The majority (76 percent) of institutional investors view shareholder activism in a positive light, with more than three quarters voicing support for an increase in ‘US-style’ activism, according to FTI Consulting.
Talking to over 100 anonymous institutional investors globally, 84 percent say that activism adds value to a target company, compared to just 7 percent who believe it reduces value.
Taking a deeper look at how this value is realized, more than a quarter (27 percent) see activist campaigns as a catalyst for change and 21 percent say that ‘it helps align the interests of the board and management with shareholders’. At the same time, 17 percent see the practice as forcing boards to ‘sharpen their strategic focus,’ according to the firm’s 2015 shareholder activism landscape report.
On the flip side, only 13 percent of those surveyed feel that forcing an event such as a sale, the separation of assets, or the return of cash is a top benefit of shareholder activism.
Regarding potential pitfalls, 61 percent say an activist’s presence prevents firms from taking a long-term approach to decision making, adding that it may also ‘produce short term gains at the expense of value for long-term shareholders’. And while many companies cite ‘distraction’ as a negative effect of shareholder activism, only 16 percent of FTI’s respondents agree.
‘Shareholder activists have been increasingly successful in gaining backing from institutional investors,’ says Steven Balet, managing director of strategic communications at FTI, in a press release accompanying the report. ‘However, this does not necessarily translate into unequivocal support. Institutions welcome activists for the dialogue they provoke with shareholders, but are less predisposed to supporting radical transformations.’
Balet advises that boards and management should be ‘regularly assessing their vulnerabilities and communicating their strategy to shareholders’ in order to defend themselves from activist campaigns.
Poor stock price performance topped the list of reasons a company might find itself a target of activism at 36 percent, followed by ineffective or inefficient capital deployment (27 percent), with poor corporate governance rounding out the top three with 18 percent.
Despite this, a strong share price is no guarantee of immunity, notes FTI. In fact, more than half of the institutions surveyed (53 percent) say that ‘even companies that outperformed the market could benefit from shareholder activism’.
FTI also reminds firms that when institutions support activist campaigns, ‘they are primarily supporting campaigns for ‘change’ rather than the specifics of that change’.
‘The institutions we surveyed were acutely aware that one of the dangers of shareholder activism is short-term gains at the expense of long-term value,’ continues Balet. ‘Companies need to effectively articulate and align shareholders behind their long-term vision, as well as execute on near-term initiatives, in order to protect themselves against activist approaches.’
