Shareholder Activism in U.S. Public Companies, 1900-1949

“Offensive shareholder activism” involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century. This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe…

It is widely assumed that with respect to corporate governance historically “market control over the allocation of U.S. corporate resources stands out as a recent phenomenon.”67 Under this view, it was not until the 1980s that an “expansion and empowerment of the shareholder class” shifted “interest group power from managers to shareholders.” It was at this point, according to the received wisdom, that the norm of shareholder primacy achieved pre-eminence, fostered initially by the rise of the hostile takeover bid and reinforced in the 1990s by the growing influence and power of institutional investors.

The rise of institutional investors, combined with a strong corporate governance counter-reaction to the building of conglomerate empires in the 1960s and revelations of widespread corporate kick-backs and bribes in the 1970s, no doubt reshaped relations between executives, directors and shareholders of U.S. public companies.70 This does not mean, however, that those running U.S. public companies in earlier eras were entirely insulated from investors inclined to take aim at firms with the intention of orchestrating changes designed to improve returns. The activist hedge funds of today lacked direct antecedents during the first half of the 20th century, as only rarely did collective investment vehicles initiate activism campaigns. Nevertheless, our research into shareholder activism during this period has uncovered numerous instances where investors targeted public companies and built up a sizeable stake with the intention of either launching a proxy contest or seeking to obtain outright voting control. Underperforming public companies no doubt have faced in recent times investor-driven discipline that is more robust than would have been the case during the period we have focused on. However, our research indicates the difference may have been one of degree rather than kind.

Cheffins, Brian R. and Armour, John, Offensive Shareholder Activism in U.S. Public Companies, 1900-49 (February 11, 2011). University of Cambridge Faculty of Law Research Paper No. 11/09. Available at SSRN. Hat tip to Jason Schloetzer.