What is an activist investor? Definition and examples

An Activist Investor is an individual or group that holds a considerable number of shares in a public company. They aim to apply pressure on the company’s management. Above all, they want to influence senior management’s decisions. The term Activist Shareholder has the same meaning.

The activist investor’s goal is often financial and may include, for example, increasing shareholder value. They boost shareholder value by altering corporate policy, such as cutting costs. They may also try to force the company to adopt greener policies.

An activist investor may even attempt to get the company to stop doing business in particular nations.

Shareholder value is all about making the shareholders of your company richer. If senior management has raised the value of the company’s shares, then it has delivered effective shareholder value.

To become a shareholder activist you do not need to become a majority stockholder. Even with just ten percent of outstanding shares, you can launch a successful campaign. Owning just ten percent is much cheaper than trying to acquire a company completely.

A business may become an activist investors’ target if it has excessive costs, or if there has been mismanagement. It may also become a target if the investor believes that it could be better run as a private company.

The Corporate Governance Institute has the following definition of ‘activist investor’:

“An activist investor is a person, or a hedge fund, who buys a significant stake in a publicly traded company to change how it is run and managed.”

Image describing what an activist investor is

Activist investor – a person or firm

Very wealthy individuals, hedge funds, and private equity firms are types of entities that may choose to act as activist shareholders.

American business magnate, Carl Icahn, who according to Forbes has a net worth of $21.3 billion, is a well-known activist investor. He has tried to bring about major changes at RJR Nabisco, Time Warner, Blockbuster, Yahoo, and several other companies.

Other well-known activist shareholders include Nelson Peltz, Bill Ackman, Eddie Lampert and Daniel Loeb.

In the US, you must file an SEC Form 13D if you own at least 5% of a company’s outstanding shares. Searching through SEC files is one way to look out for possible new activist investors.

Once despised as corporate raiders, investor activism today has gained popularity among the media. Even among the general public, active investors today are more popular than they used to be.

Corporate raiders are entities that buy companies, break them up, and sell them bit by bit.

When an activist investor targets and exposes fat-cat executives for their excessive incomes, everybody applauds.

Types of Activist Investing

There are a variety of different types of activist investing depending on the goals of the investors:

Operational Activism – focuses on the core operations of a company – changes in business strategies or management to improve efficiency.

Financial Activism – focuses on a company’s capital structure – may include modifications in debt structure, increased dividends, or share buybacks, for example. Typically, this type of activism seeks short-term shareholder returns.

Mergers and Acquisitions (M&A) Activism – focuses on aspects such as whether a company should go forward with mergers or acquisitions of other companies that the activist deems favorable. Or, in contrast, oppose proposed mergers.

Governance Activism – focuses on the internal systems of control within a company – may, for example, seek changes in executive compensation or board composition.

Environmental, Social and Governance (ESG) Activism – focuses on ensuring the company addresses any issues related to sustainable practices, ethics, and corporate governance – may, for example, demand more diversity and inclusion.

Examples

  • Engaged Capital and VF Corp.

VF Corp., a distinguished apparel retailer with prominent brands such as Vans and North Face, garnered attention when Engaged Capital announced a major stake in the company. However, this wasn’t a simple matter of share ownership; it heralded a call for change – cementing itself as an activist investor.

Engaged Capital, having closely examined VF Corp.’s corporate decisions, placed the blame squarely on former CEO Steve Rendle. According to the investment firm, Rendle, who departed from the company last December, had implemented a strategy leading to notable “value destruction.” Such accusations didn’t stop at the CEO’s office. Engaged Capital also criticized the board for what it perceived as a lack of urgency in rectifying the strategy’s evident pitfalls.

Diving deeper into the specifics, Engaged Capital highlighted several missteps during Rendle’s tenure:

  • An unnecessary expansion of the corporate cost structure.
  • The pursuit of growth through mergers and acquisitions, but at exorbitant valuations.
  • A significant reduction in the autonomy granted to individual brands for vital managerial functions.

These issues, in the perspective of Engaged Capital, required immediate attention. As a solution, the activist investor laid out a comprehensive turnaround plan for VF Corp. This plan, as elucidated in their presentation, aims at:

  • Eliminating duplicative costs.
  • Restoring the autonomy of brands, empowering them to manage key functions independently.
  • Overhauling the capital structure.
  • Revamping the board with members who prioritize value creation above all.

Such instances underscore the impact of activist investors on modern corporate governance. While their approaches may vary, their goal remains consistent: unlocking shareholder value, even if it means shaking the foundations of established corporations.

  • Bill Ackman and Canadian Pacific Railway

Bill Ackman, the founder of hedge fund Pershing Square Capital Management LP, was head of a proxy fight against Canadian Pacific Railway. In an SEC 13D filing on 28 October 2011, Pershing Square indicated that it owned 12.2% of Canadian Pacific. Its stake eventually rose to 14.2%, making it the company’s largest shareholder.

Mr. Ackman took control of the board of directors, got rid of the management, and managed to double the company’s share price for himself and other stockholders.

A small-time investor who always rattles senior management during shareholder meetings is a gadfly. Gadflies put forward proposals that the directors would rather avoid.

“Examples of activist investors might include the following: 1. Pension funds that manage assets on behalf of union employees. 2. Institutional funds with a social mission, such as environmental, religious, or humanitarian causes. 3. Hedge fund managers driven by a desire for short-term gain. 4. Individual investors with outspoken personal beliefs.”

Compound nouns with “investor”

“Activist Investor” is a compound noun, i.e., a noun that consists of two or more words. Below, you can see eight other such compound nouns, their meanings, and how they can be used in a sentence:

  • Angel Investor

A person who provides capital to start-up companies in exchange for equity ownership.
Example: “The angel investor believed in the potential of the new tech company and invested early.”

  • Private Investor

An individual who invests their personal funds in various assets or ventures.
Example: “The real estate project received funding from a private investor.”

  • Institutional Investor

An organization (such as a pension fund or mutual fund) that invests large sums of money on behalf of others.
Example: “The university’s endowment was managed by an institutional investor.”

  • Venture Capital Investor

A professional investor or firm that provides funding to high-potential start-ups in exchange for equity.
Example: “The venture capital investor saw promise in the innovative biotech company.”

  • Real Estate Investor

Someone who invests in properties (such as residential or commercial real estate) for rental income or appreciation.
Example: “The real estate investor purchased several apartment buildings.”

  • Equity Investor

A person or entity that invests in stocks or shares of a company.
Example: “The equity investor closely followed the stock market trends.”

  • Silent Investor

An individual who invests capital but does not actively participate in the management of the business.
Example: “The silent investor provided funding for the restaurant expansion.”

  • Seed Investor

An early-stage investor who supports start-ups during their initial development phase.
Example: “The seed investor believed in the app’s potential and contributed funds.”

Video – What is an Activist Investor?

This video, from our YouTube partner channel – Marketing Business Network, explains what the term ‘Activist Investor’ means using simple and easy-to-understand language and examples: