Beware of activist investors?

Activist investors are relatively new – but very influential – players in international capital markets. They are shareholders at publicly traded companies who attempt to affect change in an organization either by directly appealing to, or putting heavy pressure on, the company’s board of directors, bypassing the normal advisory process. The firms that activists target tend to underperform relative to their industry.

Types of activism
Hedge fund activism is among the most aggressive and involves shareholders who usually seek a significant change in a company’s strategy, financial structure, management or board composition.
More common, but less conflictual, investor activism consists of shareholders playing a part in deciding how much executives are paid. This is referred to as “say on pay” and originated from concerns about top executives deciding on their own remuneration and overpaying themselves. In the US, “say on pay” was a provision of strong post-financial crisis legislation referred to as Dodd-Frank, which has sought to improve accountability and transparency in the American financial system.

General Motors, etc.
In 2015, hundreds of companies worldwide, like General Motors, Dow Chemical, Nestlé, Xerox or Mondelez, were subject to so-called activist investors. 2016 has also been a big year for investor activism.
Investors David Einhorn and Carl Icahn have both used their large stock holdings in Apple to exert pressure on the company to make changes like returning capital to shareholders from the company’s massive cash reserves of around $150 billion.
A dispute between Trian fund and the board of directors at DuPont over whether DuPont should have divided into two companies resulted in a victory for DuPont CEO Ellen Kullman who stood her ground and resisted Trian’s proposal. But, Kullman ended up resigning months later. DuPont subsequently merged with Dow chemical after being the focus of another activist investor firm, the hedge fund Third Point. The merger is still underway and calls for the company to spin off into three separate entities. Trian fund is reported to have been consulted for input on the merger.

Should all companies beware of activist investors?
While activist investors don’t always succeed in getting exactly what they want, their actions can be highly influential even when they fail to achieve their specific goals.
What is certain is that they are here to stay; at least for the foreseeable future.
Your company needs to be prepared to be an activists’ target. Their rise is associated with a stronger focus on shareholder value. What’s the best way to prevent their attack? By maintaining strong company performance. Make sure that you maximize value across all of your businesses and, if you are a conglomerate, that there are solid synergies between your different enterprises.
Despite criticism, the empirical evidence is clear; share prices and operating performance at targeted companies often improve after activist involvement. So it is best summed up by Warren Buffet who said: “If every company were well managed, there would be no reason for activists. The truth is, at some companies, the managers forget who they’re working for.”

Nuno Fernandes professor of Finance at Imd, where he directs the Strategic Finance Program

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