If you make a list of the biggest targets of shareholder activist campaigns, you'll note that most of them were US-listed companies, and all of the activists were US-based firms: AT&T, ExxonMobil, Procter & Gamble, Microsoft, etc. were basically all dealing with US investors. That isn't true for hostile takeovers, where some of the biggest (Mannesmann, SABMiller) were outside the US.

Why is activism in particular such an American thing?

One reason is that US equity markets played such an important role in the country's history. US equity market cap didn't exceed that of Britain until around 1914, but railroads were a larger share of US equities, and the US was able to follow the leapfrog development model by having big railroad bubbles a bit later, and in a country that had enough of a natural resource base that these railroads ended up contributing to the overall economy (even if the railroad's shareholders and lenders didn't participate much in this).

Railroads were also an early playground for financial engineering, and for thinking seriously about corporate governance. They had access to capital through the financial markets, and some of the biggest also had access to government subsidies; they spent large sums on construction and materials, too. So someone who could get control of a railroad without paying full price could direct that spending to businesses they controlled in order to get kickbacks, or just announce surprise dividend cuts or increases that they could trade ahead of.

Shareholders didn't particularly like this setup, and the later generation of railroad professionals, like Morgan and Harriman, tended to play it straight. (Jay Gould was a special case: he was very willing to engage in some tricky behavior early in his career—including paying a large bribe to someone who turned out to be a con artist, and then trying to have him kidnapped, which led to an international incident—he ended up being a boringly competent railroad manager in the last years of his career.)

In countries with a less laissez faire approach, there were limits on what one tyrannical speculator/executive could get away with, but the US set those limits organically, by starting with the assumption that someone who controlled a company could do whatever they wanted with it, and then litigating every bit of misbehavior they came up with. There is no particular reason to privilege incumbents over outsiders in this kind of situation—it's possible for someone to take over a company and loot it, but it's also possible to for someone to take over a company specifically to stop someone else from looting it, or at least to get them to do so at a more measured pace.

There are isolated examples of shareholder activism in the early twentieth century: Benjamin Graham found out that a company called Northern Pipeline owned a small oil pipeline, but also had bonds worth more than its share price. So he bought 5% of the stock, showed up at the annual meeting—and got shot down, because he made a motion to discuss distributing the cash, but the only attendees were company employees, none of whom seconded it. So he had to go back a year later, this time bringing some company (two lawyers), got himself and one of the lawyers elected to the board, and finally convinced the company to sell most of the bonds and pay a dividend.

Three decades later, Robert R. "Railroad" Young, a successful speculator, ran a campaign to take over the New York Central Railroad. Young had worked in GM's treasury department, speculated in stocks, and eventually taken over Allegheny, a holding company mostly focused on railroads. He ran a very high-profile campaign, eventually took it over, but wasn't able to execute his plan of rolling up other railroads to create a more integrated network. (That part didn't work out; four years after taking over, he committed suicide by shotgun. Decades later, his mansion was sold to a different corporate raider.)

In a country that takes shareholder primacy seriously, and that has liquid capital markets and specialized risk-seeking investing vehicles, the equilibrium is that if a company is undervalued conditional on having better management, and someone makes a case that the management problem can be fixed, its shareholder base will soon consist mostly of people betting on that exact outcome. That's also a market where there's enough liquidity to justify an investment research and news ecosystem, and where investors have dense enough social networks that theses spread fast.

All of this means that the US is uniquely good at having preference cascades around corporate decisions: which executives to hire or fire, which division to spin off, whether to double down on some new plan or cut losses, etc. And American capital markets are deep enough that if there's something trading at $20, and it would be trading at $25 given some simple change, it's actually possible for activists to accumulate a big enough stake that they can force that change, with a market impact and timeframe that makes the $25/share outcome a pretty good one.

America's financial norms are contagious; if someone has a directional view on a foreign stock, and they want to hedge their industry exposure, the straightforward way to do that is to make an offsetting bet on that company's US-listed competitors—they're liquid, they have lots of eyes on them, and that means they're an easy default for hedging. And once that happens, those companies are also being compared to American companies, being traded in reference to how those American companies perform, etc. It's hard for financial systems not to end up tightly linked in this way, especially now that the language barrier is basically irrelevant. Shareholder activism does work, and in a sense it's democratic—it means companies are accountable to the broader investing public rather than their board, though full suffrage is only accorded to investors who have enough capital to file a 13D (and at companies where the founders don’t have supervoting shares).

Hostile takeovers and shareholder activism are common themes in The Diff. We've covered:

• The various eras of shareholder activism ($).

• Whether they're targeting companies for malinvestment, or pushing them to irresponsibly ignore important bets ($).

• The modern era of activism is hard to imagine without Drexel.

• And all of this can be helpful because finance is an invisible productivity subsidy.

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