Shareholder Activism

Firm-Level Antecedents

The most consistently tested drivers of shareholder activism are, by far, firm size and performance. Activists generally focus on large companies (Cai & Walkling, 2011; Ertimur et al., 2011; Karpoff et al., 1996, Smith, 1996), although when specific types of demands are considered the results are more equivocal (Bizjak & Marquette, 1998; Ferri & Sandino, 2009). From the perspective of financial activism, shareholder activists could create more value by targeting large firms (Del Guercio & Hawkins, 1999; Strickland et al., 1996), as they are more difficult for shareholders to monitor effectively and thus are more prone to agency problems (Jensen & Meckling, 1976). An alternative explanation, offered by the social activism stream, is that large firms are more attractive to shareholder activists due to their greater visibility (Rehbein et al., 2004). Activist campaigns with large firms have better chances of capturing public and media attention, thus facilitating spillover effects where nontargeted firms preemptively adopt the reforms demanded by shareholder activists at peer firms (Brandes et al., 2008; Ferri & Sandino, 2009). Furthermore, more visible targets could be more effective in attracting the public’s support, thus solidifying the identity of the activist group (Rehbein et al., 2004; Rowley & Moldoveanu, 2003). Unlike traditional institutional activists, hedge funds are less likely to target larger firms (Brav et al., 2008; Klein & Zur, 2009), perhaps reflecting the difficulty of building a substantial block of shares in major companies (Edmans et al., 2013).

Consistent with agency theory, firms with better operating performance tend to be less attractive to shareholder activists (Ertimur et al., 2011; Karpoff et al., 1996; cf. Renneboog & Szilagyi, 2011); several studies, however, find an insignificant relationship between the two (Bizjak & Marquette, 1998; Cai & Walkling, 2011; Ferri & Sandino, 2009). Activists are also more likely to target firms whose stock market performance is suboptimal (Bradley et al., 2010; Brav et al., 2008; Ertimur et al., 2011; Renneboog & Szilagyi, 2011; cf. Smith, 1996), although studies also report a nonsignificant relationship between market performance and shareholder activism (Bizjak & Marquette, 1998; Carleton, Nelson, & Weisbach, 1998; Faleye, 2004; Ferri & Sandino, 2009; Karpoff et al., 1996; Klein & Zur, 2009). The agency problem of free cash flows posits that managers prefer to spend cash on value-decreasing investments rather than distributing it back to shareholders (Jensen, 1986). Unsurprisingly, firms’ cash holdings draw activists’ attention (Brav et al., 2008; Faleye 2004; Klein & Zur, 2009), particularly when they have lower distributions to their shareholders (Brav et al., 2008). In addition, higher levels of debt can enforce fiscal discipline and constrain managers’ ability to engage in self-serving strategies (Hart, 1993), so less leveraged firms are more likely to be targets of hedge fund activism (Klein & Zur, 2009), although the reverse holds for governance-related activism (Ferri & Sandino, 2009; Karpoff et al., 1996). Again, hedge fund activism deviates from governance-oriented activism, as it tends to target more profitable and financially healthy firms (Brav et al., 2008; Klein & Zur, 2009).

Among corporate-governance oriented antecedents, the level of executive ownership, as a proxy for the extent of alignment between the interests of shareholders and managers (Ryan, Buchholtz, & Kolb, 2010), is the most often studied. Managers who have higher shareholdings are deemed to bear to a greater extent the consequences of their decision-making; consequently, firms with higher managerial ownership are less likely to attract shareholder activism (Bizjak & Marquette, 1998; Carleton et al., 1998; Faleye, 2004; cf. Prevost & Rao, 2000). In addition, misalignment between firm performance and executive compensation provokes shareholder discontent, as it represents a lost opportunity to alleviate the agency problem (Ertimur et al., 2011; Ferri & Sandino, 2009; cf. Cai & Walkling, 2011). Incentive compensation, however, may not be enough to resolve agency problems or may trigger new issues (Ferri & Sandino, 2009, Sanders & Hambrick, 2007), thus necessitating monitoring by both directors and shareholders.

More independent boards, not beholden to the CEO, may constrain agency problems (Beatty & Zajac, 1994; Fama & Jensen, 1983) and provide more objective oversight for shareholders’ interests (e.g., Desai, Kroll, & Wright, 2005; Hayward & Hambrick, 1997). Interestingly, firms with more independent boards seem to attract shareholder activism (Ertimur et al., 2011; Prevost & Rao, 2000), although several studies report a lack of relationship or an unclear one (Bizjak & Marquette, 1998; Cai & Walkling, 2011; Renneboog & Szilagyi, 2011). Prior research also reports that greater institutional ownership is positively related to shareholder activism (Bizjak & Marquette, 1998; Brav et al., 2009; Cai & Walkling, 2011; Carleton et al., 1998; Karpoff et al., 1996; Smith, 1996; cf. Ferri & Sandino, 2009; Renneboog & Szilagyi, 2011), and firms with large owners are more likely to be targeted by shareholder activists (Faleye, 2004; Prevost & Rao, 2000; cf. Bizjak & Marquette, 1998). The findings for monitoring by both boards and shareholders underscore a key ambiguity in the activism research: Does shareholder activism suggest governance deficiencies that drive shareholder discontent, or does it signal more vigilant shareholder monitoring? The equivocal findings of prior research, however, may also be a methodological artifact of the habitual aggregation of different shareholder demands by multiple types of investors utilizing divergent activism methods.

