Subject 4: Shareholder Activism

Question 1

What is shareholder activism?

Answer 1

Shareholder activism involves using equity stakes to influence corporate governance and operations.

Question 2

What are common objectives of shareholder activists?

Answer 2

Objectives range from financial restructuring to social and environmental improvements.

Question 3

Who are the main types of shareholder activists?

Answer 3

They include hedge funds, pension funds, individual investors, religious groups, and social/environmental advocates.

Question 4

What roles do hedge funds play in shareholder activism?

Answer 4

Hedge funds often push for financial restructures, board control, or increased shareholder returns.

Question 5

What regulatory rule governs the shareholder proposals in the U.S.?

Answer 5

Rule 14a-8 of the Securities Exchange Act allows shareholders to submit proposals.

Question 6

What minimum requirements are set by rule 14a-8 for shareholder proposals?

Answer 6

Previously $2,000; increased to $25,000 in recent SEC updates.

Question 7

What is the role of “corporate gadflies”?

Answer 7

They are frequent individual activists who file numerous governance-related proposals.

Question 8

Why do activists target companies with low market-to-book ratios?

Answer 8

Such companies often show undervaluation, making them attractive for potential improvements.

Question 9

What is the goal of hedge fund activism?

Answer 9

To bring about significant changes that can increase shareholder value, often in the short term.

Question 10

What is a “proxy battle”?

Answer 10

It is a tactic where activists seek to gain board control through shareholder voting.

Question 11

What is the primary concern of critics regarding hedge fund activism?

Answer 11

Critics argue it promotes short-termism at the expense of long-term stability.

Question 12

How does Rule 14a-8 benefit smaller shareholders?

Answer 12

It allows those with small stakes to propose corporate changes at low costs.

Question 13

What type of changes do environmental/social activists push for?

Answer 13

They advocate for policies on environmental protection, corporate ethics, and community involvement.

Question 14

What financial metrics attract shareholder activists?

Answer 14

High cash reserves, underperforming segments, and low stock valuation.

Question 15

How are “vote-no” campaigns used in shareholder activism?

Answer 15

They encourage shareholders to withhold votes from certain board nominees to pressure changes.

Question 16

Who are some top individual shareholder activists?

Answer 16

John Chevedden, Kenneth Steiner, and Evelyn Y. Davis are notable examples.

Question 17

Why might activists target a “stale” board?

Answer 17

A board with outdated practices may resist necessary corporate changes.

Question 18

What are the pros of shareholder activism according to proponents?

Answer 18

Activism mitigates agency problems and signals commitment to company improvement.

Question 19

What negative impacts can shareholder activism have?

Answer 19

It can lead to detrimental short-termism and self-serving agendas.

Question 20

How has the SEC addressed low-cost activism concerns?

Answer 20

By raising the minimum stake for proposals to $25,000 to reduce frivolous proposals.

Question 21

What outcomes are typical for proposals by top-ten sponsors?

Answer 21

These proposals often receive high support and are more likely to be implemented.

Question 22

How do shareholder proposals affect corporate governance?

Answer 22

They compel boards and management to consider shareholder perspectives on governance.

Question 23

How does activism impact stock prices post-announcement?

Answer 23

It can lead to both positive and negative stock reactions depending on the proposal type and sponsor.

Question 24

What are “passive” activism methods?

Answer 24

These include letters to the board and informal meetings with executives.

Question 25

What do critics say about the risks of uninformed shareholder voting?

Answer 25

They argue it may lead to majority votes for harmful or impractical proposals.

Question 26

How do activists approach corporate restructuring?

Answer 26

Through divestitures, mergers, or financial reorganizations to increase shareholder value.

Question 27

What distinguishes hedge fund activism from other types?

Answer 27

Hedge fund activism is typically more aggressive, focusing on financial restructuring.

Question 28

Why might a high cash reserve attract activists?

Answer 28

Activists may see it as an opportunity for dividends, repurchases, or acquisitions.

Question 29

How do social/environmental proposals influence corporate policy?

Answer 29

They can lead companies to adopt eco-friendly practices or improve corporate social responsibility.

Question 30

What is the “say-on-pay” policy?

Answer 30

It allows shareholders to vote on executive compensation, influencing pay structures.

Question 31

How does institutional ownership impact activism?

Answer 31

High institutional ownership can increase a company’s susceptibility to activist campaigns.

Question 32

What research questions arise regarding shareholder proposals?

Answer 32

Questions include whether harmful proposals gain majority support and their effects on value.

Question 33

What is the impact of shareholder proposals on corporate reputation?

Answer 33

Proposals can enhance transparency and show responsiveness, improving public perception.

Question 34

How do social-oriented activists influence corporate priorities?

Answer 34

They pressure firms to adopt policies benefiting society, such as environmental initiatives.

Question 35

What did the Gantchev and Giannetti study find about individual activism?

Answer 35

They found that proposals by top individual activists tend to have mixed success in implementation.