Shareholder Activism

According to Ernesto Hernández-López, shareholder activism  refers to any action a shareholder may take, based on his/her right as a shareholder, with the objective of influencing the management of the corporation. An activist shareholder’s role is to exert push onto management when they believe management is doing a poor job. They can do so by asking the management to disclose issues and urge action either by suggesting them to change a procedure/policy or even demand to substitute the board of directors.

Some economists favor activism and consider it to be an essential aspect for long term success of an organization (if employed properly). Even if the activist investor is dormant, the company stays vigilant. Recently, AT&T board was attacked by a hedge fund manager at Elliot Management Corporation, also recognized as one of the aggressive activist investors in the market. Elliot laid out its concerns to the board about its expensive acquisitions that left AT&T with more than $160 billion debt and put forth plans to cut costs and focus on returns. According to Elliott, AT&T can boost its profit margins by asset sales, cutting costs by outsourcing some functions and reducing the number of retail stores which could increase the share value to $60 from current $38 by 2021. Elliott owns only approximately 1% of $260 billion AT&T market value which means, it probably needs support from other investors to pressure the company. But AT&T has given a statement saying they will consider Elliott’s perspective and gain control of the market.

However, on the other hand, organizations complain that activists are focused only on short-term interests and force them to hit immediate profits that don’t sustain. Hedge fund activists particularly are known to have short time limits than other investors. As a result of the pressure, organizations are forced to engage in stock buy backs, layoffs, etc. to see a temporary rise in stock value. These quick short-term profits are questionable and impact the firm. In my opinion, investors need to evaluate whether the company decisions influence long-term benefits or not. More thoughts about hedge fund activists in my next blog entry.