General Description of Active Engagement Activities
Shareholders can engage with investee companies in a variety of ways. According to Hammond (2021), active engagement can be defined as proactive, constructive, and collaborative communication with the management teams of the investee companies. Investors that actively engage with the company can be described as activist shareholders. Such shareholders use their equity stake in a venture to put the necessary pressure on its management (“Active Engagement by Shareholders,” 2022). Engagement can be proactive when investors reach out to the company and reactive when shareholders react to the organization’s communication. For example, proactive engagement can include informal meetings of investors with the management team, whereas voting during a shareholder’s meeting is reactive as the vote is initiated by company management (“Active Engagement by Shareholders,” 2022). Shareholders can also propose specific changes to the company, such as adjustments in financial strategies or replacing the board of director members. Active engagement can be considered constructive when investors engage in purposeful dialogue with the investees on matters of strategy, governance, performance, and risk (“Active Engagement by Shareholders,” 2022). Thus, investee companies and shareholders foster a more fruitful collaborative relationship through active engagement.
Active engagement also helps increase the corporate value of the investee’s business ventures. This is traditionally achieved by replacing the CEO and the shareholders taking seats on the board of directors (“Active Engagement by Shareholders,” 2022). Investors can opt for a heavy approach and purchase the majority of shareholdings and thus, being able to delist the company and privatize it (“Active Engagement by Shareholders,” 2022). These approaches can also be classified as active engagement by shareholders as they make decisions that affect the structure of the company in order to increase corporate value and profit from the investment.
Investment Process of Active Engagement Managers
Prospective activist shareholders have a well-defined approach to the investment process. Investing begins with deep research into the potential investee company (“Active Engagement by Shareholders,” 2022). The research can last up to several years of engagement managers following the company as they need to ensure it is a worthwhile investment opportunity. After the research stage, active engagement managers meet with the top managers of the venture to better understand the company’s inner workings. Although potential investors have an analysis of the company at this stage, they do not go public with it (“Active Engagement by Shareholders,” 2022). In the next stage, the managers invest in the company and reveal to the public and their customers their analysis and the proposed plan for increasing the corporate value of the investee. The final stage includes the execution of the shareholders’ plan to increase the company’s value. During this stage, additional insider information that can inform investors’ decisions regarding the company is gathered and acted upon (“Active Engagement by Shareholders,” 2022). Overall, investing is a carefully thought-out process that requires substantial skill, knowledge, and time investment from potential shareholders.
Four Types of Engagement Agendas
There are four types of agenda when it comes to the engagement of activist shareholders with the investee companies. These include governance structure, business strategies, financial strategies, and engagement to investors’ relationship issues of the company (“Active Engagement by Shareholders,” 2022). The governance structure agenda concerns board-related governance and remuneration and is aimed at selecting the best candidates for the board to improve corporate and shareholder value (“Active Engagement by Shareholders,” 2022). Thus, engagement activities of the agenda usually include voting on the board members or creating the plan for CEO succession. Meanwhile, the business strategy agenda is focused on such issues as portfolio or business model restructuring (“Active Engagement by Shareholders,” 2022). The purpose of this engagement agenda is to improve the venture’s cash flow, specifically enhancing the company’s liquid assets (Hayes, 2021). When engaging in business strategy, shareholders can vote on business strategy decisions such as mergers or partnerships.
Investors can also communicate their wishes on the financial strategy of the company. The financial strategy agenda usually concerns the profitability of the business with the purpose of ensuring long-term gain (Kenton, 2021). Actual activities of the engagement agenda include the shareholders communicating with the management team and voting on improving return on equity (ROE) and return on invested capital (ROIC) strategies (“Active Engagement by Shareholders,” 2022). Finally, the engagement agenda can relate to engagement with shareholders itself. In this case, the purpose of communication is to discuss the existing engagement strategies with the investors and bridge any gaps between them and the investee company’s management (“Active Engagement by Shareholders,” 2022). Engagement activities can include a survey of shareholders to find what information they find pertinent and an explanation of key performance indicators (KPI) to avoid misunderstandings.
Systemic Risk Activists and Their Activities
When engaging with investee companies, activist shareholders can also opt for a systemic risk activism approach. This engagement can be defined as a systematic approach that aims to reduce the negative effect of a business venture on other companies in the investor’s portfolio (“Active Engagement by Shareholders,” 2022). Shareholders with a diversified portfolio face a higher risk of certain investee organizations outperforming and negatively affecting others to the point of bankruptcy, known as systematic risk (Coffee, 2021). Thus, the engagement activities of such investors differ from those whose portfolio is less diversified. For example, such investors can purposefully vote on strategic decisions that lower the stock of one company if it will result in positive externality and value increase of the overall portfolio.
References
Active Engagement by Shareholders [PowerPoint]. (2022).
Coffee, J. C. (2021). The coming shift in shareholder activism: From “firm-specific” to “Systematic risk” proxy campaigns (and how to enable them). The Harvard Law School Forum on Corporate Governance. Web.
Hammond, J. (2021). Investing in the age of engagement. CFA Institute Enterprising Investor. Web.
Hayes, A. (2021). Cash flow. Investopedia. Web.
Kenton, W. (2021). Distinguishing between strategic and tactical financial management. Investopedia. Web.