Activist-Level Antecedents

As Table 1 shows, most prior empirical research has focused on firm-level antecedents, thus treating firm traits as the central driving force of shareholder activism. Yet scholars also theorize that whether shareholders choose to engage in activism or not is largely determined by their own characteristics (David, Kochhar, & Levitas, 1998; Hoskisson et al., 2002; Ryan & Schneider, 2002; Sikavica & Hillman, 2008). Thus, focusing on target firms alone without considering the interests, identity, concerns, and considerations of the activists could paint a partial picture of shareholder activism, at best, and a misleading one, at worst.

First, activists’ incentives to engage in activism may be decoupled from the target firm’s financial and governance situation. Activism costs vary greatly, from shareholder resolutions that require a minimal $2,000 investment in the firm and a resource commitment to the activism process (Cunat et al., 2012; Ertimur et al., 2011; SEC, 2001) to the hefty price tag of several millions for hedge fund activism (Gantchev, 2013). To justify activism costs, activists must either derive an adequate improvement in overall shareholder value or seek benefits that are not shared by all other shareholders (Chava, Kumar, & Warga, 2010; Choi, 2000; Kumar & Ramchand, 2008). Therefore, investors’ ability and willingness to engage in activism may be affected by their investment portfolio characteristics and investment horizons (Rubach & Sebora, 2009; Ryan & Schneider, 2002), business relationship with targeted firms (Black 1998; Romano 2001), and discretion to devote resources to the focal firm (Carleton et al., 1998; Clifford, 2008).

Second, shareholders with a superior salience to corporate managers or ability to gain other shareholders’ support may be more willing to engage in activism (Gifford, 2010; Kang & Sorensen, 1999), as they expect better returns on their activism investments. Such self-selection could imply that powerful investors with negotiating leverage relative to corporate managers (Alexander et al., 2010; Chandler, 2006; Ertimur et al., 2011; Greenwood & Schor, 2009) or shareholders with higher legitimacy who can more easily garner the support of other shareholders (Chowdhury & Wang, 2009; Neubaum & Zahra, 2006; Rehbein, Brammer, Logsdon, & Van Buren, 2009; Stevens et al., 2005) may be more likely to become activists. For example, proposals by institutional investors and coordinated groups have historically received much higher rates of shareholder support than those sponsored by individual investors (Gillan & Starks, 2000; Proffitt & Spicer, 2006). Shareholder activists’ efforts are also spurred on by the urgency inherent in their pursuit of financial or social goals. They must, however, be mindful of both the benefits and the costs of their activism efforts. Gantchev (2013), for example, finds that when higher benefits are expected, activist hedge funds are more likely to escalate their activism campaigns. However, they also seek to protect their bottom lines, so funds with bigger investment stakes, and, thus, more to lose, are less likely to use adversarial or hostile activism.

A third perspective posits that activists’ social identity (Rowley & Moldoveanu, 2003), emotional makeup (Bundy, Shropshire, & Buchholtz, 2013), or moral legitimacy (den Hond & de Bakker, 2007) could explain why some activists advocate for seemingly lost causes. For instance, although most social issue proposals have little hope of gaining the approval of the shareholder majority (Thomas & Cotter, 2007), the number of social issue proposals has increased over time (Proffitt & Spicer, 2006; Rehbein et al., 2004; Vogel, 1983). Identity-based perspectives may explain why individual investors, whose proposals typically receive the lowest rates of voting approval by the target firm’s shareholders (Gillan & Starks, 2000; Gordon & Pound, 1993), continue to be the most prolific shareholder activists (Gillan & Starks, 2007; Renneboog & Szilagyi, 2011). Activists, furthermore, could be motivated by a combination of the above factors or could apply different dominant logics, as their identification with targeted firms varies across their investment portfolios (Rehbein et al., 2004; Sikavica & Hillman, 2008).

Environmental Antecedents

The rise of activism and the shareholder empowerment movement underscores the importance of shareholder activism not only for individual firms and corporate managers, but also for the macro environment. The displacement of individual shareholders by institutional investors (O’Barr, Conley, & Brancato, 1992) has led to the reconcentration of shareholdings of U.S. corporations into the hands of fewer, larger investors (Davis, 2008, 2009; Hawley & Williams, 2007; Ryan, 2000). These better-informed and more powerful financial intermediaries (Del Guercio, 1996; Schnatterly, Shaw, & Jennings, 2008) should in theory be more capable of monitoring corporate executives, but may also carry more clout in changing societal structures and norms and in driving normative and mimetic changes in the institutional environment (Davis & Thompson, 1994; Zajac & Westphal, 1995). Perhaps unsurprisingly, the reconcentration of ownership has been accompanied by changes in the legal environment (Becht et al., 2009; Karpoff et al., 1996; Pound, 1992). In 1992, the SEC relaxed rules that prevented shareholders from communicating with one another, thus enhancing activists’ ability to form alliances with other shareholders (Choi, 2000; Del Guercio & Hawkins, 1999). Normative changes seeking to render corporate managers more accountable to their firms’ shareholders (Anabtawi & Stout, 2008; Kahan & Rock, 2010) have also affected shareholders’ willingness to engage in activism. Concurrent technological changes further lowered its associated costs (Wessel, 2011).

