Shareholder adctivism

At the turn of the 20th century, large active shareholders like J.P. Morgan sat on the boards of companies to monitor their performance and to protect their investments.

The 1980s saw a revival of investor activism in the form of hostile takeovers and the rise of LBOs.

The need for active monitoring stems from an old problem: the separation of ownership from control (in large, publicly traded commercial enterprises), resulting in ineffective control of managers with, in many cases, negligible ownership stakes.

Active investors like private equity firms and some hedge funds attempt to address both the information and the control problems that confront the absentee owners of publicly traded enterprises.

Hedge fund activists buy large minority stakes in public companies, and so achieve "influence" and, in some cases, a measure of control.

Private equity investors effectively combine ownership and control by purchasing public companies, or their divisions, thereby eliminating the role of public shareholders.

The result in either case is an improvement in corporate efficiency and increasing corporate values by reducing the gap between ownership and control.

The presence of major shareholders, and oftentimes on boards, means that tough operating and financial decisions are less likely to be avoided or influenced by parties with little or no capital at risk, such as investment banks, “independent” board members, or proxy advisers.