What is Activist Investing and Why is it Important?

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What is Activist Investing and Why is it Important?

Influence Without Control

The goal of activist investing is to initiate fundamental change and generate shareholder value improvements. Constructive activists have a high research investment spend per company, relatively long holding periods of around three to five years and high concentration in their asset mix.

An activist will typically recruit experienced industry professionals to provide knowledge about significant value drivers for a specific company or industry. In a nutshell, an activist investor is a hybrid—somewhere between a full-control model, such as private equity, and a more active or passive asset manager, such as a traditional managed fund.

A constructive activist investor's primary focus is having a significant influence on a company's plan without paying for full control like a private equity firm would.  Achieving the objective goal of influence requires intelligent communication with major shareholders and the media. Resorting to costly and acrimonious public battles is avoided rather than embraced. 

A thoughtfully crafted value-creation agenda based on diligent research and careful analysis of an enterprise for months at a time, if not years, is a typical scenario before investment. Practical, highly commercial collaboration with management behind the scenes is essential as well. And sometimes, the 'stick and carrot' approach is required to motivate target companies into action.

Why is Activism Important?

A shift in power between management and shareholders has ushered in an era of 'corporate management.' Shareholders, in a sense, have become disconnected from their investment as the Board of directors and senior management of listed companies continue to find ways to exert more control. Many apparent conflicts of interest arise in this situation. 

Today, corporate management often acts as if they own a company. However, the law clearly states shareholders do. Management is merely an employee—a corporation's Board of Directors governs management. The Board of Directors works for and answers to the shareholders—the real owners of the company. Management frequently manipulates control of the Board of Directors (Board) by populating it with friends and acquaintances. They are honoured to become Board members, yet, afraid to voice objections due to fear of losing their position. 

A "rubber-stamp" Board can lead to a host of problems. Yes, this is not always true, of course. Honest, capable, and ethical management teams endeavour to create value for shareholders daily. But the trend towards management making decisions not in shareholder's best interests continues. Typically, shareholders are not well versed about the companies they own, nor are they well informed enough to prevent or stop corporate corruption in the making.  

A Way Forward with Activist Investing

Constructivist Shareholder Activism is the process of shareholders becoming involved in the governance and management of the companies they own. The key is representing shareholders and constructively working with boards, not in a hostile manner like some of the old corporate raiders.

While owning a minority of a company is typical, an Activist's goal is to create value for ALL shareholders. And many studies have shown shareholder activism produces returns superior to the overall market returns with much less risk. The Activist Insight Index, which tracks dedicated activist funds worldwide, has returned an average of 14.2% per year since 2009, against 14.5% for the S&P 500 Index and 9.5% for the ASX 200.[1]

Exposure to an activist strategy or fund offers an intelligent diversification alternative for most investors and qualifies as a healthy inclusion in a balanced fund.

[1] https://abl.sfo2.cdn.digitaloceanspaces.com/public/Expertise/ABL-Shareholder-Activism-Report.pdf