Environmental trends have not only affected shareholder activism directly by influencing the legitimacy and the ease of engaging in activism, but also indirectly by affecting the behavior of corporate managers. Task environments have long been understood to affect the latitude of managerial action (Hambrick & Abrahamson, 1995), thus influencing the relationship between firm governance and shareholder activism (Giroud & Mueller, 2011). Contemporary managers may find it easier to observe and react to shareholder activism at peer firms (Ferri & Sandino, 2009; Lee & Park, 2009; Useem, 1996), thus facilitating spillover effects and mimetic isomorphism. The shareholder activism field, however, has paid little attention to the distinct environments in which firms operate. Activism research could benefit from a more contextualized approach that considers how environmental factors affect activism itself, as well as the differences in costs, benefits, contingencies, and complementarities of activism.

Managerial Actions

One of the key premises in the activism literature is that shareholder activism addresses managerial deficiencies (Gillan & Starks, 2007; Greenwood & Schor, 2009; Rehbein et al., 2004). Although findings have been mixed concerning whether governance factors increase or reduce the odds of shareholder activism, as noted above, this lack of conclusive evidence may be due to the empirical modeling of firms as stationary targets of shareholder activism, rather than as active participants that proactively or reactively try to influence their environments. The financial and social activism streams take a somewhat different stance on the role of management in the shareholder activism process. The vast majority of the financial activism research views managers as largely inactive participants who ignore activists’ attempts unless they are compelled to yield partially or fully to their demands. At the other extreme, however, is a view of managers who respond to shareholder pressures by courting new, more compliant investors (Williams & Ryan, 2007). More recent research portrays activism as an escalating process, with increasing financial investment by activists as they transition from more cooperative, private activism to more confrontational, public methods (Gantchev, 2013). By contrast, the social activism stream argues for a range of managerial behaviors, from reactive (Neubaum & Zahra, 2006) through interactive roles that establish the importance of dialogue (Logsdon & Van Buren, 2008; Sikavica & Hillman, 2008), to a proactive role, where managers shape their environments by co-opting existing shareholders (Westphal & Bednar, 2008).

Corporate managers, therefore, may react to shareholder activism only after relentless pestering by activists (The Economist, 1997; Proffitt & Spicer, 2006) or may take a more proactive stance by anticipating or even derailing potential shareholder demands. At one extreme, managers may be able to resist or adopt a “get lost” approach to activism (Carleton et al., 1998) due to the nature of the shareholder resolution process. Despite the fact that shareholder support for activists’ proposals has grown over time (Gillan & Starks, 2007; Renneboog & Szilagyi, 2011), a significant number of proposals do not garner a majority vote by firm shareholders (Proffitt & Spicer, 2006; Sjostrom, 2008). Furthermore, although firms are increasingly likely to implement shareholder proposals that have received a majority vote (Ertimur et al., 2010, 2011; Ferri & Sandino, 2009; Thomas & Cotter, 2007), most shareholder resolutions are precatory, and thus advisory rather than binding in nature (Brandes et al., 2008; Tkac, 2006). Due to their advisory nature, companies need not implement all proposals with a majority vote (Bizjak & Marquette, 1998; Smith, 1996), although the implementation rate is much higher for proposals that do than for those that do not (Ertimur et al., 2010).

At the other extreme, managers may approach investors and implement their advice or solicit their approval, precluding the need for shareholder intervention (Rao & Sivakumar, 1999; Useem, 1996). Furthermore, CEOs could attempt to subvert shareholder activism by utilizing such techniques as ingratiatory behavior and persuasion (Westphal & Bednar, 2008). While such tactics may simply delay implementation rather than derail shareholder demands, they may be sufficiently successful that they endure the tenure of a chief executive at the focal firm. Finally, in addition to monitoring the pulse of their influential shareholders, firms can keep tabs on successful or highly visible shareholder activism directed at peer firms, and preemptively implement new corporate practices in their own firm (Brandes et al., 2008; Ferri & Sandino, 2009). A vast continuum of compromise, dialogue, and negotiation lies between these extremes (Logsdon & Van Buren, 2008; Sikavica & Hillman, 2008).

In addition to resisting or implementing shareholder activists’ demands, managers also influence the extent to which the espoused changes are implemented symbolically or substantively (David et al., 2007; Westphal & Zajac, 1994). Extensive decoupling may occur, where managers commit to a change but instead of addressing the problem at its core engage in impression management and window dressing activities (Hadani, Goranova, & Khan, 2011; Williams & Ryan, 2007). Decoupling, therefore, is counterproductive, as it diverts resources from the real activist goal (David et al., 2007; Dimitrov & Jain, 2011) or, worse, transfers undesirable practices to less visible subsidiaries (Surroca, Tribo, & Zahra, 2013). Corporate managers’ response may be influenced both by managerial traits, such as managerial entrenchment (Carleton et al., 1998; Giroud & Mueller, 2011) or an inability to address heterogeneous shareholder demands (Bundy et al., 2013; Hadani et al., 2011), and by the characteristics of shareholder activists, such as their ability to monitor whether proposed changes are implemented substantively rather than symbolically (Brav et al., 2008; David et al., 2007; Zajac & Westphal, 1995).

