Activist Shareholders are Good for Companies

Activist Shareholders are Good for Companies

February 6th, 2015 // 5:08 pm @

CEOCompany Executives rarely welcome activist shareholders, but they should. Companies with active shareholders produce better fiscal results than those without, and CEO’s will ultimately have more success if they embrace such involvement.

Not all shareholders are disconnected from how their investments are run, but too many are, and there are a number of reasons why this happens.

In public companies the shares are often bought by investors using algorithms to make investments based on how the stock is performing, not based on an underlying understanding of the business. Others are major institutional investors who too often lack the motivation to get involved. This means CEO’s of such companies worry primarily about the share price in the short term, not about getting buy in from shareholders for a business strategy.

In private companies the shareholders often lack the understanding of what positive role they can and should play in the company they are invested in. Therefore their involvement tends to be spasmodic and not necessarily focused on the issues they should as shareholders focus on.

Across almost all companies CEO’s simply do not want what they see as the interference of shareholders. This is because many of them are simply not very good at what they do and active shareholder involvement will make this clear to everyone.

Many of the rest want a stable life and the suggestions from active shareholders are often radical involving management in extra work often to make changes, which Executives see as not being in their interests. For example splitting a company into two parts may well drive shareholder value, but it is a complex managerial task to execute well, and leaves the CEO at best running half of what they were. Understandably many CEO’s see such suggestions as unappealing.

The upshot of this is the lack of serious consideration of all the strategic options open to a company, and a lack of oversight and appropriate pressure on the executives of too many companies, and ultimately lower returns for shareholders.

Shareholders should be involved in discussing the strategic options for the company including the radical, and definitely should agree what that strategy is with management.

In my experience as a CEO positively encouraging this dialogue is useful, it brings out all the strategic options for a full discussion, and when a decision is made, the shareholders and their board will be more committed to whatever the chosen strategy is chosen as they were involved and understand how the final strategy was agreed on. This in makes the CEO’s life easier as if he or she is doing their job properly all decisions can be explained in relation to the agreed strategy.

CEO’s have on occasion complained about highly aggressive activist shareholders, and some have had wild very short-term ideas and have particularly in the US pursued these ideas implementation with unnecessary and personal aggression.

However if a CEO has involved the board and shareholders properly in the development of an agreed strategy, then such attacks are less likely and if they do occur the CEO is in a much better position to explain to all shareholders why the strategy they are pursuing was agreed on and why the wilder proposals are not appropriate.

Shareholders generally should be more involved in agreeing strategy, targets and choosing CEO’s, those who do will earn higher returns.

Clever CEO’s will work with the shareholders and their board from day one to achieve a common agreed strategy and fiscal targets. Those who do will have better relations with their shareholders, and will be more successful.

 

 

 

 

 


Category : Blog &Business Strategy

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