In this post, I would like to give a quick introduction to activist investing. And why I think we need them in every company despite the reputation they have in the business world.
Is activist investing good or bad?
Activist investors have always been presented as bad actors, doing takeovers and ruining companies. But, in my opinion, activist investing is the only right way to invest in a company. Investors are the owners of the company, and, currently, the only ways investors have to exercise control over managers are during shareholders’ meetings or through the board of directors. The board of directors hires managers to run the company. So the shareholders are not the ones who actually run the company. This leads to an agency problem when the managers’ interests and shareholders’ interests are in conflict. The conflict emerges because the objectives of managers and shareholders are not aligned. To minimize the conflict, we need to have activist investors among every company’s major shareholders to question CEO’s decisions.
What’s an activist investor
Let me first give a definition of an activist investor. An activist investor is a shareholder who can accumulate a majority position in a company to actively influence the board’s decisions. Having the absolute majority of the shareholders’ votes, the activist investor can change managers, members of the board, the company’s strategy. This role requires deep understanding and extensive knowledge of the company’s operations. An investor who takes this role can be extremely beneficial for the company. It closes the gap between shareholders and managers and gives back power to the real owners of the company.
The need for activism
The drawback of activist investing is that it requires a tremendous amount of work. To understand the company deeply, one must conduct a real analysis. The investor must analyze the governance of the company, the performance of the board of directors and managers. He needs to analyze the risk of the company’s business, its cost of capital and capital structure. He must understand its reinvestment strategy and dividend policy. in order to make informed decisions and ask tough questions to top management, the investor needs to conduct a substantial amount of work.
Investors need to take more active roles in the companies they invest in. Regulations are, unfortunately, not enough to protect investors from the insanity and the ego of top management. We have already witnessed many scandals that we have discovered very late after managers have already ruined the company. An activist role is necessary to constantly keep an eye on management and make sure they take the interests of shareholders into consideration.