Shareholder Value Arena: Where Activism Meets Reality

The Shareholder Value Arena is a complex space where activist investors and companies collide. It's a place where billions of dollars are at stake, and where the outcome can be a game-changer for both parties involved.

In this arena, activist investors have been known to take a more aggressive approach, often pushing for changes that can be unpopular with the company's management and other shareholders. Their goal is to unlock value and create a more efficient operation.

The reality is that not all activist campaigns are successful, and some can even lead to a decrease in shareholder value. According to a study, about 30% of activist campaigns result in a positive outcome for the company, while 40% end in a neutral outcome, and 30% result in a negative outcome.

Companies that are well-prepared and have a strong governance structure are more likely to navigate this arena successfully.

See what others are reading: Ubs Arena Drop off

Shareholder activism operates through various mechanisms, including private meetings, letters, and public statements, to influence a company's direction and policies. Activist shareholders typically conduct extensive research and analysis to build a compelling case for change.

Activists may propose alternative candidates for the board of directors to replace incumbents they believe are not acting in shareholders' best interests. This approach can be costly and contentious but is a powerful way to achieve substantial change.

Companies can mitigate activist surprises by proactively identifying and engaging with shareholders. Understanding the shareholder base, monitoring voting trends, and reviewing backgrounds and track records can help spot activists' potential priorities.

Shareholder activism is where equity investors aggressively exercise their rights to influence corporate decisions. Its origins can be traced back to the 1980s when investors began purchasing significant stakes in companies specifically to exert influence.

Activists often target companies with strategic misalignments or operational inefficiencies, seeking opportunities to drive strategic shifts, streamline operations, or enhance efficiency to unlock shareholder value.

Discover more: Can Shareholders Equity Be Negative

Shareholder activists operate through various mechanisms to influence a company's direction and policies. They typically conduct extensive research and analysis to build a compelling case for change.

Activists often engage in dialogue with a company's management and board of directors, which can involve private meetings, letters, or public statements. If initial discussions don't yield desired outcomes, activists may submit shareholder proposals that are voted on at the company's annual general meeting (AGM).

Shareholder proposals can exert significant pressure on the company to act, even if they're considered advisory votes. In some cases, activists may propose alternative candidates for the board of directors to replace incumbents they believe are not acting in shareholders' best interests.

Activists may also leverage media campaigns and social media platforms to garner public support and pressure the company. By mobilizing other shareholders and stakeholders, activists can amplify their message and increase their influence.

In the United States, proposing alternative board candidates can be costly and contentious, but it's a powerful way to achieve substantial change. For example, Nelson Peltz's Trian Fund Management pushed for strategic shifts at Disney by targeting board seats.

Companies can mitigate activist surprises by proactively identifying and engaging with shareholders. This involves understanding the shareholder base, monitoring voting trends, and reviewing backgrounds and track records before an AGM.

Solutions like Proxymity Shareholder Insights Suite offer details of the structure of a company's shareholder base, including visibility of ownership through the intermediary chain and voting trends. This can help companies prepare effective responses and engage with their investors ahead of the meeting.

Suggestion: Elliott Management Seeks to Replace Southwest Airlines' Board

Shareholder activism is a powerful force that can drive real change within companies. It's a way for investors to influence a company's direction and policies, often by identifying issues such as underperformance or governance concerns.

Activist shareholders typically conduct extensive research and analysis to build a compelling case for change. This can involve private meetings, letters, or public statements with the company's management and board of directors.

In some cases, activists may propose alternative candidates for the board of directors to replace incumbents they believe are not acting in shareholders' best interests. This can be a costly and contentious approach, but it's a powerful way to achieve substantial change.

To stay ahead of the curve, companies must proactively engage with investors and foster a culture of openness and adaptability. This engagement goes beyond compliance and risk mitigation, and is a key part of adapting to the evolving landscape of shareholder activism.

A different take: Keycorp Board of Directors

Adopting the right technology can help drive real-time connectivity and enhance engagement with investors. By leveraging media campaigns and social media platforms, activists can also garner public support and pressure the company to act.

The impact of shareholder activism can be significant, with activists often submitting shareholder proposals that are voted on at the company's annual general meeting. While these votes are advisory, they can exert significant pressure on the company to act.

In some cases, the results of these votes can be surprising, such as when activist investors like Nelson Peltz's Trian Fund Management push for strategic shifts at companies like Disney.

For your interest: A Company Owner by the Holders of Its Capital Stock

Shareholder activists often look for companies with specific characteristics that suggest opportunities for value enhancement or governance improvements.

One key factor is underperformance, which can be a major red flag for investors.

Companies with governance concerns or a lack of transparency are also likely targets.

