Will Elon Musk turn activist at Twitter?

Last week, Elon Musk completed the purchase of 9.2% of Twitter's stock and became the social media company's largest shareholder. He was also offered a seat on the company's board, which he recently declined. On one level, Musk's investment seemed to make a lot of sense: Musk has long been one of Twitter's loudest, most controversial, and — with more than 80 million adherents — most followed voices. It was also a great deal: He paid a total $2.64 billion over about three months, and the stock rose more than 25% when the news broke.

On another level, however, the acquisition doesn't seem to track so well: Musk is a big user of Twitter, but he's also been a fierce critic. He has complained that Twitter "serves as the de facto public town square" but fails "to adhere to free-speech principles." He has criticized the platform's utility, because users are unable to edit the content they post. He has objected to the bans that Twitter has placed on certain users. Why would someone who dislikes a company this much want to own not just a piece of it, but a piece larger than anyone else's?

Why, to change it, of course! Musk isn't buying the whole company, but you don't have to own the boat — or even be the helmsman — to influence the direction it sails in. Once an investor buys stock in a company, they have a legal right to coerce and cajole and persuade and shout about the things they don't like and what they think the company should do. Most investors don't do this. Most investors buy stock in companies because they like the product and approve of the way the company is run. They invest, they watch the stock price, and if they don't like the way things are going, they sell. They are what Wall Street generally calls passive investors. And what some people derisively call sheep.

On paper, Elon Musk looks like a sheep. Because his stake in Twitter is less than 20% and he filed a certain kind of disclosure form with the SEC, the Wall Street regulators formally regard him as a passive investor. But the reality is that the amount of stock an investor owns neither predicts nor dictates how silent or voluble they might be as a shareholder. In other words, Musk might look like a sheep on paper, but there's nothing to stop him from behaving like another kind of animal. Like a lion. Or a wolf.

A lot of people in the market are anticipating that Musk will throw off his sheep's clothing and become what's called an activist investor in Twitter. Not just an active investor — which is someone who might buy and sell a lot of stock, which Musk could well do — but an activist, someone who puts pressure on management; someone who has an agenda; someone who just won't shut up until he gets what he wants.

The "first" activist investor eventually got his way

There's a long history of shareholder activism, dating at least as far back as the early 1600s when an investor named Isaac Le Maire began complaining about the way the Dutch East India Co. managed its money. In the U.S., the distinction of "first activist investor" is usually bestowed upon a man named Benjamin Graham. In 1926, Graham was a shareholder in a company called Northern Pipeline, which owned a lot of railroad bonds and other securities. Graham suggested that the company sell those assets and distribute the profits to shareholders. The company ignored him, so he launched a campaign, writing letters and meeting as many other stockholders as he could. He eventually got his way.

This week, The Indicator spoke with Brandeis University finance professor Anna Scherbina, who outlined the range of tactics activists can use to influence a company. The least aggressive is simply meeting with the board of directors and outlining their concerns. The next step might be pressuring shareholders by lobbying them, or releasing information about the company to the public. Next up is trying to install somebody on the board of directors to change the way the company approaches its decisions. And finally, and most aggressively: trying to replace the CEO of the company.

The activist investor is usually in conflict with the company — and often confrontational — Scherbina says, because they believe there's something about that company that is being mismanaged. They make a fuss about it because they want that thing changed. And they're often right. Scherbina says that in the past, corporate governance in many companies was poor; companies would make acquisitions that didn't make sense, and pay was often linked to performance. Activists have gone a long way to improve corporate governance in areas like these, Scherbina says.

But company boards don't usually like being criticized or told what to do by shareholders, no matter how big a stake they own. And boards are often suspicious of the activist investor's motives. This isn't surprising, given the history of shareholder activism, especially in the United States. It may have started innocently enough, with Graham's request for a dividend, but by the 1980s, activists were pushing companies much further. Investors like Carl Icahn and Nelson Peltz made huge investments in storied companies like U.S. Steel and DuPont. In many cases, activists forced their target companies to make the kinds of changes that fundamentally altered the way they did business. Occasionally, they put them out of business altogether.

Shareholder activists got a bad reputation

As a result, shareholder activists got a bad reputation that has lingered until today. It hasn't helped their cause that many activists today aren't individuals. They're hedge funds, like Third Point LLC, run by the irrepressible Daniel Loeb, who is not shy about using all sorts of tactics to pressure companies to do things that he argues will increase shareholder value.

But activist investors today aren't just about juicing shareholder value. They're often increasingly focused on less fiscally tangible aspects of a company's business, such as its approach to climate issues, the way it treats its workers, its stated stance on world events, the kinds of nonprofits it supports and the way corporate decisions are made. Many big investors, like CalPERS and the New York State Common Retirement Fund, are paying particular attention to these kinds of environmental, social and governance (ESG) factors. They're bringing these issues to the attention of corporate boards, pressing for change, and effectively turning from passive investors to activists.

In a way, this is a move away from the '80s-style activism that made big moves, breaking up companies and selling off the parts. It looks more like a return to the activism of old, where shareholders just wanted to make small tweaks to the way companies ran. Isaac Le Maire wanted the Dutch East India Co. to improve its accounting. Benjamin Graham wanted a dividend. Relatively small potatoes, compared to Carl Icahn's wholesale dismantlement of TWA in 1985 or Third Point's campaign to remove Yahoo CEO Scott Thompson in 2012.

We have no real idea at this point what Elon Musk might do, but there is plenty of speculation: that he might push to make Twitter less restrictive when it comes to expression of views; that he might lift the bans placed on people for spreading misinformation; that he might agitate for an edit button. What seems almost certain is that now he's on board the ship, he won't be huddled below with the sheep. He'll likely be the epitome of an activist investor: up on deck, waving his arms about, dispensing advice and giving direction. Doing everything, in fact, short of taking the helm.

Until he decides to do that, too.