According to economic experts, shareholder activism refers to a process through which an individual with equity in a publicly traded corporation attempts to use his or her shareholder rights to pressure the management team into making changes. Shareholders are partial owners of a corporation. Thus they have rights they can exercise to influence a change of behavior. However, achieving this feat is highly dependent on one’s share classification.
Major shareholders have a greater influence over the running of a corporation compared to minority shareholders who only have limited options such as proxy battles, publicity campaigns, litigation, as well as writing formal proposals that are voted for during annual meetings. An activist shareholder focuses on pressuring the management to make financial and non-financial changes that range from the corporate policy, financing structure, disinvestment, adoption of environmentally conscious policies to cost-cutting measures, among others.
Several publicly listed companies in the United States have been the subject of activism where shareholders mainly ask for disinvestment from politically sensitive countries and revision of sustainability strategies. Reports indicate that the efforts of activist shareholders have been escalating at an alarming rate over the last decade. This observable fact has been influenced by the high dissatisfaction of shareholders with the poor performance of the management team, which is often characterized by elements such as low profitability, reduced support for workers’ rights, and lack of accountability.
Advantages of Shareholder Activism
Studies has shown that shareholder activism has a number of benefits to a corporation in terms of making the right corporate social responsibility decisions. Experts argue that shareholder activism has numerous benefits to an organization as long as it is done at the right time, using the appropriate channels, and with a precise intention. For it to have a positive impact on a corporation, it is important to ensure that its objectives reflect the long-term interests of everyone and not just a group of shareholders.
The main reason for this is that it influences the manner in which decisions are made during annual meetings. Stakeholders whose interests are not considered during a campaign to tend to conduct protest votes that often compromise the ability of a corporation to meet its goals in an objective manner. Over the years, shareholder activism has helped a number of companies that were on the blink of collapsing to get back on track.
One major advantage of shareholder activism is that it increases the accountability of the management team. According to a study, two out of three activist campaigns tend to achieve their objectives. This is an indication that shareholder activists play a crucial role in ensuring that organizational leaders are more accountable with regard to the decisions they make on behalf of shareholders.
This improves a corporation’s reputation, thus enhancing the capacity to promote its corporate social responsibility initiatives. In the contemporary world, corporations have an ethical responsibility for environmental stewardship as people struggle to manage the effects of global warming. Therefore, it is important for shareholders to ensure that organizational leaders are held accountable whenever they fail to develop and adopt environmentally friendly policies. The success of a corporation’s corporate social responsibility initiatives helps to attract investors and earn more goodwill from the public with regard to the products and services they offer.
The second advantage of shareholder activism is that it plays a pivotal role in promoting sustainable and ethical business practices. For example, in cases where a shareholder activist is seeking a corporation’s management to disinvest from a politically sensitive country, the long-term value is achieved because it helps to solidify the existing assets, prevent the share value from dropping, as well as maintaining good profit margins. Economic experts argue that every corporation should focus on adopting sustainable business practices that complement its objectives for corporate social responsibility initiatives.
The management team should ensure that the process of decision-making adapts an inclusive model that allows all the relevant stakeholders to express their opinions and interests. The importance of involving all stakeholders in making crucial decisions is the fact that it manifests their value with regard to achieving the long–term objectives of a corporation. In turn, this helps a company to gain a competitive advantage in its respective markets because of crucial elements such as improved employee retention rate, increased output from the workforce, and a strong brand.
The demands of shareholder activists help to reorient a corporation’s policy framework towards promoting the values of responsibility and sustainability, which are crucial to the success of corporate social responsibility programs. In addition, it is important to note that such programs are often a direct reflection of the values that a company promotes through its activities.
Therefore, it is necessary to ensure that the approach applied in decision-making is well informed and guided by the same values. Reports indicate that a poorly coordinated decision-making process that lacks inclusivity and guiding principles geared towards achieving sustainable business practices often results in a disoriented corporate social responsibility strategy. The financial value of shareholder activism often reflects in the intensity of corporate social responsibility programs a company chooses to support.
Disadvantages of Shareholder Activism
Shareholder activism is a fully-fledged industry that has been in existence for quite some time. This phenomenon is evidenced by the existence of elements such as activist funds, activist newsletters, activist databases, and activist conferences that give an indication of the pivotal role they play with regard to influencing the running of publicly listed corporations. Research has established that shareholder activism can negatively affect decision-making for corporate social responsibility if it is not done with honest intentions.
One of its notable disadvantages is the fact that is it affects the credit rating of an organization in a negative way. Although shareholder activism helps to strengthen corporate governance within an organization, the biggest challenge lies in the constant pressure put on the management teams with regard to their investment decisions. In turn, this affects the amount of money available for other crucial activities such as corporate social responsibility initiatives, paying dividends, and buying back shares, among others.
This does not create an ideal situation for credit investors because of an increase in the net advantage. In addition, the financial and non-financial changes that shareholder activism influences within an organization often conflict with the needs of corporate debt holders, thus compromising the effectiveness of decision-making.
Another notable disadvantage of shareholder activism is the fact that activists are not always right and often look out for themselves. Thus their investment horizon may be different from that of the corporation. One of the main objectives of shareholder activists is convincing shareholders to buy into their agenda through aggressive media campaigns that portray them as having great concern for a corporation’s welfare.
However, the truth of the matter is that they primarily focus on pressuring the management to make changes only in areas that meet their interests. Reports indicate that they often bank their campaigns on the perceived notion within the industry that they are always right due to their extensive experience in the investment sector. In most cases, this turns out to the opposite because their timing is often off with regard to the objectives of their activism and the benefits they project a corporation will get by making the proposed changes.
Investors ought to keep this in mind when making decisions relating to a corporation’s mission and objectives for corporate social responsibility initiatives. The main reason for this is the fact that the ability of any corporation to be responsible and maintain sustainable business practices is highly dependent on the degree of influence that its shareholders have on the decision-making process.
Corporate social responsibility programs should be guided by the sober interpretation of the interests that shareholder activists seek to meet through their campaigns. For example, it is important for investors to have a good comprehension of the fickle nature of activists, with regard to their unique investment horizon compared to the ordinary shareholder. Their uniqueness is characterized by their willingness and financial capacity to accept losing a position within a corporation’s board as long as they realize no one is buying into their agenda. This element often affects the ability of an organization to execute its corporate social responsibility agendas because the support of shareholders is often shaky.