Shareholder activists typically conduct extensive research and analysis to build a compelling case for change.

They often engage in dialogue with the company's management and board of directors to identify issues that require attention.

Private meetings, letters, or public statements are common ways for activists to initiate discussions with company leaders.

If initial discussions don't yield desired outcomes, activists may escalate their efforts by submitting shareholder proposals.

These proposals are voted on at the company's annual general meeting (AGM) and can exert significant pressure on the company to act.

Activists may also propose alternative candidates for the board of directors to replace incumbents they believe are not acting in shareholders' best interests.

For more insights, see: Centene Corporation Board of Directors

Defending Against Activist Campaigns requires a proactive approach. Companies can mitigate activist surprises by proactively identifying and engaging with shareholders.

Understanding the shareholder base, monitoring voting trends, and reviewing backgrounds and track records before an AGM can help spot activists' potential priorities. M&A expert Chris Ruggeri recommends this defence.

Companies should review key areas that might attract activists' attention, including returns to shareholders, capital structure, commercial positioning, and financial performance of units. Deloitte's research on activist campaigns highlighted these considerations.

Over 20% of the activist campaign's objectives in 2020 were focused on changing the board composition. Hence, it is crucial to assess board performance and compensation.

Companies should maintain open lines of communication to keep shareholders informed about strategic directions and governance issues. This includes making available to the public contact information for the IR team, company secretary, and board readily available to the public.

Ongoing dialogue helps preemptively address potential concerns that may attract activists. Strategic involvement of board members in communications, particularly regarding executive compensation and corporate governance, adds credibility and engagement.

Effective communication and engagement strategies can help companies navigate shareholder activism challenges. Companies should engage with investors during the off-season, providing ample time to address major issues.

Companies can demonstrate a commitment to sound corporate governance and reduce the risk of activism by addressing areas such as returns to shareholders, capital structure, commercial positioning, and financial performance of units.

By leveraging the right technology, companies can prepare effective responses and engage with their investors ahead of the meeting. Solutions like Proxymity Shareholder Insights Suite offer details of the structure of a company's shareholder base, including visibility of ownership through the intermediary chain and voting trends.

Companies should consider the environmental and social impact of their operations and address ESG concerns to enhance shareholder value.

Take a look at this: A Corporate Financial Manager Trying to Maximize Shareholder Value

The shareholder value arena is built on the foundation of economic theories, particularly the concept of shareholder value maximization. This theory posits that the primary goal of a company is to increase shareholder value.

The Efficient Market Hypothesis (EMH) plays a crucial role in this framework, suggesting that financial markets reflect all available information. This implies that investors cannot consistently achieve returns in excess of the market's average.

In the context of shareholder value, the EMH highlights the importance of a company's stock price as a key indicator of its performance.

Lynn Stout argues that shareholder value thinking leads managers to focus exclusively on short-term earnings to the detriment of investors, corporations, and the public.

Conventional wisdom holds that corporations should maximize shareholder value, but Stout claims this is a harmful myth. She believes that corporations should be able to pursue anything lawful, and if they choose to prioritize shareholder value maximization, they should be able to stipulate that in their corporate charters.

For more insights, see: Lynn Stout the Shareholder Value Myth

Stout points out that neither history nor state law supports the primacy of shareholder value, and that key pieces of evidence suggest that shareholder value thinking is ultimately destructive. Shrinking corporation lifespans and diminishing corporation populations are two examples she cites.

Jonathan Macey disagrees with Stout, arguing that shareholder value maximization is the default position of public corporations. He claims that shareholders are the residual claimants of excess earnings, and that they have exclusive voting rights under law.

Macey suggests that shareholder wealth maximization should not be blamed for poor corporate decisions, and that corporations may choose to expressly opt out of the default. He uses benefit corporations as an example, pointing out that they can choose to prioritize stakeholder value over shareholder value.

Excess stock returns are calculated by subtracting the returns on US Treasury bonds, also known as the risk-free rate of return, from the compounded monthly return.

This is a crucial step in understanding the relationship between excess stock returns and other variables, such as cloud ratio increases and advertising intensity.

An unanticipated increase in advertising intensity can strengthen the negative effect of unanticipated cloud ratio increases on idiosyncratic risk, which in turn affects excess stock returns.

The efficient market hypothesis suggests that the disclosure of new information, such as an increase in advertising intensity, can affect investors' assessment of a firm's shift to cloud computing and its impact on excess stock returns.

By leveraging the benefits of advertising, such as boosting brand awareness and reducing customers' perceived risk of purchase, cloud providers can potentially attract new customers and nurture existing ones, leading to increased excess stock returns.

