What an Activist Investor Means for Your Investments

Carl Icahn, influential activist investor
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It’s common these days to hear about a company that is under pressure from “activist investors” who are looking to force change. These investors are often hedge fund managers who work to acquire a big percentage of a company’s shares, then use that as leverage to lean on management. Often, these investors are seeking spots on a company’s board of directors. They also look to influence the direction of a company’s business or urge the company to sell itself or acquire another firm.

Activist shareholders made public demands of 886 companies worldwide in 2021, according to Insightia. They launched 173 new campaigns globally with an aggregate value of $41.9 billion in 2021, Lazard reported. The U.S. accounted for 55% of global activism.

The Impact of Activist Investors

What do activist investors mean to average shareholders? It’s a mixed bag. There are many examples where their efforts have succeeded in boosting shareholder value and making money for the typical investor. But there's also evidence that activist investors are too likely to push for short-term changes instead of taking a long view that would be more beneficial to everyday investors with a long time horizon.  

Average Holding Periods

The average shareholding period in the U.S. has dropped from a peak of eight years in the late 1950s to 5.5 months as of 2020, according to the World Economic Forum.

Activist investors can help give a voice to average investors who typically own too few shares of a company to have a real voice in its decisions. If you own 100 shares of Apple out of a total of 5.1 billion outstanding, for example, you’re probably not getting CEO Tim Cook’s attention. But it’s also important to understand that activist investors don’t necessarily have the same motivations or investment goals as the average citizen.

High-Profile Activist Investor Battles

Over the years, several top activist investors have gained notoriety—and wealth—by wielding the power of their shares to influence corporate decisions.

One of the most famous activist investors is Carl Icahn, who came onto the scene in the 1980s after engineering a hostile takeover of Trans World Airlines, then profiting from the sale of the company’s assets. Over the years, he has used his power as a shareholder to influence decisions by some of the world’s most recognizable companies, including Apple, eBay, and PayPal.

In 2014, Icahn acquired a nearly 10% stake in Family Dollar, then urged the company to sell itself to competitor Dollar Tree. He later sold his stake in the company, personally earning $200 million, according to Reuters.

In 2013, Icahn also played a role in pressuring Apple to return some capital to shareholders by performing a share buyback and issuing dividends.

Some of Icahn’s proteges have gone on to become notable activist investors themselves, in some cases even going up against Icahn on deals. Other top activist investors include Starboard Capital, which has waged fights with Macy’s and Yahoo! and fought its way to a takeover of Darden Restaurants, and Trian Partners, which in 2017 fought to have its CEO Nelson Peltz placed on the board of directors for Procter and Gamble.

Do Activist Investors Make a Difference?

Do the actions of activist investors actually help make money for shareholders? In many cases, yes. 

Icahn’s efforts against Apple were undoubtedly positive for people who owned the company’s shares. Apple’s share price rose nearly 30% over the course of 2012 and has continued to rise since.

In a 2016 article in Harvard Business Review, two officials from consulting firm PwC argued that more companies should listen to activist investors because they often ask tough but valid questions. An author for worldwide business consultancy McKinsey & Company, meanwhile, said that if a company engages positively with activist investors, they can almost serve as informal advisors.

“To look at the matter in a less threatening way, instead of having to spend millions on a consulting review, you could get one for free from would-be activist investors,” business professor David R. Beatty wrote in 2017.

However, a 2015 paper by business professors from Columbia University and Rutgers University expressed concern that companies have been investing less in research and development due to pressure from activist investors, who want to see profits sooner rather than later.

It’s also worth noting the impact of having one person or group controlling large quantities of a company. When an individual or group of investors buys a large number of shares of stock, that can force a price upward. That’s good for everyone. But this also means they can sell large quantities of shares all at once, thus pressing share prices down.

They May Not Have Your Interests in Mind

If you are saving for retirement, you want a stock’s value to rise, but you aren’t going to be too concerned about whether a stock goes up dramatically over the next few months or even the next year. As long as there is upward movement over time, you’re pretty happy.

Activist investors, on the other hand, can be more concerned about a company’s performance in the short term. They may want to force change that will boost share prices right away so that they can then sell shares at a profit. Activist investors aren’t generally concerned about the impact on a company’s performance five, 10, or even 20 years into the future. This is why some critics have expressed concern over the drop in research and development by companies that have faced pressure from an activist investor.

This is not to say that activist investors can’t make you money. Indeed, changes made now can certainly pay off in the long run. But keep in mind that other investors’ goals aren’t necessarily the same as yours.

Frequently Asked Questions (FAQs)

How do you become an activist investor?

An activist investor is anyone who uses a significant stake in a company to influence the company's decisions. That means you need to own a large portion of a company's shares to become an activist investor. This allows you to have an outsized impact on company-wide votes about matters like board of director nominations.

How can you tell when an activist investor is selling a stock?

There isn't a way to know for sure when an activist investor is selling a stock. However, since activist investors own a large portion of the shares, selling them all at once would put significant downward pressure on the stock price. If someone notices the stock price suddenly drop with massive share volume, that could be an indication that a major shareholder is selling off their stake in the company. Even if the selling took place over several days, a major shareholder like an activist investor could still drag the stock price down.

Article Sources

  1. Insightia. "Shareholder Activism in 2021," Pages 4, 6. Download PDF.

  2. Lazard. "2021 Review of Shareholder Activism," Pages 1-2. 

  3. World Economic Forum. "Long-Term Investing: What Are the Reasons Behind Its Decline?"

  4. U.S. Securities and Exchange Commission. "Schedule 14A Proxy Statement: Family Dollar Stores, Inc.," Pages 1, 17, 23, 78.

  5. Reuters. "Exclusive: Icahn Sells Entire Stake in Family Dollar—Sources."

  6. Twitter. "@Carl_C_Icahn, 2:25 p.m., Aug 13, 2013."

  7. Institutional Investor. "Activist Investor Jeffrey Smith Preaches Value for Shareholders."

  8. Trian Partners. "Revitalize P&G – Together," Pages 3, 5.

  9. Harvard Business Review. "The Case for Activist Investors."

  10. McKinsey & Company. "Activist Investors," Pages 1, 4.

  11. Columbia Law and Economics. "The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance." Accessed Jan. 16, 2020.