Institutional investors warming to shareholder activism

According to a new report, institutional investors are becoming more receptive to shareholder activism as it gains ground in Europe.

While shareholder activism, which happens when an outside investor such as a hedge fund or specialist activist fund takes a stake in a company and agitates for change, is a mainly US phenomenon, it is developing in Europe, particularly in the UK and the Nordic region, according to a Deutsche Bank report, Shareholder Activism in Europe: Stirred, not shaken. While traditional institutional investors may adopt shareholder activism, it is also used as an investment strategy by hedge funds and private equity investors. Some investors may use pressure and hostile tactics, or voting control of a company, in order to push through changes. Assets under management at hedge funds specialising in shareholder activism have quadrupled from 2008 to $111 billion in 2014.

Several trends have supported the rise in shareholder activism, such as a lower tolerance for underperformance and excessive pay, cheaper funding making it easier to return cash, and social media and the internet, making communicating with stakeholders cheaper. The objectives of shareholder activism are identified as balance sheet optimisation (such as returning cash to shareholders), portfolio optimisation (for example spinning of non-core assets to extract hidden value), operational efficiency (such as raising margins or changing direction), and better corporate governance.

Shareholder activists have often been accused of damaging long-term value by seeking short-term gains, but the report said that empirical evidence does not support this, and found that management and investors should engage with activists rather than dismiss them. In addition, the report said that institutional investors are becoming more engaged – if not more activist, with a greater focus on governance.