Activist campaigns and the resultant change in performance

Abstract

Since the 2008 financial crisis, shareholder activism has been gaining traction and is now playing a prominent role in public markets. The need for shareholder activism arises from the agency problem in companies which is the cause of conflict of interests between the management and shareholders. Shareholder activism aims at driving change to make the management more accountable. Various tactics used by activists include vote, engage, voice, takeover, proposal and exit, depending on type of change the activist shareholder is aiming to bring about. Although individual shareholder activism was prevalent in the 1980s, today there are predominantly two types of activists – i) Institutional activists, which include pension funds, asset managers, mutual funds, insurance companies and ii) Hedge funds, which are the new class of activists. Activism by institutional investors tends to be incidental whereas hedge fund activism is ex ante and strategic. Some key areas targeted by activists include corporate governance reforms, strategic transactions, executive compensation or operational performance. The origin of shareholder activism can be traced back to the early 20th century, where it first began in the United States. It has evolved from being focused on civil rights, environmental issues and consumer safety issues during the 1970s to the ear of “corporate raiders” in 1980s and then eventually controlled by institutional activism in 1990s. Contemporary activism is dominated by hedge fund activists. Contrary to the Corporate Raiders who pursued self-interests, today’s activists have been labelled as catalysts for change and disruptors of the status quo. Several economic events such as the Dot-com bubble, corporate scandals and the 2008 financial crisis has brought about a change in the perception of activism. The most common rationale given by activists explaining the rise of shareholder activism is simply, “because it works.” To understand the motivations behind shareholder activism, we analyzed activist campaigns in USA in the last five years. We observed that the result of the transactions is almost equally likely to be successful or unsuccessful with proposals being the most deployed and successful tactic. The success of the transactions was observed to be higher for transactions for which the initial stake ranged from 10% to 15%. However, most transactions saw hedge funds acquiring a stake between 5% to 10%. It was also observed that longer duration campaigns were most successful bet generated lower returns. Further, 51.22% of the campaigns under study showed that positive excess returns over S&P500 have been generated. Review of research papers also shows that activists have historically generated higher returns for investors than the S&P 500. We also attempted to understand various trends that dominate activism in current times. Some interesting trends are i) small cap companies are being increasingly targeted ii) companies prefer to settle than fight iii) M&A focused activism is witnessing an increased focus iv) USA share of global activism decline as Europe and APAC’s share surges v) rapid growth of ESG investing. To further corroborate our understanding on this topic, we studied three marquee activist transactions and the impact it created on the company and the shareholders. Even as activists continue to expand their presence, there is no doubt that shareholder activism is controversial. There are two schools of thought here. Proponents argue that active shareholders assuage management complacency and make them more accountable for their actions. It is considered as a legitimate means of improving corporate governance and financial and operating performance. Opponents argue that shareholder activism is disruptive and focuses only on short-term gains to activist shareholders, especially in the case of hedge fund activists whose interests are not always aligned with those of minority shareholders. Despite the differences, we believe that shareholder activism is here to stay.