WHU General

Activist Stakeholders and Their Demands

Companies are not defenseless against attacks

Activist shareholders are banding together to make demands. They want, among other things, special dividends, a separation from less profitable branches of the company, and a stricter compliance with ESG criteria (environmental, social, and good corporate governance). These groups are on the rise at listed German companies and act aggressively, seeking to exert their influence (often through their position on the supervisory board) to promote their agendas, increase company value, and ultimately increase their own profits. It is true that an increase in value is, in principle, also desirable to the management team of any company listed in the DAX (Deutscher Aktienindex [German stock exchange]). That being said, having such influential investor groups can have a long-lasting, negative impact on how the management team decides on strategy.

According to a new study performed by WHU – Otto Beisheim School of Management and FTI Strategic Communications, companies are not defenseless against this problem. Christian Andres, Chair of Empirical Corporate Finance at WHU, states that “the more transparent the corporate group’s financial forecast, the smaller the gap that management leaves between its perceived value and the value realized on the capital market. If you leave no gap, you give activist shareholders little room to argue that the company could be underperforming.”

Two defensive stratagies against activist shareholders

The results of this study show that companies that only published vague or short-term forecasts for the current financial year were particularly vulnerable to an attack from activist shareholders. The authors were able to substantiate this claim on the basis of 33 public attacks by shareholders on companies listed in the DAX, MDAX, SDAX, and TecDAX, all occurring over the last decade. In more recent years, such attacks occurred less frequently, specifically due to the rising share prices seen after the crash caused by the COVID-19 pandemic. Nevertheless, the number of these attacks will increase again if share prices consolidate and certain companies experience another period of weakness compared to their competitors. 

An analysis of this predicament shows that two strategies in particular help make corporate groups resistent to investor attacks: First, listed companies should perform routine vulnerability checks. If they do so, they will be able to anticipate any points of criticism and argue against any objections from their shareholders. Managers should be capable of comprehensibly explaining how the business model and corresponding strategy will have a positive impact on the company’s profitability. In doing so, they should place considerable importance on the mid- and long-term approach, thus making it possible to present shareholders the anticipated returns over an extended period of time.

The second strategy to avoid an attack is to be as transparent as possible about the company’s financial forecasts. The study has revealed a direct link between unclear, short-term financial forecasts and the risk of being targeted by activist shareholders. The researchers discovered that companies that have previously faced attacks had published concrete financial figures significantly less often in comparison to those who had not been attacked.

While almost all of the analyzed companies provided an outlook for the current business year, some lacked forecasts on turnover, profit, or cash flow for the following year (mid-term) and the years to come (long-term). It was precisely those companies that became the preferred targets for the (at times quite radical) demands of the shareholders. Conversely, companies that released at least mid- and long-term sales targets were less likely to fall victim to attacks by a considerable margin. “Corporate groups with many direct, listed competitors, such as those in the automotive industry, have to risk looking at both the near and distant future,” explains Florian Bamberg, Director of Strategic Communications at FTI Consulting, co-author of the study, and alumnus of WHU. “Otherwise, investors will simply buy from rival companies, which would lead to a weakened share price and give an activist shareholder the room needed to launch an attack. In this case, that shareholder would be able to secure the support of the others with relative ease.”

To read an article on this topic published by Handelsblatt (in German), please click here.