Take a look at this: How to Increase Home Value

Our research has several important theoretical implications that help us better understand the effects of moving to the cloud from a vendor's perspective.

This study complements the research of Son et al. (2014) by examining the performance implications of shifting to the cloud from the vendors' point of view, which is crucial for cloud providers who are under pressure to determine how well they are operating in the cloud environment (McKinsey & Co., 2015).

Developing a more granular insight into the performance implications of shifting to the cloud requires accounting for return and risk as separate dimensions of shareholder value, which is not fully explored in previous studies.

This study uses stock return response modeling to investigate the joint effects of moving to the cloud on a vendor's firm return and firm risk, providing a more comprehensive understanding of the effects of cloud transition.

By examining the moderating role of market maturity in determining the effectiveness of shifting to the cloud, we complement previous studies in the innovation literature that underscore how an industry's life cycle affects the evolution of technological innovations (e.g., Cusumano et al., 2015; Sood & Tellis, 2005).

Our investigation into the role of advertising intensity in moderating the relationship between cloud transition and shareholder wealth contributes to the nascent literature on the performance effects of value creation and appropriation investments (e.g., Frennea et al., 2019; Srinivasan et al., 2009).

Recommended read: What Is Cvar

An unanticipated increase in market maturity can have a significant impact on the performance of cloud computing. This is because mature markets tend to experience increased product commoditization and demand saturation, making it harder to earn above-normal profits.

In such markets, customers become more price-sensitive, and cloud-based solutions become more economically appealing. The hosted nature of cloud computing, for example, can lower customers' operating expenses compared to running IT infrastructure in-house.

Cloud computing's usage-based pricing scheme also enables customers to eliminate costs associated with unused IT resources that stem from demand uncertainties. This can be a major advantage in mature markets where demand is unpredictable.

As market maturity increases, cloud vendors can expand their customer base by reaching new segments, including small- and medium-sized businesses with limited purchasing power. This can help cloud vendors cope with declining demand in mature markets.

An unanticipated increase in market maturity can therefore provide new information to investors about the performance potentials of a move into cloud computing. It strengthens the negative effect of unanticipated cloud ratio increases on idiosyncratic risk.

Here's an interesting read: How Does Share Buyback Increase Shareholder Value

In the shareholder value arena, estimation and results are crucial for making informed decisions.

Estimating shareholder value requires a deep understanding of the company's financial performance, as seen in the example of XYZ Corporation, where its market capitalization was 10 times its earnings before interest and taxes (EBIT).

A key aspect of estimation is identifying the drivers of shareholder value, such as revenue growth, profitability, and cost management, as demonstrated by ABC Inc.'s successful turnaround, which led to a 25% increase in shareholder value.

Results from these estimations can be used to make strategic decisions, such as investing in growth initiatives or optimizing operations to maximize shareholder value.

To estimate the impact of cloud computing on shareholder wealth, researchers Nezami, Tuli, and Dutta employed a marketing perspective.

Their study analyzed data from software firms transitioning to cloud computing.

The methodology involved a thorough examination of shareholder wealth implications.

The researchers used a specific dataset to inform their analysis.

This dataset allowed them to identify patterns and trends in shareholder wealth.

By focusing on software firms, the study provided valuable insights into the cloud computing phenomenon.

To calculate excess stock returns, we follow the methodology outlined by Bharadwaj et al. (2011), which involves computing compounded monthly stock returns. This is done by subtracting the returns on US Treasury bonds, also known as the risk-free rate of return, from the compounded monthly return.

The compounded monthly stock return is denoted by SRijt, and the holding-period return is represented by Retijk. We subtract the risk-free rate of return from the compounded monthly return to obtain excess stock returns.

In this study, we use the formula and methodology described by Bharadwaj et al. (2011) to calculate excess stock returns. This approach helps us to isolate the returns that are not due to the risk-free rate of return.

Here's an interesting read: Should Stock Buyback Be Illegal

The estimation results are in, and they're telling a pretty compelling story. The proportion of peer firms with non-missing cloud revenues is a significant predictor of the selection probability, with a coefficient of 2.441 and a p-value less than 0.01.

We also looked at the average of peer firms' cloud ratios, and found that it has a positive and significant effect on unanticipated changes in a firm's cloud ratio, with a coefficient of 0.031 and a p-value less than 0.05.

The average of peer firms' advertising intensities also had a significant effect on unanticipated changes in a firm's advertising intensity, with a coefficient of 0.033 and a p-value less than 0.01.

The F-statistics in Models 2 and 3 are 14.90 and 12.55, respectively, both of which are well above the recommended threshold of 10, indicating strong evidence for the validity of our instrumental variables.