As Twitter's largest shareholder, could Elon Musk become an activist investor? : The Indicator from Planet Money Elon Musk is not shy about the changes he'd like to see with Twitter. So now that he is the largest shareholder in the social media giant, some fear he could become an activist investor.

Elon Musk and the fear of the activist investor

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And I'm Adrian Ma. There was some drama over the weekend involving Twitter and the world's richest man, Elon Musk. You might have heard he recently bought a 9.2% stake in the company, making him its largest shareholder. He has even more shares than Twitter's co-founders. The company said it appointed Musk to its board of directors. He accepted. And then almost immediately, he turned around and said, no thanks. But I don't think it's going to be the last that we hear about Musk and Twitter.

HIRSCH: And because Musk filed a certain type of paperwork with the SEC, the Securities and Exchange Commission, and because his stake is less than 20%, Wall Street considers him a passive investor. That's someone who buys company stock and holds it - doesn't really get involved in the running of the company.

MA: And most people who watch Twitter and keep an eye on Musk, you probably know that he's not a passive guy, right? Pretty much the opposite - he's loud and proud and opinionated, and he is engaged in a lot of opining on Twitter and about Twitter and even opining on Twitter about Twitter.

HIRSCH: And because of his strong views, investors are anticipating that Musk is going to become not just an active investor in Twitter that is quite likely to buy more of the company's stock, but also an activist investor - the kind of investor who puts pressure on management, the kind that has an agenda, the kind that just won't shut up. So today on the show - what makes an activist investor? What do activist investors do? And why are they so often painted as villains? That's coming up after the break.


HIRSCH: An activist investor is someone who both owns a company's stock and really, really wants to get into a company's business, like this guy.


MICHAEL DOUGLAS: (As Gordon Gekko) Well, I appreciate the opportunity you're giving me, Mr. Cromwell, as the single largest shareholder in Teldar Paper to speak.

HIRSCH: That, of course, is Gordon Gekko, the villainous corporate raider played by Michael Douglas in the 1987 movie "Wall Street." You know this movie, right, Adrian?

MA: I mean, I know of it. I'm going to be honest with you - I've never actually seen "Wall Street."


MA: (Laughter).

HIRSCH: You're killing me, Adrian. You're killing me. It means I have to explain a few things to you about this movie. Anyway, so Gekko's character was reportedly based on several financial deal-makers of the time, like Carl Icahn and Michael Milken. And in this scene, Gekko has just become the largest shareholder in a company called Teldar Paper, just like Elon Musk has become the largest shareholder in Twitter. Anyway, in this scene, Gekko is at the annual meeting of shareholders, making a speech about the way the company is being mismanaged, in his opinion, by the board of directors, chaired by the poor Mr. Cromwell.


DOUGLAS: (As Gordon Gekko) And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock - he owns less than 1%. You own the company. That's right - you, the stockholder. And you are all being royally screwed over by these bureaucrats with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes.

RICHARD DYSART: (As Cromwell) This is an outrage. You're out of line, Gekko.

MA: I would like that as my ringtone - this is an outrage.

HIRSCH: Yeah. You can totally make a ringtone out of this, if you want.

MA: That's right. So for some perspective on how the movies kind of line up with real life, we talk with Anna Scherbina. She's a professor of finance at Brandeis University. And she says, what Gekko is up to here is investor activism 101.

ANNA SCHERBINA: An activist investor is somebody who sees that there's something about that company that is being mismanaged, and they are acquiring shares in the company with the goal to make some changes in the company.

HIRSCH: Gekko's motivation here - to increase the value of the company so that he can sell his shares and make a bundle of money. That's pretty much it. Anna says regardless of what an activist investor might want, there are several tactics that they can use to persuade a company to take the direction that they want them to take.

SCHERBINA: They could just request a meeting with the board of directors and outline their concerns and hope that the company will change its policies. They could become more aggressive, so they could try to put out information about the company and get shareholders to vote on their proposals. They could even become more aggressive than that and try to install somebody on the board of directors to change the way that company is approaching its decisions. And they may even try to replace the CEO of a company.

