Shareholder activism

Based on Wikipedia: Shareholder activism

In 1609, a Dutch merchant named Isaac Le Maire made history by inventing a form of financial warfare that would echo through the centuries. Le Maire had helped found the Dutch East India Company, the world's first publicly traded corporation, but had a falling out with its directors. His revenge was elegant: he organized a group of investors to short-sell the company's stock—betting that the price would fall—while simultaneously launching a public campaign to convince other shareholders that the company was mismanaged. It worked. Stock prices tumbled. Le Maire had discovered shareholder activism.

Four centuries later, the tactics have evolved, but the fundamental insight remains the same: you don't need to own a company to control it. You just need to own enough of it to cause trouble.

The Arithmetic of Influence

Here's what makes shareholder activism fascinating from a purely mathematical standpoint. To take over a company outright—to buy it completely—you need to acquire at least fifty percent of its shares, usually at a premium over the market price. This costs billions of dollars for any significant corporation.

But to launch a successful activist campaign? Less than ten percent will often do.

Sometimes much less. The logic is straightforward: most shareholders are passive. They own stock because it's in an index fund, or because their pension fund bought it, or because they inherited it from their grandmother. They don't vote. They don't pay attention to proxy battles. They just want the stock to go up.

This creates an opportunity. An activist investor with even a small stake can punch far above their weight by being the loudest voice in the room. They write letters. They make speeches. They threaten proxy fights. They talk to the press. Suddenly, management has to respond to someone who owns maybe three percent of the company as if they owned thirty percent.

What Activists Actually Want

Shareholder activism splits into two distinct camps, and understanding the difference matters.

The first camp is financial. These activists want the stock price to go up, and they have specific ideas about how to make that happen. Cut costs. Sell off underperforming divisions. Buy back shares. Pay a special dividend. Merge with a competitor. Fire the CEO. The unifying theme is making the company worth more money, at least in the short term, so the activist can sell their stake at a profit.

The second camp is non-financial. These activists care about something other than the stock price—environmental impact, labor practices, human rights, political donations. They're trying to change corporate behavior, not extract value. A religious organization might pressure a company to stop doing business with countries that persecute their faith. An environmental group might demand a company disclose its carbon emissions.

These two camps sometimes clash. A financial activist might argue that environmental commitments are destroying shareholder value. A social activist might counter that short-term profit-seeking destroys long-term sustainability. The company caught in the middle has to navigate both pressures simultaneously.

The Weapons of Shareholder Warfare

Activists have developed a sophisticated arsenal over the decades.

Proxy battles are the nuclear option. In a proxy battle, the activist tries to convince other shareholders to vote their way on corporate matters—usually to replace members of the board of directors with people more sympathetic to the activist's agenda. These fights are expensive, public, and often ugly. Both sides hire public relations firms, send glossy mailings to shareholders, and trade accusations in the press.

Shareholder resolutions are a gentler approach. Any shareholder can propose a resolution to be voted on at the annual meeting. These resolutions are usually non-binding—even if they pass, the company doesn't have to do what they say—but they create public pressure and force management to respond. Environmental groups have become particularly skilled at this tactic, submitting hundreds of resolutions every year demanding climate disclosures, emissions targets, and sustainability reports.

Publicity campaigns bypass the formal corporate governance system entirely. Daniel Loeb, who runs a hedge fund called Third Point Management, became famous for writing extraordinarily caustic letters to the CEOs of companies he invested in. These letters, which often accused executives of incompetence in colorful terms, were technically private communications—but somehow they always seemed to leak to the press. The embarrassment alone was sometimes enough to force change.

Litigation is the nuclear option in the other direction. Shareholders can sue the company or its directors, claiming breach of fiduciary duty or other legal violations. These suits are expensive and time-consuming, but the threat of litigation gives activists leverage they might not otherwise have.

Negotiation is what usually happens in practice. Most activist campaigns end not in dramatic proxy fights but in quiet conversations. The activist makes their demands known. Management pushes back. Eventually, someone compromises. Maybe the activist gets a board seat. Maybe the company agrees to study a strategic alternative. Maybe everyone agrees to disagree but the company makes some modest changes to show good faith.

The Principal-Agent Problem

To understand why shareholder activism exists at all, you need to understand a concept that economists call the principal-agent problem.

Imagine you own a small business. You run it yourself. Every decision you make affects your own wealth directly. If you work hard, you get richer. If you slack off, you get poorer. Your incentives are perfectly aligned with the success of the business.