Shareholder Actions

The choices available to shareholders have traditionally been understood as loyalty (hold), exit (trade), or voice (activism) (Davis & Thompson, 1994; Hirschman, 1970). Voting, as a fundamental right of corporate shareholders, allows them the opportunity to take sides, by either supporting management or opposing it. Such opposition can be exercised by voting against management (Ashraf et al., 2012; Butler & Gurun, 2012; Davis & Kim, 2007) or by supporting such activist undertakings as “just vote no” campaigns (Del Guercio et al., 2008; Ertimur et al., 2011), which prompt shareholders to vote against particular directors (Conyon & Sadler, 2010; Hillman, Shropshire, Certo, Dalton, & Dalton, 2011). Voting for activist proposals or voting against management proposals can play a critical role in shaping corporate practices, by facilitating the implementation of activists’ demands (Ferri & Sandino, 2009; Thomas & Cotter, 2007) or by sending powerful signals to corporate managers and influencing their actions (Hillman et al., 2011). Opposition through voting is the least costly action that shareholder activists can take, followed by filing shareholder resolutions and engaging in institutional investor activism (Black, 1998); both stand in stark contrast to activist hedge funds’ spending on activism (Gantchev, 2013).

In addition to choosing whether and how much to invest in shareholder activism, shareholders may also utilize a variety of tactics ranging from public to private shareholder activism. Public activism includes such options as SEC rule 14a-8 shareholder resolutions (Dimitrov & Jain, 2011; Reid & Toffel, 2009); 13-D filings that are required for active investors with a 5 percent or greater stake in the company (Brav et al., 2008; Edmans et al., 2013; Klein & Zur, 2011); or publicized letters, focus lists, and media campaigns (Chowdhury & Wang, 2009; Hillman et al., 2011; Song & Szewczyk, 2003; Ward, Brown, & Graffin, 2009). Private activism, on the other hand, is typically unobservable to researchers and includes private negotiations (Becht et al., 2009; Carleton et al., 1998), behind-the-scenes consultations, letters, phone calls, meetings, and ongoing dialogues (Brandes et al., 2008; Logsdon & Van Buren, 2009). Private activism, sometimes referred to as “quiet diplomacy” (Hendry, Sanderson, Barker, & Roberts, 2006), is perceived to be the more powerful option of the two, as corporate executives and directors may be more responsive to activists’ demands behind closed doors, in order to avoid public embarrassment and cost to their reputations (David et al., 2007; Hadani et al., 2011). Private activism, however, does not preclude the public form, as activists could take a public stance early on or after an initial quiet approach fails to yield satisfactory results (Brav et al., 2008; Cheffins & Armour, 2011; Del Guercio & Hawkins, 1999; Gantchev, 2013).

Private activism, where the very existence of negotiations between management and activist investors is private information, is estimated by researchers to be more prevalent than public activism (Becht et al., 2009; Carleton et al., 1998; Rubach & Sebora, 2009). Lack of transparency, however, may be a double-edged sword. On one hand, private activism, as both a more potent and a more collaborative tool, may be more effective in achieving the changes and reforms pursued by activists, and therefore could provide more lucrative benefits to the firm and its remaining shareholders. On the other hand, private activism could open the door to “rob Peter to pay Paul” scenarios (Anabtawi & Stout, 2008: 1280), as it is not subject to shareholder approval and, furthermore, could create information asymmetries between shareholder activists and other shareholders. Whether the impact of shareholder activism benefits all of the firm’s shareholders or just a select few hinges on two critical factors: (1) the ability of the activist to solicit the desired response or an acceptable compromise from corporate managers and (2) the alignment of the interests of the influential activist with the interests of other shareholders.

Useem (1996) argues that, to be able to negotiate successfully, corporate activists need key resources, such as power and bargaining leverage, or they may have to rely on the threat of negative publicity. Stakeholder salience is the key theoretical framework that explains the differential ability of shareholder activists to attract managerial attention and influence managerial behavior. Facing heterogeneous or even competing shareholder claims, managers would give priority to more powerful activists, with legitimate and urgent demands (Chowdhury & Wang, 2009; Mitchell, Agle, & Wood, 1997; Neubaum & Zahra, 2006; Rehbein et al., 2009; Stevens et al., 2005). The salience framework could provide a theoretical explanation of the varying treatments of shareholder proposals. For example, as noted above, a significant number of proposals that receive a majority vote are not implemented by the targeted companies, while a small number of shareholder proposals that fail to receive a majority vote are (Del Guercio & Hawkins, 1999; Ertimur et al., 2010, 2011; Telman, 2011). Furthermore, managers are more likely to settle proposals filed by more salient institutional investors or coordinated groups, rather than by individual shareholder activists (David et al., 2007; Gillan & Starks, 2000).

