Corporate Governance: Shareholder Mechanisms

Shareholders want the board to pursue profit maximization. If they don't feel that's happening, watch out! In such cases, a company would have to take steps to maintain and enhance their relationships with displeased shareholders.

What do you think is the easiest way to smooth things over for shareholders?

Well, no. This can be done, and it might even make some shareholders happier. But this is more of a long-term strategic decision that must pass several levels of approval first.

Sure. Beyond the annual meeting, a lot of companies are finding that there are benefits to engaging shareholders throughout the year with updates and nonfinancial information. This seems to build some trust and support which makes other measures less necessary.

Not exactly. An acquisition may add value, but it is far from easy.

Hedge funds are often big shareholder activists. What do you think is a reason for this?

Right. Hedge funds are _not_ usually well-diversified, which is why they can afford the time to be activists in causes at individual firms. If the cause is successful, the payoff can be large. The fee structure of hedge funds is usually a large share of profits without much concern for loss, so this makes them perfectly suited as shareholder activists. An extreme measure of activism would be a lawsuit. "Shareholder derivative lawsuits" are filed against the Board of Directors, management, or even controlling shareholders by activist shareholders who feel they aren't doing their jobs right.

Nope. Every investor has profit motive.

No, actually. Hedge funds quite often are not. If they were, they couldn't take the time to be such activists in a single cause.

Other market factors that play into shareholder relationships are potential takeovers. A __proxy contest__ is where an attempt is made to get enough board members in a certain group elected that they take control of the board. Another way is to just convince shareholders to sell their shares to another party wanting to take control. That's a __tender offer__. Finally, if the takeover is without management's approval, then it is termed a __hostile takeover__. Suppose that some party starts quietly purchasing shares in the hopes that they will soon be sold to a highest bidder in a hostile takeover. Which method of takeover do you think this party is hoping for?

Yes!

No, a tender offer, actually.

A proxy contest just looks for votes, where a tender offer is someone looking to purchase shares.

There are defenses against takeovers. Sometimes a company will have a __poison pill__ provision like a shareholder rights plan, which allows shareholders to purchase additional stock if ownership becomes concentrated to a certain point, or a change to a staggered board term. The idea in both of these is to make it more difficult and costly to undertake a takeover. It's a whole lot better to keep shareholders happy in the first place.

To summarize: [[summary]]

That phrase "other measures" sure has an ominous sound to it. And it should. If shareholders don't feel that the board is acting in their best interest, there are a lot of things they can do. __Shareholder activism__ includes an array of actions that shareholders might consider to push management in certain directions. This could include a battle for proxy votes or introducing a shareholder resolution. They could even try legal action, but that's not allowed in some places.

Find riskier projects

Communicate more

Acquire a competitor

They're well diversified

They're motivated by profit

They have fee structures that allow for it

Tender offer

Proxy contest

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