Are Activist Investors Good or Bad for Companies?

Activist investors take significant stakes in companies to push for changes they believe will increase shareholder value. Their involvement can lead to shifts in corporate strategy, leadership, and financial decisions. Some argue these investors drive necessary improvements, while others claim their focus on short-term gains harms long-term stability.

Understanding their methods and impact is essential for assessing whether their influence benefits or harms companies.

Types of Activist Investor Approaches

Activist investors use different tactics to influence a company’s direction, depending on their goals and the company’s responsiveness. Some take a confrontational stance by making their demands public, while others work behind the scenes to negotiate changes with management. Their approach can affect operations, shareholder relations, and stock price movements.

Public Campaigns

One of the most visible tactics is launching public campaigns to rally support for proposed changes. This can involve open letters to shareholders, media interviews, or social media efforts highlighting concerns about mismanagement or underperformance. Public pressure can force company leadership to respond.

In 2022, Carl Icahn criticized McDonald’s over its animal welfare policies, urging improvements in its treatment of pigs in its supply chain. While his campaign did not lead to board changes, it drew attention to the issue and pressured McDonald’s to act. Public campaigns can be effective when management resists change, but they also carry risks, as companies may push back with their own messaging, and shareholders may not always support aggressive tactics.

Proxy Fights

When activist investors seek direct influence over a company’s decision-making, they may initiate a proxy fight to replace board members by persuading shareholders to vote for their nominees. Proxy fights can be costly and time-consuming but provide a formal path to reshaping corporate governance.

In 2023, Nelson Peltz’s Trian Fund Management launched a proxy battle against Disney, advocating for operational improvements and cost management. After months of campaigning, Disney adopted some of Trian’s proposals, demonstrating how proxy fights can push management to engage with activist demands. While these battles can lead to strategic shifts, they also create uncertainty for employees and investors, sometimes causing stock price volatility.

Engagement Through Negotiation

Some activist investors prefer working directly with company leadership to negotiate changes rather than taking an adversarial approach. This strategy is often used when both sides see value in constructive discussions. Negotiations typically involve private meetings and settlements where activists may gain board seats without a public confrontation.

In 2023, Starboard Value reached an agreement with Salesforce, leading to board changes and cost-cutting initiatives. By negotiating instead of launching a public campaign, Starboard avoided negative publicity while achieving its objectives. This approach is often favored by long-term investors who seek operational improvements while maintaining a cooperative relationship with management.

Common Criteria for Targeting Companies

Activist investors target companies based on financial performance, operational inefficiencies, and market positioning. Firms with prolonged underperformance relative to industry peers often attract scrutiny, as activists see opportunities to unlock value through strategic changes. Companies consistently missing earnings expectations, carrying excessive costs, or failing to capitalize on growth opportunities become prime candidates for intervention.

Balance sheet weaknesses also make a company vulnerable. High debt levels, inefficient capital allocation, or large cash reserves with no clear reinvestment strategy may signal mismanagement. Investors may push for debt restructuring, share buybacks, or dividend increases to enhance shareholder returns. For example, if a company holds substantial cash reserves without a deployment plan, activists may demand capital be returned to investors or used for acquisitions that drive growth.

Industry dynamics play a role as well. Companies in sectors undergoing consolidation or disruption may attract activists who believe management is not adapting quickly enough. A firm losing market share due to outdated business models or slow innovation may be pressured to pursue mergers, divestitures, or a shift in strategic focus. Activists often target companies lagging behind competitors in adopting technology or optimizing operations, arguing that leadership changes or structural adjustments are necessary to remain competitive.

Corporate Governance Adjustments

When activist investors gain influence, they often push for corporate governance changes to improve oversight, accountability, and financial performance. These adjustments can reshape decision-making at the highest levels, affecting leadership structure and executive pay.

Board Composition

One of the most common activist demands is altering the board of directors. They may seek to replace members with individuals they believe will better represent shareholder interests, particularly those with experience in financial restructuring, operational efficiency, or industry-specific expertise. A board with too many long-tenured directors or insufficient independent oversight can be seen as resistant to change, making it a target for reform.

U.S. corporate governance guidelines emphasize the importance of independent directors. Activists often argue that a board dominated by insiders may not challenge management effectively, leading to poor strategic decisions. By pushing for new board members, they aim to introduce fresh perspectives that can drive operational improvements. In 2022, Elliott Management secured a board seat at Pinterest, giving the firm direct influence over the company’s direction.

Executive Compensation

Activists frequently scrutinize executive pay, particularly when they believe compensation is misaligned with company performance. They may push for changes ensuring that bonuses and stock awards are tied to measurable financial metrics such as earnings per share (EPS) growth, return on invested capital (ROIC), or total shareholder return (TSR). If a CEO receives substantial compensation despite declining stock performance, activists may argue that incentives need restructuring.

Regulatory frameworks, such as the Dodd-Frank Act’s “Say on Pay” provision, allow shareholders to vote on executive compensation packages, giving activists a tool to challenge excessive pay. In some cases, they advocate for clawback provisions, requiring executives to return bonuses if financial results are later restated due to accounting errors or fraud. In 2023, ValueAct Capital pressured Seven & i Holdings to revise its executive pay structure, arguing that compensation should be more closely tied to profitability and shareholder returns.

Strategic Realignments

Beyond governance and compensation, activists often push for broader strategic shifts to improve financial performance. This can include divestitures, spin-offs, or changes in capital allocation. If a company operates multiple business segments with varying profitability, activists may argue that separating underperforming divisions could unlock shareholder value.

General Electric (GE) faced pressure from activist investors to break up its conglomerate structure. In response, GE announced plans to split into three separate companies focused on aviation, healthcare, and energy. Activists often use financial metrics such as EBITDA margins, asset turnover ratios, and free cash flow to justify these moves, arguing that a more focused business model can lead to higher valuations.

By advocating for these changes, activist investors seek to reshape corporate governance in ways they believe will enhance financial performance. While some of these adjustments lead to long-term improvements, others may prioritize short-term stock price gains, raising questions about their broader impact on a company’s future stability.