Investor Activism

Literature review

Activism as a solution to agency problems (Jensen 1976) by monitoring (Grossman 1980) by blockholders (Shleifer 1986).
The main activist tools:
  1. Schedule 13D: "Schedule 13D is an SEC filing that must be submitted to the US Securities and Exchange Commission within 10 days, by anyone who acquires beneficial ownership of more than 5 percent of any class of publicly traded securities in a public company."
  2. 13G filling: The investors that acquired more than 5 percent of company's share and have intentions to pursue some changes in the corporations must fill 13G form with the SEC and state their investment purpose. There can be amendments to their investment purpose in the future.
  3. Rule 14a-8 shareholder proxy proposals ("There are two types of proposals. Management proposals are put forward by the company’s management, and shareholder proposals are proposed by a company’s shareholder. The SEC’s Shareholder Proposal Rule (Rule 14a-8) requires that companies include in their proxy materials shareholder proposals are to be presented for vote at their annual meetings.")
  4. "Just vote no" campaign (DELGUERCIO 2008)
"Just no vote" campaigns intend to communicate shareholder dissatisfaction to the board members. These campaigns are organized by activist who try to convince other shareholders to withhold their vote from one or more directors. They are carried via letters, internet communication or press releases. These campaigns generate negative publicity toward the board members and may provide enough incentives for the board members to voluntarily act in line with shareholder's demands. Grundfest 1993 argues hat these campaigns may be even more effective than direct issue-oriented shareholder proposals because the directly impact professional reputation of the board members.
On the other hand, many others perceive the "just vote no" campaigns as ineffective. The withholding of the votes does not itself result in removing a director from the board. Directors run for their position often unopposed. Therefore just voting "no" does not influence their election and represents only a symbolic gesture. 
DELGUERCIO 2008 examine a sample of 112 publicly announced "just no vote" campaigns between 1990 and 2003. They find that these campaigns are usually sponsored by public pension funds and target large poorly managed companies. This is in contrast with hedge funds who usually use different forms of activism and target rather smaller firms. They also find that these "just vote no" campaigns are usually successful and result in increased CEO turnover and significant improvements in post-campaign operating performance.
Clifford 2008 examines the shareholder activism by hedge funds on a sample of 197 hedge funds families between 1998 and 2005. When the hedge funds acquire more than five percent of the firms equity, it is obliged to file a regulatory disclosure with the SEC (the schedulle 13D). In this disclosure the hedge fund has to state whether its investment intentions are passive or active and in case of active investment intentions also to specified its planed actions. The fund can later make changes to this disclosure in form of amendments. Clifford finds that the firms targeted with active investment intentions tend to improve their operating performance and earn larger excess stock returns than firms targeted for passive investment purposes.  On the side of the hedge funds, he finds that the hedge funds that engage in activism tend to have longer lock-up periods and withdrawal notification periods than other non-activist hedge funds.