We are not aware of any formal definition of shareholder activism. Loosely speaking, any time that a shareholder does anything in order to express his or her opinion or tries to affect or influence a firm, he or she is being an active shareholder. A shareholder who votes his or her shares, submits proposals to be voted on, and/or attends the annual shareholder meetings could certainly be considered an active shareholder. Even writing a letter to management regarding some aspect of the firm's operations or social policies could also be considered investor activism. For example, Lee Greenwood is a well-known active shareholder to the General Mills management. Greenwood once simply suggested that Wheaties should appear in airlines and hotels.  Among individual shareholder activists, however, Evelyn Y. Davis is perhaps the most well known and was once even featured in People magazine.  As the modest shareholder of around 120 firms, she attends about 40 shareholder meetings each year. What does she do at these meetings? As everyone from journalists to executives seem to put it, she "raises hell." She has berated executives for everything from questionable merger decisions to the enormous size of their pay. She even told Lee Iacocca, then CEO of Chrysler, to watch his diet.  Most individual shareholder activists use less dramatic methods . But there are enough people like Evelyn Davis who make themselves vigorously and frequently heard that they have been deemed "corporate gadflies."
Lewis Gilbert is generally credited with being the first individual shareholder activist.  In 1932, as the owner of ten shares of New York's Consolidated Gas Company, he attended the company's annual meeting. While at the meeting, however, he was appalled that he wasn't given a chance to ask questions. Subsequently, he and his brother pushed for reform. In 1942, the SEC created a rule to allow shareholders to submit proposals that could be put to a vote. Today, most shareholder proposals are governance-oriented, primarily attempting to forge an alignment between shareholder views and managerial actions. For example, proposals may address issues related to anti-takeover amendments , shareholder voting rules, or board composition.  Having these proposals passed, or even brought to the attention of the managers, can certainly have a potentially positive effect on a firm.
In reality, however, most proposals don't pass, especially those that go against management desires and those that involve obtaining a board seat. One reason for this is that it is difficult and expensive for one shareholder to communicate with all other shareholders. Also, most passive shareholders are reluctant to vote against the firm's management anyway. For example, during 2000, the stock price of Computer Associates had dropped from a $70 high in January to about $30 in September. In the following year, stockholder Sam Wyly sponsored a proposal to unseat four board members at Computer Associates.  After a highly publicized and expensive campaign, Wyly's proposal was defeated, primarily because it also sought to unseat the firm's co-founder and board chairman, Charles Wang. This doesn't mean, however, that proposals, and even defeats, are fruitless or that shareholders should give up. Robert A. G. Monks spent $250,000 to run for a board seat at Sears in 1991 that resulted in defeat, but the publicity eventually caused Sears to make its own massive changes. 
Proposals sometimes get majority support. John Chevedden sponsored a proposal in 2001 to change the way board members are elected at Airborne Freight and he received the support of 71 percent of the voting shareholders.  During the same year, Guy Adams beat tremendous odds with his bid for a board seat. As the owner of 1,100 shares of Lone Star restaurant's stocks, or 0.005 percent of the company, he was disgruntled that his stock had plummeted in value while at the same time the CEO's income rose. Consequently, he took it upon himself to run for a board seat. The seat was one held by the restaurant's CEO, Jamie B. Coulter. Despite the fact that Chevedden had never before served on a corporate board and had no restaurant experience, Chevedden actually won. What does he plan to do with his newfound authority and power? He says he will be a watchdog for other Lone Star investors.  Isn't that what we want all the board members to be?
One of the more dramatic forms of individual investor activism is to buy a significant stake in a firm and become one of its larger shareholders. Carl Icahn with RJR/Nabisco and TWA and Kirk Kerkorian with Chrysler are two popular names that come to mind in this regard. For example, Kerkorian purchased a significant stake in Chrysler in 1990, and over the next decade he was able use his voting power to influence the board and management to get dividends increased and stocks repurchased. 
No matter the size of the victories of individual shareholders, they are all nice because they show that individuals can make a difference in corporate policy, and they give other shareholders a free ride. That is, other investors do not have to conduct monitoring activities. But the bottom line is this: We definitely shouldn't have to rely on them! After all, independent shareholders do not have explicit fiduciary responsibilities to one another. Nor should we expect these apparent knights in shining armor to always appear and make us money. Perhaps most importantly, the odds are heavily stacked against individual shareholders for them to be able to make a difference.
But there are shareholders who have the potential to exert effective activism. They are the institutional investors. For example, one academic study finds that proposals sponsored by institutional shareholders have a much greater chance of success than ones sponsored by individuals.  And, fortunately, institutional shareholders, especially the public pension funds, have become more active in their oversight of companies. One reason for their increased activity is their increasing ownership stakes. The pie charts in Figures 11-1 and 11-2 show the percent of U.S. equities held by different shareholder types for the years 1970 and 2001. 
Figure 11-1. Shareholders of stocks by investor type in 1970.
Figure 11-2. Shareholders of stocks by investor type in 2001.
From these pie charts, it's easy to see that institutions now own more shares than they did in 1970. The most dramatic increases are with pension funds and mutual funds. In fact, according to John Bogle, retired founder of Vanguard, just 75 funds alone held 44 percent of the U.S. stock market at one point during 2001.  As such, these funds have the economic incentive to be more active, and some actually have been.
Further, both pension funds and mutual funds are actually managing the money on behalf of many smaller investors. As such, the individual investor has a right to push the institutions to be more active shareholders. This may be especially true of pension funds, which have less restrictions on how much of a firm they can own. Pensions can take on a relatively large ownership stake and subsequently be engaged in a long- term active ownership role in the firm. Furthermore, under the Employment Retirement Securities Act (ERISA), pension funds have a fiduciary responsibility to their plan participants and beneficiaries. Therefore, it's not surprising that for the most part, it is the public pension funds that have been leading the way with regard to institutional shareholder activism.
Since the early 1990s, a few public pension funds have taken on a relational investor role with a long-run mindset. The primary ways that they have tried to influence the firms they own are through direct communications with management and with other shareholders and through something known as "targeting," a process in which they specifically identify poor corporate performers and push for reforms .  For example, the public pension fund California Public Employees' Retirement System (CalPERS), which has $100 billion in assets and serves 1 million members, has targeted Sears and Westinghouse in the past and has pushed for them to divest laggard divisions. Also, during July 2002, the chairmen of 1,754 major U.S. firms all received a letter from the Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF), the country's largest pension fund, asking them to account for stock options as an expense.  Activism by TIAA-CREF is quite common. It constantly monitors firms and makes numerous recommendations for reform.
To help further their influence, many pension funds also belong to a coalition called the Council of Institutional Investors (CII), which, as its primary objective, seeks to help members take an active role in protecting their assets. Given that they control more than one trillion dollars worth of assets, members certainly have an incentive to come together and exert influence as large shareholders. But before we get too excited about having this powerful ally on our side, there are two issues that need addressing: Does institutional activism pay off and do institutional activists face any hurdles to exert effective activism? The answer to the first question seems to be a luke-warm "yes" at best and more likely a "maybe." The answer to the second question, unfortunately , is a resounding "yes." We discuss each, in turn , next.