Now imagine you hire a manager to run the business for you while you sit on a beach somewhere. The manager gets a salary. If the business does well, the manager might get a bonus. But if the business fails, the manager just finds another job. The manager's incentives are no longer perfectly aligned with yours. They might make decisions that benefit themselves—a bigger office, a larger staff, a corporate jet—even if those decisions hurt the business.

This is the principal-agent problem. The principal—the owner—wants one thing. The agent—the manager—might want something different.

In large public companies, this problem becomes acute. The owners are thousands or millions of dispersed shareholders who each own a tiny fraction of the company. The managers are executives who might own only a modest stake themselves. The executives have enormous power over corporate resources, while any individual shareholder has essentially no power at all.

Shareholder activism is one solution to this problem. By concentrating ownership and attention, activists can provide the oversight that dispersed shareholders cannot. They can force managers to focus on shareholder value rather than empire-building. They can challenge cozy relationships between boards and executives. They can demand accountability.

Or at least, that's the theory.

The Dark Side of Activism

The theory sounds noble. In practice, things get complicated.

Activists often focus relentlessly on short-term stock price gains at the expense of long-term value creation. They might force a company to cut research and development spending—boosting profits this quarter but undermining the company's future. They might demand the company take on dangerous levels of debt to fund stock buybacks. They might push for a merger that enriches them but destroys jobs and innovation.

There's also the problem of greenmail, a term coined in the 1980s when corporate raiders were in their heyday. The idea is simple: an activist accumulates a stake, makes threatening noises about a proxy fight or hostile takeover, and then offers to go away quietly—if the company buys back their shares at a premium. It's essentially corporate extortion. The company pays the activist to leave, using money that belongs to all shareholders, while the activist profits handsomely.

The 1980s were the golden age of this behavior. Carl Icahn and T. Boone Pickens became household names by threatening companies and walking away with massive payouts. They were called "corporate raiders" and were widely despised by the business establishment. Poison pills and other defensive measures were invented specifically to stop them.

Modern activists claim they've moved beyond greenmail. Philip Goldstein, himself an activist investor, has argued that today's activists see themselves as catalysts for value creation rather than extortionists. The public perception has softened, with activists sometimes portrayed as reformers who hold lazy management accountable.

But the fundamental tension remains. An activist who owns three percent of a company and plans to sell in two years has very different interests than an employee who has worked there for twenty years, or a customer who depends on the company's products, or a community that relies on its jobs. Maximizing the short-term stock price is not the same as maximizing the company's long-term value or its contribution to society.

The Rise of Institutional Investors

Here's a number that should stop you in your tracks: as of 2020, institutional investors—pension funds, mutual funds, index funds—owned approximately sixty-eight percent of all shares in publicly traded American companies. Retail investors, meaning individual people like you or me who might own some stock in a brokerage account, owned only thirty-two percent.

But here's the really striking part: ninety-eight percent of institutional shares get voted at corporate meetings, while only twenty-eight percent of retail shares do.

This means that corporate governance in America is effectively controlled by a small number of very large asset managers. Vanguard. BlackRock. State Street. Fidelity. These firms manage trillions of dollars, and they have to vote on thousands of proxy proposals every year.

How do they do it? Mostly, they outsource the decision to proxy advisory firms—companies like Institutional Shareholder Services, known as ISS, which analyze proxy proposals and make voting recommendations. When ISS says vote for a shareholder resolution, institutions tend to vote for it. When ISS says vote against, institutions vote against.

This creates a strange situation. The ultimate owners of American corporations—the teachers and firefighters and office workers whose retirement savings are invested in these funds—have almost no direct voice in how the companies they own are run. Their votes are cast by asset managers following the advice of advisory firms that most people have never heard of.

It also changes the dynamics of shareholder activism. An activist trying to win a proxy fight doesn't just need to convince dispersed shareholders; they need to convince a handful of very large institutions. And those institutions are often cautious, focused on diversified portfolios and long-term relationships with management. They may not want to rock the boat.

On the other hand, when institutions do decide to support activist campaigns, their concentrated power can be overwhelming. A company that might have been able to resist pressure from a hedge fund owning five percent of its shares may find it impossible to resist when BlackRock and Vanguard pile on.

The Mechanics of Voting

If you've ever received a thick envelope from a company you own stock in, full of confusing documents about a shareholder meeting, you've encountered the world of proxy voting.