MA: And this is not, like, a recent phenomenon. Activist investors have been around as long as companies have had shareholders. There's even a story about an investor named Isaac Le Maire. He had a reputation as kind of a troublemaker for hassling the board of the Dutch East India Company, you know, way back in 1602.

HIRSCH: 1602 - right. And because activists have been around for so long, making complaints, hassling shareholders, and generally being a thorn in the side of corporate boards, Anna says they're often vilified in what can be a vicious cycle of public verbal abuse.

SCHERBINA: Activist investors are very confrontational, and they are very negative about the firm management. The firm fights back, and the firm is also creating this negative perception of activist investors to try to discredit them as well.

HIRSCH: It's not just the things that activist investors say that can make them unpopular. In the past, Anna says, activists have generally been focused on doing things that juice a company's stock in the short term so that they can sell it at a profit.

SCHERBINA: So maybe in the short term, they're able to increase the company value through the changes that they make. But maybe in the long term, that's detrimental.

MA: And certain activist investors did get a reputation in the '80s for breaking up companies and making money selling the parts. But Anna says that doesn't mean they're bad people or even doing the wrong thing. Activist investors can draw attention to some big problems at companies, especially when it comes to changing the way companies are run or how the people who run the companies are paid.

SCHERBINA: A lot of times, managers would destroy value through bad acquisitions that was not really related to performance. And that actually has been changing sometimes due to the direct involvement of activist investors and sometimes just because of the threat that activist investors would get involved.

MA: And because positive changes can come from shareholder activism, Anna says more and more passive investors are becoming activists. So for example, big pension funds like the California Public Employees' Retirement System and CalSTRS - that's the teachers' pension fund - both of those have become increasingly vocal.

HIRSCH: Yeah. And they're not necessarily focused on making a quick buck. Anna says these days, activists often want to nudge the companies in directions that could actually make them less financially profitable in the short term, but may be more sustainable and attractive to investors in the long term, especially investors who are focused on environmental, social and governmental issues.

SCHERBINA: So a lot of times, investors just want to improve companies' policies in terms of their environmental impact, in terms of their diversity, in terms of the treatment of employees. So that has been happening in recent years a lot.

HIRSCH: Now, we have no idea, of course, what Elon Musk's play with Twitter might be. He's already made a massive return on his investment. Twitter stock jumped nearly 30% when news broke that he made the purchase.

MA: But there is talk about him wanting to change Twitter's algorithm. Here he is talking about making Twitter less restrictive when it comes to freedom of speech.


ELON MUSK: Like, freedom of speech is fundamental. Twitter is a war zone. If somebody is going to jump in the war zone, it's like, OK, you're in the arena. Let's go.

HIRSCH: Twitter's a war zone?

MA: That's somewhere in the First Amendment, I'm pretty sure.

HIRSCH: I think I'm just going to stick to Instagram. Anyway, regardless of how active Musk might get, for now, the company's shareholders seem to be delighted to have him on board. Anna says the company's growth hasn't really lived up to Wall Street's expectations recently.

SCHERBINA: Now the market thinks that Elon Musk is going to make some positive changes.

HIRSCH: Of course, positive is in the eye of the beholder. The danger for Musk and for Twitter is that Twitter's users might not want it to be liberated. I mean, if Musk decides that he wants to push the company to be a platform of unfettered free speech, that might not go down so well. Many users and shareholders might not want the bans that Twitter imposed on certain people to be lifted. They might not be comfortable being involved with a company willing to host misinformation and violent rhetoric. Instead, they might run for the hills, deserting the platform, selling their stock, and leaving Elon Musk and the board of directors very badly needing a drink.


MA: This episode of THE INDICATOR was produced by Jamila Huxtable and Jess Kung with help from Isaac Rodrigues. It was fact-checked by Corey Bridges and Jess Kung. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.


DOUGLAS: (As Gordon Gekko) Now, you're not naive enough to think we're living in a democracy, are you, buddy? It's the free market, and you're part of it.

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