Activist investing isn't a new concept. It has existed since the stock market crash of 1929, perhaps earlier. Not all activist investing campaigns have been successful, but they all have a similar goal: To increase shareholders' value and by extension, a stock's price.
Many point to Benjamin Graham's 1926 fight with Northern Pipeline as the beginning of the activist investing movement. Graham, a mentor to Warren Buffett, accumulated a major stake in the railroad company and worked with management to return excess cash to shareholders.
Graham's campaign as well as the stories of many other efforts to control public companies is detailed in Jeff Gramm's 2016 book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism.
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"During the stock market booms of the 1890s and 1920s, shareholders focused on horizontal and vertical grabs for power in the form of mergers and stock market manipulations," Strategy + Business contributor Jill Priluck wrote in a 2016 review of Gramm's book. "In the 1950s and 1960s, it was common to see companies engage in serial acquisitions to build conglomerates."
Once the 1980s hit, there was " an abundance of what become known as greenmailing – a phenomenon in which activist investors would amass a stake, threaten a takeover, and then sell their shares back to the company at a higher price," she continued.
While activist investors undoubtedly believe their campaigns add value to a company and its shareholders, the evidence on how activist investing actually impacts stocks is less conclusive.
How does activist investing impact stocks?
On the one hand, in order to have the standing to pressure management into making changes, an activist investor must acquire a major stake. This buying power certainly helps support the share price in the short term.
However, the lasting impact is negligible. For instance, Goldman Sachs Research looked at data from 2006 through May 2023, and found that the impact of the more than 2,100 activist campaigns analyzed over 17 years was marginal.
"The results of these campaigns over the years have been mixed. The median stock targeted by activist investors outperformed its sector by 3 percentage points in the week after the launch of a campaign. However, excess returns were short-lived and typically turned negative after six months," Goldman Sachs wrote.
What are the benefits of activist investing?
"When you stop growing you start dying," wrote author William S. Burroughs. The same adage applies to activist investors and their quest for change.
In a 2019 podcast hosted by McKinsey & Co., panelists examined the pros and cons of activist investors, noting this particular breed of investor had four areas where they try to affect change: Corporate governance, M&A activity, business strategy and operations, and capital allocation.
Generally, activist investors tend to get involved with good companies that have lost their way, underperforming from their historical norm or relative to their peers.
"What we see is not so much geography or industry affecting whether a company could be under attack, but rather a good company that has been performing less well recently," stated Sandra Oberhollenzer, then a McKinsey & Company consultant.
Activist investors believe their actions are the kick-in-the-behind companies need to deliver higher share prices.
What is the impact of activist investing?
Activist investors tend to focus on three corporate governance issues: CEO, executive compensation and board composition. Ancora Holdings and Norfolk Southern (NSC) offer a recent example.
In March 2024, activist investor Ancora Holdings wrote to Norfolk Southern's board asking why its CEO Alan Shaw got a 37% pay raise in 2023, given the company's handling of the hazardous materials derailment in East Palestine, Ohio, earlier that year.
"It is astonishing to us that the Board would reward Mr. Shaw with a 37% increase in the value of compensation to a total of $13.4 million for a year in which the Company's customers, employees, shareholders and community partners all suffered," the letter stated.
On April 22, Ancora sent a second letter to shareholders outlining its plans for the company, including adding seven new board members with railroad experience and replacing the CEO.
As a result of its activist investing efforts, Ancora secured at least three NSC board seats according to preliminary results from its mid-May shareholders meeting. However, shareholders voted in favor to keep Alan Shaw on the board as well.
M&A is the biggest reason behind activist investing, data shows
One of the most common requests from activist investors is to sell or spin off a particular unit of a target company. According to 2023 data for activist campaigns from Barclays, approximately half were acquisition-related.
"The demand for M&A was the top driver for activists, with a record 49% of all campaigns in 2023 having some sort of M&A demand," the report stated. "Likely driving the surge is a desire to invigorate a sluggish M&A market, weighed down by higher interest rates and inflation."
M&A is one area where activists will wait longer for the desired results.
Activist investors also seek change elsewhere
Related to M&A activity, activist investors often have recommendations around a company's business strategy. An example is the recent proxy battle between activist investor Nelson Peltz and Walt Disney.
Peltz wanted several things from Disney, including two board seats, increased profit margins, and a clear strategy.
Although Peltz did not gain seats on the board, he was satisfied with the result.
"Over the last six months, Disney's stock is up approximately 50% and is the Dow Jones Industrial Average's best performer year-to-date," commented Trian Partners, Peltz's company, in an April 3 press release.
Other initiatives activist investors seek out, according to Goldman Sachs, are strategic reviews (19%) and returning more capital to shareholders through dividends and share repurchases (12%) – all of which can impact a company's short- and long-term returns.
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