Investors increasingly using shareholder power to create change, says McKinsey
Activist investors are targeting more companies and benefitting as a result, analysis from consulting firm McKinsey has found. If handled correctly, shareholder activism can also improve the company targeted in the long-term.
According to the research, the US-listed companies that activists targeted in 2013 were worth, on average, $10 billion (£5.9 billion) – an increase on the $8 billion (£4.7 billion) registered in 2012 and the less than $2 billion (£1.2 billion) at the end of the last decade. The findings suggest that shareholders are realising that they can have an impact at any of the companies they invest in, no matter how large.
In addition to targeting larger businesses, activist investors are also launching more campaigns. In the past three years, 240 campaigns have been launched on average each year – more than double the number a decade ago. This could be linked to the success activists have experienced, encouraging more action.
“Even though activists are a relatively small group, with only $75 billion in combined assets under management compared with the $2.5 trillion hedge fund industry overall, they’ve enjoyed a higher rate of asset growth than hedge funds and attracted new partnerships with traditional investors”, McKinsey said.
“As a result, they have both the capital and the leverage to continue engaging large-cap companies.”
The McKinsey analysis supports previous research that found shareholder revolts within the FTSE 350 companies, on issues such as remuneration reports and the role of auditors in the organisation, had increased since 2010. It also backs up claims that using ownership to create change and more sustainable operations can improve financial returns for investors.
The way that executives handle shareholder engagement can have a massive impact on the company. McKinsey explained that many executives reflexively resist activists but noted that activists often provoke this response with confrontational overtures. However, if the two groups can work together, it often benefits both the shareholder and company.
McKinsey added, “Those executive who can set aside tone and style will find that some activists do indeed have ideas that create value and improve shareholder performance. In fact, a collaborative, negotiated, or settled response to activists initiatives tends to lead to higher excess shareholder returns than a combative one.”
From a company point of view, early engagement can offer context, insight and means that the campaigns are less likely to turn hostile. This allows them to benefit from the suggestions without negatively impacting on the firm.
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