The Basics

Before we get into activist investing and corporate governance, we need to understand the basic structure of a corporation.

So- corporations can be broken down into two types. Private and public. Private companies are companies that are NOT listed on a stock exchange, and public companies ARE listed on a stock exchange (there are some details here that I am glossing over- but nothing important for our purposes). Some examples of a stock exchange are: New York Stock Exchange (NYSE), NASDAQ, etc...

In terms of activist investing, and corporate governance- we don't have to worry to much about private companies- our focus is public companies.

Public companies are interesting because a substantial portion of them are owned by us- regular people. If you own stock in a company, then you own a piece of that company. In fact, approximately 40% of any given company is owned by individual investors (the other 60% is owned by institutions- for example- pension funds, hedge funds, mutual funds, etc...).

While investors (both individual and institutional) own these corporations, they don't run their day to day operations.

Investors (which are also known as Shareholders) vote for a board of directors, and those directors run the corporation. Every year, shareholders have the right to vote for board members.

It is the board members responsibility to hire the CEO (or fire the CEO), set compensation for managers, and perform lots of other important functions that we will talk about in later posts.

The board members are supposed to represent OUR interests- and that usually means- they are supposed to make us money. They are our employees. However, sometimes, the board looks out for their own interests. Or, sometimes, they are just incompetent.

This is where activist investing can come into play.