In order for the efforts of influential activists to be beneficial to the firm’s remaining shareholders, the activist’s interests must be aligned with theirs. A key, albeit implicit, assumption in the activism literature is that activism will benefit all firm shareholders, as focusing on share price will create value for the remaining shareholders (Cziraki et al., 2010; Karpoff et al., 1996). Modern corporations, however, are akin to political arenas (Pound, 1992), where heterogeneous and at times conflicting demands by different shareholder groups create challenges both for managerial action and for shareholder agreement on the appropriateness of an action. The growing literature on ownership heterogeneity points out that the interests of a particular firm’s shareholders may differ on a number of dimensions, such as varying investment horizons (Bushee, 1998, Connelly, Tihanyi, Certo, & Hitt, 2010; Dikolli, Kulp, & Sedatole, 2009; Hoskisson et al., 2002; Tihanyi, Johnson, Hoskisson, & Hitt, 2003), business relationships with the firm (Brickley, Lease, & Smith, 1988; David et al., 1998; Davis & Kim, 2007; Kochhar & David, 1996), portfolio considerations (Davis & Kim, 2007; Goranova, Dharwadkar, & Brandes, 2010; Ryan & Schneider, 2002), or discrepancies between cash flow and voting rights (Anabtawi & Stout, 2008; Christoffersen et al., 2007; Hu & Black, 2006).

Free riding incentives present a deterrent to shareholder activism that raises the share price: while all of the firm’s shareholders share in the benefits, the activist alone bears the costs. As noted above, however, shareholder activists could choose to pursue agendas unrelated to shareholder value: for instance, researchers in finance and accounting often exclude social-issue shareholder proposals as frivolous (Romano, 2001; Thomas & Cotter, 2007) or interpret weak voting support for such proposals as evidence of misalignment with the interests of the average firm shareholder (Gillan & Starks, 2007). Furthermore, some activists may bear the cost of activism privately in order to achieve private benefits that are not shared by other shareholders (van Essen, van Oosterhout, & Heugens, 2013). Examples abound of shareholder activism where the interests of activists deviate from firm value due to conflicts of interest. Union pension funds are argued to be more concerned with employee welfare than with the stock price of the targeted firm (Agrawal, 2012; Cai & Walkling, 2011). Public pension funds have been suspected of pursuing corporate social performance goals due to political pressure or the political ambitions of their administrators (Romano, 1993; Wahal, 1996; Woidtke, 2002). Finally, shareholder activists may face portfolio considerations or business relationships that interfere with a precise focus on shareholder value at the target firm (Ahmedjian & Robbins, 2005; Ashraf et al., 2012; Davis & Kim, 2007; Romano, 2001; Ryan & Schneider, 2002).

Firm-Level Outcomes

The market reaction to shareholder activism is by far its most examined outcome, but the results exhibit significant variance. Scholars report positive (Brav et al., 2008; Cunat et al., 2012; Greenwood & Schor, 2009; Klein & Zur, 2009), negative (Bizjak & Marquette, 1998; Cai & Walkling, 2011; Karpoff et al., 1996), and insignificant market reactions to activism (Agrawal, 2012; Becht et al., 2009; Carleton et al., 1998; Del Guercio & Hawkins, 1999; Gillan & Starks, 2000; Strickland et al., 1996; Wahal, 1996). Two main factors could explain these equivocal findings. First, as noted above, many shareholder proposals are negotiated and withdrawn prior to their appearance in a proxy statement, so the appearance of an actual proposal may suggest that corporate managers were unresponsive to activists’ private efforts (Chowdhury & Wang, 2009; Del Guercio & Hawkins, 1999). Second, the majority of the event studies examine shareholder proposals, which are advisory in nature, thus not necessarily resulting in changing the targeted company’s practices. Prior research reports that the market reaction to shareholder activism is positively related to the proposals’ implementation (Cai & Walkling, 2011; Smith, 1996). Other contextual factors that affect the market’s reaction to shareholder activism include the type of shareholder activist (Cai & Walkling, 2011; Cunat et al., 2012; Gillan & Starks, 2000), the type of activism demands (Becht et al., 2009; Carleton et al., 1998; Del Guercio & Hawkins, 1999), whether the interests of the activist reflect the interests of other shareholders (Agrawal, 2012; Alexander et al., 2010; Cunat et al., 2012), the extent of agency problems at the focal firm (Cai & Walkling, 2011; Carleton et al., 1998), and the degree to which managers are willing to negotiate with shareholder activists (Smith, 1996; Strickland et al., 1996).

In addition to investigating share price changes following shareholder activism events, activism research has examined its relationship with operating performance. Little evidence exists that traditional activism directed toward governance changes is related to significant improvements in operating performance. Some report performance improvements (Del Guercio et al., 2008), while others find underperformance (Karpoff et al., 1996; Prevost & Rao, 2000) or a lack of performance improvement (Del Guercio & Hawkins, 1999; Song & Szewczyk, 2003; Wahal, 1996). Findings that shareholder activism is unrelated to firm performance (e.g., Black, 1998; Gillan & Starks, 2007; Yermack, 2010) are perhaps unsurprising, given that the empirical research focuses primarily on governance-related shareholder activism, and the governance literature, in turn, reports an equivocal relationship between governance structures and firm performance (Daily, Dalton, & Cannella, 2003; Dalton, Daily, Ellstrand, & Johnson, 1998). In contrast, the impact of hedge fund activism on subsequent performance is predominantly positive (Becht et al., 2009; Brav et al., 2008; Greenwood & Schor, 2009; Klein & Zur, 2009; cf. Klein & Zur, 2011), although the resulting benefits may be due to subsequent acquisitions of targeted firms (Greenwood & Schor, 2009) or to reduced value for bondholders (Klein & Zur, 2011).

