Firms wary as investor activism gains traction (2024)

FAQs

What are the risks of activist investing? ›

If the target company is successful, the activist and its group of investors can suffer damages including a loss of voting rights as stockholders. Such litigation is not only expensive but can also involve reputational harm where seemingly irrelevant dirty laundry may be aired.

Disadvantages of Individual Activist Investors

Individual activist shareholders may not share the same interests or goals as other shareholders and, therefore, may destroy shareholder value. For example, an activist shareholder may only prefer a short-term holding time horizon;.

Activist investors play a vital role in the modern financial landscape. Their interventions can lead to improved corporate governance, increased accountability, and enhanced shareholder value.

The activist investor identifies a target and then obtains a sizeable stake in the company's equity, which often signals to the market that changes are soon to come. Hence, after the news gets around that an activist firm has become a shareholder, the company's share price can rise in anticipation of a turnaround.

The firms that activists target tend to underperform relative to their industry. Due to activists' aggressive attitude toward management and hostile approaches to short-term profit making, they are often perceived as “corporate raiders,” “green mailers” or “asset strippers”.

Activist investors may have sound ideas about how management can use the company's assets better, improve its operations, or enhance shareholder value. Management may or may not be receptive to such ideas. However, the dialog could be productive of positive changes for the individual investor as well as the activist.

These effects can easily evolve into more intense feelings such as burnout, compassion fatigue, and even suicidal ideation in some case. Involvement in higher-risk activism, such as involvement in a protest or riot, is associated with more negative side effects and distress than lower-risk activism.

While such activism can pose threats, including disruption of management plans, reputational damage, and potential change in control, it also presents opportunities for companies to identify areas for improvement, enhance shareholder value, and improve corporate governance.

Understanding Shareholders Activism

For example, if a company is making a lot of profit, shareholders could ask for more dividends to be paid to them. Financial reasons for taking action could also include cutting costs, changing how the company is structured, choosing new leaders, or dealing with salaries.

Activist investing is the practice of buying a large amount of a company's stock with the goal of gaining influence and pressuring the leadership team to make a specific set of changes to the enterprise. Activist investors push for changes that would increase the company's share price or benefit the activist investor ...

How successful are activist investors? ›

Multiple studies have shown that activism succeeds in raising share prices, at least temporarily. A major recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang of activist investments from 1994 through 2007 also found five-year improvements in the operating performance of targeted companies.

The three most well-known shareholder activists today are Carl Icahn, Bill Ackman, and Dan Loeb. Activist Investment Funds are companies that manage a pool of funds to give more power to shareholders that seek change. One of the most well-known of these types of funds is the Elliot Management Corporation.

No duty to discuss or negotiate, but usually advisable to meet with the activist and discuss the activist's criticisms and proposals (company participants in any such meeting should prepare carefully with the company's activist response team and there should be at least two company participants in any such meeting); no ...

Activist investors buy minority stakes in public companies to change how they are run. If they fail to persuade company managers, they may wage a proxy fight for board seats. Some hedge funds specialize in activist investing while institutional investors may engage in it from time to time.

The most common adverse side effects from being involved in activism include depression, anxiety, and stress. These effects can easily evolve into more intense feelings such as burnout, compassion fatigue, and even suicidal ideation in some case.

These risks may include credit risk, market risk, liquidity risk, and currency risk, among others. To mitigate these risks, investors should diversify their portfolios, conduct thorough due diligence, and monitor their investments closely.

One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.