Management Practices in an Age of Engaged Investors

Abstract

Engaged investors are an increasing source of influence among U.S. publicly-traded companies, using their influence to reshape the competitive landscape across industries. Also known as activists, these investors typically acquire a minority stake in a target company and present recommendations directly to the boardroom for the purpose of increasing shareholder value. This has created a fierce debate over whether shareholder-driven demands are helpful or detrimental to U.S. public companies, their investors, and the nation’s economy. As the discussion continues to intensify, market participants and policymakers have increasingly focused on the actions that may promote “short-termism” (or “quarterly capitalism”), which can impair a company’s ability to invest and innovate for the long term.

In this study, we develop a framework focused on helping management teams and boards of directors: 1. Predict future engaged investor campaigns with our proprietary Vulnerability Score™; 2. Identify engaged investor motivations and behaviors; 3. Identify actions that companies can take to address these issues internally; 4. Recommend actions that corporations should take once they have been approached by an activist; and 5. Develop a framework and “roadmap” that examines how a company should respond to investor challenges to enhance both their long-term interests and the interests of the investor.

Keywords: Corporate Governance, Shareholder Activism, Hedge Fund Activism, Proxy Fights, Short-Termism, Market Efficiency, Long-Term Value, Shareholder Rights, Hedge Funds, Agency Cost

JEL Classification: D21, D22, D81, D82, G12, G23, G32, G34, G35, G38, K22