In addition to influencing firms’ financial performance, shareholder activism can affect firms’ political, environmental, or corporate social performance (CSP) (Clark & Crawford, 2012; David et al., 2007; Guay, Doh, & Sinclair, 2004; Rehbein et al., 2004; Reid & Toffel, 2009). Neubaum and Zahra (2006) find that activism’s impact on CSP depends on the shareholders’ temporal horizon; activism interacts positively with long-term ownership, but negatively with short-term ownership. David and his colleagues (2007) test two competing hypotheses for shareholder activism and CSP: on one hand, activism could discipline managers (Johnson & Greening, 1999) or, on the other hand, it could signal CSP deficiencies (Prevost & Rao, 2000). Interestingly, they find that both challenged and settled proposals are negatively related to subsequent CSP. Stevens and his colleagues (2005) find that shareholder activism is related to the adoption and internalization of ethics codes by financial executives. Reid and Toffel (2009) also find that firms are more likely to participate in the Carbon Disclosure Project if they are targeted by environmental shareholder proposals; this effect is more pronounced when the firm operates in an environmentally sensitive industry and when a threat of regulation exists. Agrawal (2012) reports an even more direct effect for organizational stakeholders, finding that activism by the AFL-CIO is associated with reductions in labor union/management disputes.

Although shareholder activism’s effect on targeted firms’ performance, whether performance is broadly or narrowly defined, is fairly equivocal, shareholder activists have been increasingly successful in influencing firms’ corporate governance (Ertimur et al., 2010; Thomas & Cotter, 2007). Earlier investigations of CEO turnover found little impact of shareholder activism (Del Guercio & Hawkins, 1999; Karpoff et al., 1996; Smith, 1996), but more recent research documents that activism enforces managerial discipline and raises the likelihood that the CEOs of targeted firms will lose their jobs (Brav et al., 2008; Del Guercio et al., 2008). Furthermore, by reducing managerial entrenchment, activism could precipitate activity in the market for corporate control. Activism related to shareholder rights issues, such as rescinding poison pills (Bizjak & Marquette, 1998) or declassifying boards of directors (Guo, Kruse, & Nohel, 2008), for example, could make firms more attractive takeover targets. Firms that are consistently targeted for their anti-takeover provisions are subsequently more likely to be acquired (Del Guercio & Hawkins, 1999; Greenwood & Schor, 2009).

No other governance issue has attracted as much research attention as executive compensation. Ertimur and his colleagues (2011) find that executive pay proposals and “vote no” campaigns are related to a reduction in excessive executive pay. Say-on-pay activism, however, is a contentious arena, where corporate executives are more likely to obtain support from mutual funds that manage corporate retirement plans (Ashraf et al., 2012; Davis & Kim, 2007) or whose managers share the educational network of the focal CEO (Butler & Gurun, 2012). Chen (2004) finds that, while activism does not affect executives’ ability to reprice stock options, firms that voluntarily restrict option repricing improve their stock performance, particularly if they are listed on the Council of Institutional Investors (CII) focus list of underperforming firms. Ferri and Sandino (2009) find that firms that are targeted with proposals to expense stock options are more likely to announce voluntary expensing. Furthermore, shareholder activism constrains CEO pay increases, particularly when proposals receive a shareholder majority vote. Brav and his colleagues (2008) also report that hedge fund activism has a positive impact on pay-for-performance, while Klein and Zur (2009) find that hedge funds rarely demand reductions in CEO compensation, but often succeed at gaining board representation.

Activist-Level Outcomes

Empirical research on the outcomes of shareholder activism for the activists themselves is rare, perhaps due to the assumption that activists will benefit financially from their activism efforts as targeted firms’ share prices improve. Becht and his colleagues (2009) find substantial benefits from private engagement activism by the HUKFF fund, while Gantchev (2013), in examining activist blockholders’ returns to activism, finds that, on average, the returns are insignificant. He notes, however, that shareholder activists differ tremendously in their ability to capture financial benefits, and that some activists reap significant financial benefits for their efforts. Beyond shareholder value, activists could realize benefits for the activist group, such as reinforcement of the activist’s identity (Rehbein et al., 2004; Rowley & Moldoveanu, 2003), or benefits for corporate stakeholders, such as employees (Aggrawal, 2012) or community members, through improved corporate social responsibility (David et al., 2007; Neubaum & Zahra, 2006), environmental performance and disclosure (Reid & Toffel, 2009), or political activity (Clark & Crawford, 2012). Public benefits could also include widespread spillover effects of activism (Brandes et al., 2008; Ferri & Sandino, 2009). As Richard Koppes, the former chief counsel of CalPERS notes: “It makes sense for us to try to raise the ocean in order to lift our boat” (Del Guercio & Hawkins, 1999: 294). Shareholders could seek such benefits by directly communicating governance expectations to portfolio firms (Rubach & Sebora, 2009; Ryan & Schneider, 2002; Vanguard, 2002), developing shareholder voting guidelines (Clark & Van Buren, 2013), or using situations where shareholder consent is required as a “pressure point” to encourage substantive changes in corporate behavior (Holland, 1998: 259). In addition to public benefits, which offer positive externalities for other shareholders or organizational stakeholders, shareholder activists may also seek private benefits that are unshared with other shareholders (Bainbridge, 2012; Chava et al., 2010; Choi, 2000; Kumar & Ramchand, 2008). The practical odds of powerful activists being able to generate private benefits at the expense of other firm shareholders have been questioned by some (Bebchuk & Jackson, 2012; Briggs, 2007) and vigorously debated by others (Business Roundtable and Chamber of Commerce v. SEC, 2011; SEC 2005, 2010).

