IN A TIME when the retail industry is grappling with evolving consumer habits, digital transformation challenges and heightened competition, the emergence of activist investors has been viewed by many as polarizing.

Activist investors, in essence, are individuals, groups or hedge funds that purchase large amounts of a company’s shares and use their ownership stake to put pressure on management. The primary motive? To bring about changes that supposedly enhance shareholder value, often through strategies such as cost-cutting, strategic divestitures, or altering the business model in fundamental ways.

Although the narrative around these investors often revolves around their ability to enhance shareholder value and impose discipline on so-called complacent management, a deeper look suggests that their influence might not be so benign, particularly for the long-term health of the retail sector.

On the face of it, these initiatives might seem beneficial, but there’s an underbelly to this beast that often goes unnoticed.

SOME RECENT ACTIVIST INVESTOR CAMPAIGNS:

  • BED BATH AND BEYOND: After a successful proxy fight, the board was replaced, a new CEO came in, replaced the entire management team, changed the business model from brands to private label, and the company ended up in liquidation.
  • VF: Engaged Capital had been agitating for change at the apparel giant, including shaking up the VF board. Engaged is known for its low-key constructive engagement approach, and that led to constructive talks with VF that included the addition of a new board member.
  • GILDAN: Browning West led a group of institutional investors in a proxy fight who wanted to reconstitute the board and reinstate former CEO and company co-founder Glenn Chamandy. The former board refreshed the board composition a few weeks before the annual meeting, but then resigned, including the CEO replacement, when all three leading proxy advisory firms said shareholders should vote in favor of the activist’s proposed slate.
  • HASBRO: Activist investor Barington Capital Group has been urging the toymaker to consider selling off some of its well-known brands, such as Fisher-Price and American Girl.
  • KOHL’S: The department store chain is facing a proxy fight from activist investors unhappy with its performance. Hedge fund Vision One Management Partners is pushing for asset sales or a buyout, which could weaken the retailer financially.
  • MACY’S: An activist investor has been pressuring Macy’s to improve its performance, and the company said in February that it was looking to close 150 underperforming stores. In its most recent quarter report, profits came in better than expected.

“STAKEHOLDERS, INCLUDING CUSTOMERS, EMPLOYEES AND LONG-TERM SHAREHOLDERS, MUST ADVOCATE FOR GOVERNANCE THAT VALUES SUSTAINABLE PRACTICES OVER FLEETING GAINS.”

Looking at the above examples, it’s clear that the strategies implemented by some activist investors often focus on immediate financial results rather than long-term sustainable growth. Retail, a sector inherently consumer-centric, demands continuous innovation and requires capital investment in the customer experience and employee welfare — areas that often see budget slashes under the stringent cost-control measures often pushed by activists. Such “short-termism” conflicts with the long-term strategy required in retail, potentially crippling a company’s ability to adapt to future market trends.

Moreover, the playbook of many activist investors often includes pushing for leadership changes or a strategic overhaul that may not always align with industry best practices. While new leadership can inject fresh perspectives into a stagnant company, abrupt shifts can also disturb the internal culture and erode brand identity, leading to confusion both in the market and workplace.

Retail companies thrive on consistency and reliability, and the instability triggered by activist interventions can inadvertently lead to a loss of customer loyalty as well as employee morale.

Lastly, the wave of divestitures and asset sales that commonly accompany activist campaigns can strip a retailer of vital components of its ecosystem. While selling non-core assets can be beneficial, excessive pruning might compromise the long-term capabilities of the business. In retail, where a strong balance sheet is key to weathering economic downturns and capturing new markets, this strategy seems particularly short-sighted.

Proponents of activist investors might argue that these financial agitators bring positive discipline to companies that have strayed from their path. Indeed, there are instances where activist investors have spurred improvements and added value. However, the overarching narrative within the retail sector seems less promising. Stakeholders, including customers, employees and long-term shareholders, must advocate for governance that values sustainable practices over fleeting gains.

I think it’s time for the retail industry to reflect deeply on its core values and resist quick fixes, focusing instead on durable growth that ensures resilience and relevance in the rapidly evolving market landscape.

To connect with Michael, visit here.