Very few companies find themselves on an ever-improving business path. It's way more common for a business to cycle between good times and bad times, especially if it has been around for a long time.
Sometimes, usually when a business is having a tough time, an activist investor will show up and take a large stake in the company with the hope of spurring management and the board of directors to improve performance in some specific ways.
If this happens to a company you're a shareholder in, you'll need to think carefully about what this means for you.
Activist investors have bigger voices
Shareholders technically own part of a company and, thus, have a say in the way it is run. For most investors, that say is limited to voting for the board of directors, who are supposed to operate on the shareholders' behalf. A stake of a few hundred shares, or even a few thousand, probably isn't enough at most companies to get you any real attention from management. But if you owned 1% or more of the common shares, well, the CEO might be willing to take your call. Often, activist investors take positions much larger than that.
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This is important because the more shares a person controls, the greater their impact is in shareholder votes. In some cases, an activist might actually have enough voting power to sway the outcomes of close decisions. Keeping large shareholders happy can be very important.
Sometimes the appeasement process requires little more than sitting down with the activist and hearing them out. Perhaps the company might put in place some of their suggestions. Other times, well, there are material disagreements. In these situations, the activist may attempt to force the company to allow shareholders to vote on the activist's shareholder resolutions or, even more aggressively, the activist might put up their own slate of director candidates to compete for election to the board.
There are two broad types of activists. Some are looking to compel companies to improve their behaviors with regard to environmental, social, and governance (ESG) goals. The others are more narrowly focused on companies' financial performance. As a shareholder, you don't have to do anything simply because there is an activist in the picture. But it makes sense for you to understand why the activist has gotten involved.
Consider what you care about
With regard to ESG issues, you may or may not care from a big-picture perspective. However, activist investors can expose issues that you might not know about. For example, Tulipshare is currently calling out sneaker giant Nike (NKE 0.19%) over labor issues. The activist believes that Nike isn't doing enough to ensure that the company and its suppliers and subcontractors aren't using forced labor in their overseas factories.
If the complaint proves true, Nike could face reputational damage. That, in turn, could lead to it losing customers. You need to consider what's being said carefully and the overall impact the issues being brought up could have. And remember that an activist investor with ESG-related goals may have an agenda that doesn't focus solely on profitability.
More notable is probably when an activist investor gets involved with the hope of improving a company's financial performance. This happened to Procter & Gamble (PG -0.78%) when it engaged in a major public battle with Nelson Peltz, eventually appointing him to the board of directors in 2017. At that time, P&G was not performing well as a business and Peltz wanted to see changes made. The company resisted his demands and nearly lost a fight over control of the board. Realizing that the closeness of the shareholder vote in that board election was a sign of discontent, P&G essentially gave in to Peltz's demands.
Peltz basically asserted that the consumer staples giant needed to streamline its business and tie pay more closely to performance. As an investor, you should pay attention to the demands of an activist, as they can highlight company weaknesses that you may not be fully aware of. That may change your opinion of the stock.
In this situation, Procter & Gamble took Peltz's advice and performance improved. The stock, as you would expect, recovered from its malaise. In 2022, Peltz left the board. And shortly thereafter he began a fight with P&G peer Unilever (UL 0.63%).
Unilever, perhaps taking into consideration how Peltz's ugly battle with P&G had gone, was far more amenable to his suggestions. It added the activist to its board in short order. The suggestions Peltz had for Unilever were basically the same as the ones he'd had for P&G. Although Unilever is still working through its turnaround effort, it has streamlined its operations (selling slower-growing businesses, for example) and has attempted to more closely tie pay to performance. For an investor, the fact that an activist's efforts to redirect one company were apparently successful could be worth considering when you learn that this activist has moved on to a similar fight with another similar business.
Think about the usefulness of the information
Some investors will buy a stock simply because an activist investor has gotten involved, based on that activist's past successes. In other cases, though, depending on the issues being raised, the arrival of an activist in the mix could be a signal for you to reconsider your commitment to a stock.
The key here, as with so many other issues on Wall Street, is to take the potentially new information and use it to test or update your investment thesis. Perhaps what the activist is saying isn't meaningful enough to change your view, maybe it supports it, or perhaps it changes things so radically that you want to get out. You won't know unless you take the time to dig in a little and see what your fellow (and likely much larger) shareholder is saying.