The word "proxy" comes from the Latin term for "to act on behalf of." When you can't attend a meeting in person, you can designate someone else to vote your shares for you. In modern corporate practice, this usually means filling out a card or clicking a button on a website to indicate how you want your shares voted.

Voting mechanics matter more than you might think.

Most companies use what's called straight voting or statutory voting. Each share gets one vote on each question. If you own one hundred shares and there are three candidates for the board, you get one hundred votes for each candidate. This system tends to favor incumbents and makes it hard for minority shareholders to elect their preferred candidates.

Some companies use cumulative voting instead. With cumulative voting, you get a total number of votes equal to your shares multiplied by the number of candidates. You can then distribute those votes however you like. If you own one hundred shares and there are three candidates, you get three hundred votes—and you can give all three hundred to a single candidate if you want. This makes it much easier for a minority shareholder to concentrate their voting power and elect at least one sympathetic director.

Most large corporations are incorporated in Delaware, because Delaware has spent decades developing corporate law that is attractive to businesses. In Delaware, cumulative voting is optional, and most companies don't use it. But there's a wrinkle: companies physically headquartered in California, even if they're legally incorporated in Delaware, may be classified as "pseudo-foreign" under California law and required to follow California's corporate governance rules instead. California is more shareholder-friendly on several dimensions.

There's also been a movement toward majority voting for directors. Under plurality voting, the traditional standard, candidates who receive more votes than their competitors win, even if most shareholders voted against them. A candidate could theoretically win a seat with a single vote if no one else got any. Majority voting requires candidates to receive more than fifty percent of votes cast. If they don't, they're not elected. As of 2018, seventy-one percent of companies in the Standard and Poor's 500 index had adopted some form of proxy access or majority voting rules.

Who Are the Famous Activists?

Certain names have become synonymous with shareholder activism, each with their own style and reputation.

Carl Icahn is perhaps the most famous, a survivor from the 1980s corporate raiding era who has reinvented himself as an activist investor. Now in his eighties, Icahn has targeted hundreds of companies over his career, from TWA to Apple. His style is confrontational—he's been known to call executives "morons" in public—but he's also proven remarkably successful at forcing change.

Bill Ackman runs Pershing Square Capital Management and is known for taking very concentrated bets. His style involves building a large position in a company and then publicly advocating for specific changes, often in detailed presentations to other investors. Ackman's most famous success was his campaign against Canadian Pacific Railway, which led to a turnaround in the company's operations. His most famous failure was a massive short position in Herbalife, which he accused of being a pyramid scheme; he eventually lost over a billion dollars when the stock refused to collapse.

Nelson Peltz runs Trian Partners and tends toward a less confrontational approach than Icahn or Ackman. Peltz often seeks board seats and then works from within to push for operational improvements. His targets have included Procter and Gamble, DuPont, and General Electric.

Daniel Loeb of Third Point Management is known for those scathing letters, which have described executives as "presiding over a catastrophe" and accused boards of "unconscionable incompetence." The letters make for entertaining reading, whatever their effect on corporate governance.

David Einhorn of Greenlight Capital became famous for publicly questioning the accounting at Lehman Brothers before the 2008 financial crisis—and being proven right when the firm collapsed. He's continued to take public positions on companies he believes are mismanaged or overvalued.

Larry Fink is a different kind of figure. As CEO of BlackRock, the world's largest asset manager with over ten trillion dollars under management, Fink isn't an activist in the traditional sense. But when he writes his annual letter to corporate CEOs—which he's been doing since 2012—executives pay attention. Fink has increasingly focused on environmental, social, and governance issues, arguing that long-term value creation requires attention to sustainability and stakeholder interests.

Activism Goes Global

Shareholder activism was born in America, but it hasn't stayed there.

As of 2018, approximately forty-seven percent of companies targeted by activist investors were located outside the United States. The tactics that worked on Wall Street have been exported to London, Tokyo, Hong Kong, and Frankfurt.

In Europe, activists have found fertile ground, especially in countries where corporate governance has historically been cozy and management has been insulated from shareholder pressure. Christer Gardell's Cevian Capital, based in Sweden, has targeted major European corporations including ABB, ThyssenKrupp, and Nordea Bank.

Asia has been a harder market to crack. Corporate cultures often emphasize harmony and consensus over confrontation. Cross-shareholdings and family control make it difficult for outside investors to build influential positions. But activists are increasingly willing to try. Oasis Management, a Hong Kong-based hedge fund, has targeted Japanese companies that it argues are hoarding cash and undervaluing their shareholders.

