Drawing Lessons From the Activist Investor Playbook

Activist investors have made a name for themselves by shaking up companies, driving operational efficiencies, and unlocking shareholder value. By pushing for changes in strategy, management, and capital allocation, activist funds have been instrumental in revitalizing underperforming businesses. While their primary focus is on publicly traded corporations, many of the principles they apply can serve as valuable lessons for small businesses looking to drive growth and efficiency.

However, it's not lost on us that activist funds aren’t always viewed in the best light. Some argue that their methods prioritize short-term gains over long-term stability, sometimes leading to drastic cost-cutting measures or workforce reductions. What we’re suggesting is that taking certain aspects from their playbook can serve as important lessons for small businesses.

How Activist Funds Create Value

1. Operational Efficiency

   
   

   Activist investors often identify inefficiencies within a company and push for cost-cutting measures, streamlined processes, and better resource allocation. For example, in the UK, Elliott Management successfully pressured Whitbread to spin off Costa Coffee from its hotel business, Premier Inn. This move allowed Costa Coffee to be sold to Coca-Cola for £3.9 billion, unlocking significant shareholder value. Similarly, in the case of Rolls-Royce, activist investors have advocated for aggressive cost-cutting measures to restore profitability.

   
   

2. Strategic Focus

   
   

   Many companies struggle due to a lack of clear strategic direction. Activist funds advocate for shedding non-core business segments and doubling down on high-growth areas. A notable UK example is Third Point’s activism at Prudential, which led to the insurer separating its US and Asian businesses, allowing each to focus on its respective market strengths. Similarly, Standard Life Aberdeen restructured and rebranded to Abrdn following pressure to streamline its business model.

   
   

3. Leadership & Governance Overhaul

   
   

   Poor leadership can hold a business back. Activist funds often push for board changes or new executive leadership that aligns with a performance-driven mindset. An example of this in the UK is Sherborne Investors' campaign at Barclays, where they pushed for leadership changes and a more focused business strategy to enhance profitability. Another case is the restructuring at Saga, where investor pressure led to changes in leadership to refocus on its core travel and insurance businesses.

   
   

4. Capital Allocation Discipline

   
   

   Activist investors emphasize the importance of allocating capital wisely. Whether it’s reducing wasteful spending, reinvesting in R&D, or optimizing debt structures, ensuring that every pound spent contributes to long-term value is a key focus. For instance, Melrose Industries, known for its "buy, improve, and sell" strategy, took over GKN, a major engineering firm, with a promise to improve capital efficiency and refocus on its most profitable operations.

   
   

Lessons for Small Businesses

1. Streamline Operations

   
   

   Just as activist investors push for efficiency, small business owners should regularly assess their expenses, automate processes where possible, and eliminate inefficiencies to improve profitability.

   
   

2. Define & Stick to a Clear Growth Strategy

   
   

   Instead of spreading resources thin across multiple ventures, small businesses should identify their core strengths and focus on the most lucrative opportunities. Being strategic about expansion and investment decisions is crucial.

   
   

3. Evaluate Leadership & Decision-Making

   
   

   Just as activist funds push for strong leadership, small business owners should assess their own management capabilities. Seeking mentorship, training, or even hiring external advisors can bring fresh perspectives and drive growth.

   
   

4. Allocate Capital Wisely

   
   

   Growth should be fuelled by smart capital allocation. Whether it’s reinvesting in technology, marketing, or hiring, small businesses should ensure that every investment aligns with long-term success.

   
   

5. Embrace Change & Innovation

   
   

   Businesses that resist change often fall behind. Whether it’s adopting new technologies, adjusting pricing models, or exploring new markets, continuous improvement is essential for staying competitive.

Activist funds have played a crucial role in reshaping companies by enforcing discipline, streamlining operations, and fostering strategic growth. While their tactics can sometimes be controversial, their methods of improving efficiency, refining strategic focus, and strengthening leadership offer important lessons for businesses of all sizes. By focusing on operational discipline, strategic clarity, strong leadership, and smart capital allocation, small businesses can unlock new growth opportunities and future-proof their enterprises.