Activist investor shave been viewed as saviours who act as catalysts for positive change in companies to improve long-term company performance. The board of the target company, however, can view them as disruptive to the long-term strategy of the company, acting out of their own self-interests.
To agitate for change, activist investors buy a large number of shares at the prevailing market price. The more shares they acquire, the more the board pays attention to their proposals. This is unlike a private equity firm or strategic buyer of a company who may have to pay a premium for a large number of shares in order to influence the direction of the company.
Activist investors propose changes revolving around economic and governance structures, including strategic initiatives like selling off the company, board and executive management compensation or changes in the company’s capital composition.
The more aggressive forms of investor activism include going after the board and seeking to replace board members and the CEO.
Investor activism is not limited to individuals. Institutional investors can engage in activism.
Activist strategies take several forms, such as behind the scenes discussion with the board on matters the activist is dissatisfied with, grievance letters to the board, publicity campaigns focused on arguments in favour of the activist position, proxy fights and activist investors seeking to get elected to the board.
When the activist approaches the board, a good strategy would be to engage them, balancing the activist’s demands with the best interests of other stakeholders.
A poor strategy would be, to disregard the activist, implying if the activist is dissatisfied, they can sell their shares. Selling the company’s shares may not pacify an activist investor, if they are of the view that their proposed changes will optimise long-term business performance.
Hostility from the board elevates the profile of the disagreement with the activist. This will negatively affect the company’s image.
Risk factors a company may possess making it a likely target of investor activism include under performance when compared to its peers, poor strategy execution, carrying large cash balances relative to its market capitalisation, insufficient investor relations, undervaluation of its assets, weak sustainability indicators and negative media reports.
Big and small companies are potential targets of an activist investor. Therefore, the board of a company needs to be their own activists. The company needs to evaluate its vulnerabilities that make it a potential target of an activist investor and take steps to mitigate the risks. Furthermore, companies need to continuously engage with shareholders, understand the categories of their shareholders and the interests of each category.
There is a paradigm shift from the passive shareholder who asks questions at the annual general meeting, to the more sophisticated aggressive investor willing to use activism strategies to demand change and transparency from the board.
Shareholders are increasingly keen on what serves their best interests.
Wangari Muchui is a compliance manager at the Nairobi Securities Exchange.
The views expressed in this article are of the author.