The globalization of activism reflects the globalization of capital itself. When pension funds in California own shares in German automakers and Japanese electronics companies, they expect the same shareholder rights they would have at home. Activist strategies that prove successful in one market get copied in others.

The Social Activism Movement

Not everyone wielding shareholder power wants to maximize profits.

The Interfaith Center on Corporate Responsibility, known as ICCR, has been using shareholder resolutions to push for social change since 1971. Originally focused on pressuring companies to divest from apartheid South Africa, ICCR now coordinates hundreds of religious investors—pension funds, foundations, and religious orders—to advocate for human rights, environmental protection, and corporate accountability.

As You Sow, founded in 1992, specializes in environmental shareholder advocacy. The organization has filed resolutions demanding that companies disclose climate risks, set emissions targets, and reduce plastic pollution. They've claimed victories at major corporations from Amazon to ExxonMobil.

Ceres is a nonprofit that works with institutional investors to advocate for sustainability. The organization's investor network includes asset managers with tens of trillions of dollars under management—enough concentrated power to make even the largest corporations pay attention.

The California Public Employees' Retirement System, known as CalPERS, is the largest public pension fund in the United States and has long been active on governance issues. CalPERS maintains a "focus list" of underperforming companies and publicly advocates for changes in corporate governance practices.

Labor unions have also entered the activist arena, often through pension funds like CalPERS or coalitions like the Strategic Organizing Center. These efforts sometimes blend financial and social activism—pushing for better wages and working conditions while also advocating for long-term corporate value.

The rise of environmental, social, and governance investing—usually abbreviated as ESG—has created new pressure on companies to respond to non-financial concerns. Asset managers increasingly claim to integrate ESG factors into their investment decisions, and shareholder proposals on environmental and social issues have grown more common and more successful.

Does Activism Actually Work?

The honest answer is: it depends on what you mean by "work."

Research suggests that activist investment strategies can generate returns higher than passive investing. A 2012 study found that activist-focused hedge funds consistently outperformed the MSCI World Index in the years following the 2008 financial crisis. In 2013, activist funds earned average returns of sixteen and a half percent, compared to nine and a half percent for the hedge fund industry overall.

But these numbers measure returns to the activists themselves, not necessarily to other shareholders or to society at large. An activist might profit by pressuring a company to take actions that boost the short-term stock price while damaging long-term value. By the time the damage becomes apparent, the activist has moved on to their next target.

Research on target companies shows mixed results. Some studies find that companies targeted by activists improve their operating performance. Others find that the gains are short-lived, or that they come at the expense of employees, communities, or long-term investment.

The social activists face an even harder measurement problem. How do you assess whether a shareholder resolution on climate change made a difference? The company might have changed its behavior anyway. Or it might have changed its rhetoric without changing its behavior. Or the resolution might have failed but shifted the public conversation in ways that led to regulation or market pressure years later.

What seems clear is that shareholder activism is here to stay. Activist campaigns are more common than ever—an average of 272 per year in the United States alone, including 47 formal proxy contests. Machine learning algorithms now try to predict which companies will be targeted next and which activists will do the targeting.

The Future of Corporate Power

Stand back far enough, and shareholder activism is really a debate about who should control corporations and for whose benefit.

One view holds that shareholders are the owners, and managers are their servants. On this view, activist investors are performing a valuable service by holding managers accountable and ensuring that corporations are run for the benefit of their owners.

Another view holds that corporations are social institutions with responsibilities to multiple stakeholders—employees, customers, communities, the environment—not just shareholders. On this view, activist investors are often destructive forces, sacrificing long-term value and social good for short-term stock price gains.

A third view holds that the whole question of corporate governance has become unmoored from the people who are supposed to benefit. When most shares are held by index funds that vote based on the recommendations of proxy advisory firms, when activist hedge funds are funded by institutions that include pension funds for ordinary workers, when the same asset managers appear on both sides of corporate battles—who exactly is making decisions, and in whose interest?

The story of Isaac Le Maire, that Dutch merchant who invented activist investing four centuries ago, didn't end happily. His campaign against the Dutch East India Company eventually failed. The company recovered. Le Maire lost his fortune and died in disgrace.

The company, however, also eventually failed—going bankrupt in 1799 after becoming corrupt and poorly managed. Perhaps it could have used more activist shareholders after all.