August 23, 2017 by
Illustration by Derek Joy

Activist investing. What is it? Who does it? Is it effective? Does it work?

As with anything, the answer to most of these questions is situational. According to the qz.com article “The 10 activist investors you should know,” whether activist investors are good or bad for companies and shareholders is a debate for the ages: “Are they short-term bettors who cause drama and then get out of a stock as soon as shares see a pop? Or are they constructive critics who add value, partly by pushing executives and boards to do things they are too complacent to do otherwise?”

A shareholder activist is a person who attempts to use his or her rights as a shareholder of a publicly-traded corporation to bring about change, according to investopedia.com. Issues addressed by activist investors, hypothetically, might focus on the environment, sweatshops, investment in politically “sensitive” parts of the world, and other issues surrounding worker and animal rights. However, the term “activist investor“ generally refers to institutional investors wishing to maximize their own profits (often in the short term). For example, Cabela’s sale to Bass Pro Shops was a deal pushed by New York hedge fund Elliott Management. In October 2016, after the sale was confirmed, Elliott Management was cashing out its 6 million shares for an expected $90 million in profit. The effect of this move on the employees residing in, and the community of, Sidney, Nebraska, was not the hedge fund’s concern.

According to Dr. Ernie Goss, who holds the MacAllister Chair in Economics at the department of economics and finance at Creighton University, “An activist investor is a person who owns enough shares to bring some issues before the board and force some changes on the board or in company operations…As an economist, I would have some issues with activist investors who take positions that are contrary to the overall, which is long-term shareholder value. In other words the goal of a corporation is long-term stakeholder and shareholder value.”

It is bad business, Goss says, to ignore community and employee stakeholders because one does not maximize shareholder value. “There’s a reason that ConAgra and Union Pacific and Mutual of Omaha give money to nonprofits, and that’s to maximize shareholder value,” Goss says. “In the short run, it reduces shareholder value, but in the long run it does contribute to shareholder value. So the goal of the board of directors and the management of a corporation is to maximize long-term shareholder value and stakeholder value as well. Other stakeholders that aren’t shareholders include the community, the employees, of course, and the environment.”

Union Pacific and ConAgra’s community philanthropy reflects a trend for corporate social responsibility.

An interesting example of activist investing, which advances a social or cultural activist agenda, occurred in March 2017 when the animal rights group People for the Ethical Treatment of Animals became a shareholder in the clothing company Canada Goose. According to PETA’s executive vice president Tracy Reiman, “PETA became a shareholder in Canada Goose in order to pressure the company from the inside to stop using cruelly-obtained coyote fur and down. Coyotes trapped in the wild can suffer for days before being shot, stomped on, or bludgeoned to death, and geese used to stuff Canada Goose jackets are violently killed for both their feathers and flesh—and the throats of many are slit while they’re still conscious and able to feel pain.” While it may seem quite a leap from storefront demonstrations at Canada Goose locations to the boardroom, PETA plans to use basically the same strategy used by Elliott Management (in the sale of Cabela’s to Bass Pro) to push the company in a “cruelty-free” direction.

Activist investing is an interesting tactic and one which has as much chance of succeeding as any other corporate takeover, with certain caveats. Activist investors, regardless of their intention, still need to maintain shareholder value in order to further their goals. In other words, for PETA to “be the change it wants to see in the world,” it still needs to behave in the best interest of its shareholders and stakeholders. Otherwise, according to Goss: “What would happen would be contrary to the goals of the corporation and to PETA, because ultimately that’s not good for shareholder value and ultimately that corporation is going to have less and less influence because they’re pursuing goals that might be contrary to the overall long-term goal, which is shareholder value. Because ultimately if the stock price keeps coming down, then PETA owns shares that are coming down in value.”

PETA could inadvertently be self-defeating while successfully achieving their primary goal of ending the use of animals in Canada Goose products, as insistent consumers might simply go elsewhere for goose down and wild coyote fur parkas. It’s a delicate balancing act.

Regardless of its efficacy as an investment strategy, many investors don’t like to call themselves “activist,“ according to cfo.com, because activist investing is just one style among many, and while growing in popularity, less than 10 percent of 8,800 hedge funds worldwide were activist.

Visit elliottmgmt.com or peta.org for more information about the shareholder activitsts discussed in this article.

This article published in the Fall 2017 edition of B2B.