Environmental Outcomes

Shareholder activism can trigger changes in the focal firm’s task environment, as well as in its institutional and legal context (CII, 2011). First, even if a particular firm is not an activism target, itself, dialogues with its shareholders or screening of activism events at peer firms could facilitate the spread of particular reforms throughout the organizational network (Brandes et al., 2008; Rao & Sivakumar, 1999; Useem, 1996). For example, Ferri and Sandino (2009) find evidence of an industry spillover effect: firms are likely to respond to shareholder activism at their competitors, even when they themselves are not directly targeted. Second, social movement theory is often invoked to explain activism’s transformational role in challenging prevailing organizational frames and prompting corporate executives to consider alternatives (Reid & Toffel, 2009). While Reid and Toffel explain the spread of stakeholder-friendly environmental practices, Davis and Thompson (1994) utilize the social movement perspective to examine the shift to a dominant view of the firm as an entity owned by shareholders and devoted to the purpose of maximizing shareholder value. In addition to positioning shareholder value as a pivotal point for the attention of corporate executives and directors (Rao & Sivakumar, 1999), this social movement has also been successful in influencing regulatory reforms that facilitate shareholder monitoring and executives’ accountability to firm shareholders (Bainbridge, 2006; Davis & Kim, 2007; Davis & Thompson, 1994).

Methodological Challenges

Our review of the activism literature identified a number of methodological challenges. First, prior research has addressed the heterogeneity of activists, interests, and issues in two ways: by focusing on a particular type of activism, thus ignoring other types of shareholder demands, or by applying a generic treatment to activism, where different activists and demands are aggregated and treated as equivalent (Tables 1 and 2). Both of these approaches could contribute to the equivocal findings in the activism field. Focusing on a partial picture of activism comes with the risk of omitting important factors and mistakenly attributing the results to one form of activism, when they are instead driven by another. Treating activism generically, on the other hand, may encourage confounding interpretations by aggregating activism forms that have varying levels of salience to corporate managers. For instance, mixing less and more salient forms of activism could lead to weak results, even if the salient forms are successful in generating corporate change. Future research, therefore, should empirically address the heterogeneity of shareholder activism and the potential interrelations among different types of activism. Scholarly work both on the theoretical advancement of the field and on the development of a strong nomological framework that organizes activism diversity could offer invaluable guidance for such empirical work. Future advances in the field could increase the degree of commonality in empirical studies and reduce potential underspecification of research models.

The problem of activism heterogeneity is further compounded by prior research’s tendency to simply model the presence or absence of “shareholder activism” (see Table 1), thereby not only treating shareholder activism as monolithic, but also ignoring the fact that the heterogeneity of demands may affect corporate executives’ response to activism. Discriminating between firms that receive one or two shareholder proposals and those that literally attract their shareholders’ wrath may also provide a stronger test of whether shareholder activism is indeed driven by managerial and governance deficiencies (Gillan & Starks, 2007; Klein & Zur, 2009) or by growing rifts between shareholder and stakeholder groups (Barnett & Salomon, 2012; Klein & Zur, 2011). While in the first case, shareholder activism could constrain managerial problems, in the latter, managers’ pursuit of shareholder value maximization could come at a price to stakeholders, or, alternatively, the corporate pursuit of social and environmental performance could detract from shareholder wealth. Cross-sectional models would be inadequate in either case. On one hand, shareholder activism could involve a multiyear undertaking and have a path-dependency effect on corporate executives and directors. On the other hand, stakeholder/shareholder value dynamics may change over time. For example, if actions beneficial to shareholders are harmful to firm stakeholders, the resulting withdrawal of stakeholder contributions to the firm may eventually harm shareholder value in the longer run (Donaldson & Preston, 1995; Freeman, 1984). Longitudinal designs and analyses, therefore, could allow activism researchers to study how shareholder activism unfolds over time and the dynamics of the value-creating or value-distributing effects of activism. Furthermore, by controlling for time-invariant sources of unobserved heterogeneity, panel data methods could also constrain problems of biased or misleading parameter estimation.

