What are activist investors good for anyway?

Starbucks looks set to become the latest company to reach a deal with an activist investor, with CNBC reporting that the coffee giant is close to agreeing terms to grant Elliot Investment Management a seat on the firm’s board and review its operations in China in a bid to boost profits.

On the face of it, it appears to be the latest win for a so-called activist that has taken on a company. Closer to home, drinks company C&C last week agreed to Engine Capital’s demand that the cider maker add a board member with capital markets experience – a clear suggestion that the company could end up with a for sale sign over the front door.

Activists tend to take a relatively small position in a company – usually just a few per cent – and then write to the board demanding changes in strategy. Unlike the corporate raiders made famous in the 1980s, activists are often seen as serving a useful purpose. Their defenders tend to describe them as spurring moribund companies into taking action to boost the business, and by extension, shareholder returns.

Cantillon is sceptical of this viewpoint. A fascinating paper published in the Yale Law Review in November 2022 demonstrates how little utility activists have. In short, activist investors tend to do more damage to companies they target by forcing unnecessary changes and, as they are committing a relatively small amount of cash to building up their holding, they are more likely to “mistarget” their attack. Meanwhile the much maligned corporate raider commits a huge amount of capital to buy a company and so can access non-public company information, and as a result do far more due diligence than a fund that buys, say, 3 or 4 per cent of a company and then kicks up.