and compensation. An activist may try to change certain executive pay standards or otherwise challenge entrenched management teams.
Stakeholders. Some activists will try to boost the focus on environmental, social, and governance issues, while others may desire to do the opposite if they feel the company is not acting in the best interest of shareholders.
Activist investors may be concerned primarily with short-term or long-term outcomes. Activists who care only about short-term results are likely to prioritize a different set of reforms than investors playing the long game.
The who’s who of activist investing
Activist investing isn’t for the conflict avoidant. Here are five activists who have historically grabbed headlines as they attempted to enact their reform agendas:
2. Bill Ackman. Founder of the hedge fund Pershing Square Capital Management, Ackman is known for activist campaigns aimed at companies like Wendy’s (WEN), Target (TGT), and the Canadian Pacific Railway (CP). Ackman’s short-selling campaign against Herbalife (HLF) also put him in a very public battle with Icahn, who took the opposite side of the trade.
1. Carl Icahn. A legendary activist investor known for using aggressive tactics and organizing high-profile campaigns, Icahn has waged activist battles against companies including Apple (AAPL), eBay (EBAY), and Xerox (XRX).
3. Paul Singer. Founder of the hedge fund Elliott Management, Singer is a notorious activist investor with a history of reform campaigns against companies such as AT&T (T), PayPal (PYPL), and Samsung.
4. Nelson Peltz. As the cofounder of the hedge fund Trian Partners, Peltz has led major activist campaigns against the Walt Disney Company (DIS), PepsiCo (PEP), Mondelēz (MDLZ), and others.
5. Daniel Loeb. This activist and founder of the hedge fund Third Point is known for penning sharp letters to company boards of directors. His corporate targets have included Intel (INTC), Yahoo!, and Sotheby’s (BID).
The bottom line
Is activist investing an ethical pursuit? Using forceful tactics to raise a company’s stock price can benefit all shareholders, but activists don’t always have the same priorities as the company’s management team—or even its other shareholders. And what’s good for the stock price today may not be good for the company over the long term.
If you’re researching a public company as a potential investment, pay attention to any ongoing activist campaigns that have the company in their crosshairs. Consider what changes the activists are proposing, whether those changes make sense, and how they might affect the company’s long-term prospects.
This article was most recently revised and updated by Allie Grace GarnettThis article was most recently revised and updated by Doug Ashburn