Another issue that becomes apparent when examining Tables 1 and 2, and the commonality of variables used both as drivers and outcomes of shareholder activism, is the potential for endogeneity concerns. Empirically addressing this issue could strengthen readers’ confidence in activism research findings, by reducing the likelihood that the causes and consequences of activism are confounded. Furthermore, researchers comparing targeted and nontargeted firms could find little difference between the two, if nontargeted firms responded preemptively to activism at peer firms or, alternatively, were targeted by activists only privately, unobserved by researchers. While scholars have suggested that private activism is pervasive (Becht et al., 2009; Carleton et al., 1998; Rubach & Sebora, 2009), prior research has not addressed this concern empirically. If shareholder activism is a substantially path-dependent and evolving process, where public activism is undertaken only after the failure of private activism, then empirical research, and our review, by extension, may be biased toward describing only the tip of the iceberg. Research models, however, rarely, if ever, address this issue, possibly sacrificing data relevance for data availability. Yet, studying both public and private activism could enrich our understanding of activism processes and outcomes, and could address the relationship between activism transparency and the value-creation/value-transfer impact of activism.

Finally, despite the fact that activism theory suggests multilevel antecedents and outcomes of shareholder activism, empirical research has focused on cross-sectional, single-level analyses. Shareholder activism involves relationships, actions, and interactions among at least two and often more parties (Figure 1). At the firm level, qualitative and process-driven studies could enrich our understanding of how CEOs and directors perceive, react, anticipate, and deal with different types of shareholder activism, different activists, and different demands. At the activist level, we need to understand what drives some shareholders but not others to become activists, how widespread shareholder activism is among shareholders, and whether activism reflects all shareholders’ interests or just those of a small but vocal minority. Future research, therefore, should investigate how various activist groups construe and approach activism: how they perceive firm value and the benefits of their activism efforts, how they decide which issues to address, and how they build alliances and garner support from other shareholders. For future research to be most informative, it will need to include variables from more than one level of analysis. Multi-level models could further advance our understanding of how firm, activist, and environmental characteristics affect the processes and outcomes of activism, and may be crucial in distinguishing fashions and fads in activism from substantive corporate reforms.

Theoretical Implications

The bifurcation of prior research into financial and social activism presents unsolved puzzles both within the two theoretical frameworks and between them. We address these in turn.

Implications for Practice

Research on shareholder activism has crucial implications for the normative debate on shareholder empowerment and whether further shareholder empowerment could be expected to solve or increase governance problems. Given the importance and ubiquity of publicly traded firms in contemporary societies, two key governance questions remain. What is the purpose of the corporation (Sundaram & Inkpen, 2004a, 2004b)? and, In whose interest should the public corporations be managed (Fiss & Zajac, 2004)? While the market for corporate control has declined in recent years, the importance of shareholder activism and the “market for corporate influence” has escalated (Gillan & Starks, 2007; Greenwood & Schor, 2009; Karpoff et al., 1996). Critics, however, have pointed out that, as shareholders do not owe a fiduciary duty to their portfolio firms (Anabtawi & Stout, 2008; Lan & Heracleous, 2010), shareholder activism may be decoupled from responsibility. To address whether further shareholder empowerment is desirable, therefore, we need to better understand the broader value implications of shareholder activism: (1) whether activism creates or destroys overall firm value and (2) how this value (or cost) is distributed among different shareholder and stakeholder groups. Future research should address this issue by focusing on an aggregate understanding of firm value (rather than a benefit to a particular constituency), as well as by studying the dynamic implications of activism, for example, when activism creates value in the short-run by “borrowing” value from the long-run and when activism promotes the corporation’s long-term viability.

For the time being, the shareholder activism literature fails to offer strong support for the classical agency theory assumption that shareholder monitoring will improve firm performance, despite findings of improvements in corporate governance (see Table 2). The activism literature, furthermore, raises several questions regarding the feasibility of this central tenet. As shareholders encompass a broad range of interests and identities, shareholder activism could cost as well as benefit firms’ shareholders. In addition to creating overall firm value, shareholder activism could instead create short-term shareholder value by transferring value away from firm stakeholders or from long-term shareholders. Alternatively it could transfer value to stakeholders by detracting from shareholder wealth. Furthermore, activism could destroy overall firm value, while still generating benefits for the activist group. For instance, short-term shareholders could benefit from holding corporate executives accountable and aligning their compensation to short-term performance; a focus on short-term shareholder interests, however, may aggravate the problem of managerial myopia (Freeman et al., 2004; Neubaum & Zahra, 2006). Finally, the shareholder activism literature is unclear concerning what renders activists more informed or knowledgeable about appropriate corporate actions and strategies than corporate managers themselves or what renders institutional investor executives immune to the same set of agency problems (e.g., Coffee, 1991; Jin & Scherbina, 2011) widely believed to afflict corporate executives. In Table 3, we present these and other research questions across the multiple levels of analysis that we employed throughout the article, as well as proposing an integrative approach across social and financial activism. We also point out the need for an open-systems approach that studies the cost and benefit dynamics of shareholder activism, not only at the firm level but also for the organizational population. The substantial decline in the number of public corporations in the U.S. (Davis, 2011), which many blame on drastic increases in corporate regulation, has largely coincided with growing shareholder empowerment, highlighting the urgency for research on the systemic benefits and costs of shareholder activism.