Speaking With One Voice: Shareholder Collaboration on Activism

Abstract

Activist shareholders can often exert a large influence on corporate governance. However, the lead activist of a shareholder campaign typically only owns a small percentage of the target firm’s shares. How can a small activist govern a firm via intervention? By developing a game-theoretic model, I show that the small activist can organize a coalition with fellow active shareholders to share activism costs and win over passive shareholders. I analyze how the activist communicates and collaborates with fellow active shareholders behind the scenes. Perhaps surprisingly, a smaller coalition is more likely to win support from passive shareholders. The interplay between collaborating with active shareholders and winning over passive shareholders endogenizes the optimal size of the activist's coalition. I also find that potential shareholder collaboration makes boards more likely to reach agreements with activists before proxy fights.