Influencing the influencers – how activist campaigns are won and lost

Not a week goes by without the news of a new activist campaign being launched. Activist hedge funds generate significant news coverage in the financial media because their campaigns to achieve change at target companies are often rich in drama and colour. 

An observer might be forgiven for thinking that activist hedge funds are financial markets’ carnivores, red in tooth and claw, that positively relish the chase and the kill. 

But almost invariably, a public campaign is a last resort for an activist investor, a course only embarked upon after their previous attempts with the company’s management to achieve change behind closed doors have failed.  

Many activists will say that they prefer to think of themselves as ‘constructivists’ or ‘suggestivists’ that are aiming only to provide good ideas to management, indeed that they are a source of free management consulting. 

Indeed, the ideas need to be good because it is usually the views of the other investors in the company that matter most, and they who need to be convinced of any change of strategy. 

So a successful activist campaign has to win hearts and minds and ultimately needs to be seen as increasing shareholder value for the company’s shareholders as a whole. 

Therefore, it is not the most aggressive campaign that is likely to win, but the one that is most sensible. The loudest voice doesn’t win, the most reasonable one does. 

That is why any company seeking to defend itself from an activist campaign will typically seek to paint the activist as acting in its own, short-term interests, rather than the interests of shareholders as a whole.  

And it is why an activist attempting to gain traction for a change of corporate strategy has to demonstrate what is going wrong and explain how they can fix it. 

To do so, they will have to demonstrate that they understand the company better than its own management. It is not so absurd as it sounds. Some management teams have admitted they were astounded how much detail activists had gone into and how they knew things management did not. 

But does this all really deliver results? Academia is divided. “Governance by Persuasion: Hedge Fund Activism and Market-Based Shareholder Influence”, published last year by distinguished academics Alon Brav, Wei Jiang and Rongchen Li, argues that “the empirical evidence supports the conclusion that interventions by activist hedge funds lead to improvements in target firms, on average, in terms of both short-term metrics, such as stock value appreciation, and long-term performance, including productivity, innovation, and governance.” 

But “Barbarians Inside the Gates: Raiders, Activists, and the Risk of Mistargeting” by Zohar Goshen and Reilly S. Steel in the Yale Law Journal, comes to a quite different conclusion.  

They argue that “the conventional wisdom about corporate raiders and activist hedge funds—raiders break things and activists fix them—is wrong. Because activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be underperforming—they are much more likely than raiders to destroy value and, ultimately, social wealth.” 

Regardless of who is right, one thing is clear. An activist campaign is won and lost in the public domain. To prevail, the winning side must influence the influencers, ie they must explain their case to the journalists writing about it better than the other side. 

Christen Thomson is a Senior Director at Citigate Dewe Rogerson specialising in hedge funds