Shareholders Getting Chummy with Activists

Management and the board of directors may assume that a company’s institutional shareholders will be their allies in a fight against an activist investor. They shouldn’t.

Shareholder activists continue to take on boards of directors and management, especially at large companies. Of the 137 financial or board-seat activist campaigns announced as of August 12, nearly 30 percent involved companies with a market capitalization of more than $1 billion at the time the campaign was initiated, according to, up from 20 percent in 2012.

While companies may just be more vulnerable to activist campaigns, experts say a key driver is that institutional shareholders are more often embracing these much-maligned investors instead of siding with the company against them.  

“There is real change in how activists are perceived by the investing public,” says Alexander Khutorsky, managing director of The Valence Group, a specialist investment bank. In the past, if an institutional investor didn’t like a company’s performance or its management team, it “voted with its feet” and sold the shares. But now many investors are “more open to outsider influence,” says Khutorsky. “They’re willing to concede that a company could be made better through activism, so they are sticking around and voting for changes.”

A note from highlights “an increased willingness by mainstream mutual funds and other institutional investors to side with activists, which is absolutely essential [for a hedge fund] to effect changes with a small ownership stake, as they often do when targeting larger companies.”

The goals of activists often align with investors: returning excess balance-sheet cash to shareholders, selling underperforming or noncore business units or even ousting an ineffective board of directors.

“As much as management may feel they are being attacked, their shareholders will not necessarily share that view,” Khutorsky says.

In addition, activist investors have a “good track record” of creating value, at least in the nominal sense, says Khutorsky. “The stock [often] goes up so they can show very straightforward returns; they’re not necessarily creating long-term value, but they have credibility in helping shareholders realize near-term value,” he says.

Activist investors can also give “voice” and muscle to shareholder concerns and dig deeper into the financials to find ways to unlock value. As Charles Nathan, partner at RLM Finsbury, wrote on the Harvard Law School Forum on Corporate Governance and Financial Regulation last March, “shareholder participation in corporate strategy and operations is essentially passive. The institutional shareholder community, which dominates share ownership of most public U.S. companies, is ill-suited to influence company performance through dialogue with management or proxy contests and very rarely tries to do so.”


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