What Is a Gadfly?

Gadfly is a colloquial term for an investor who attends a firm's annual shareholders' meeting to criticize the corporation's executives or express concerns about the direction of the company. A gadfly will address issues for the shareholders, often raising questions to management about specific company policies or corporate governance.

Key Takeaways

  • Gadfly is slang for an investor who regularly attends shareholders' meetings to voice their concerns or critiques.
  • Named after small insects that bite and annoy livestock, the gadfly looks to irritate a corporation's management until it acts or compromises on shareholder concerns.
  • Typically, proposals by gadflies center on environmental concerns, social responsibility, corporate political spending or lobbying, executive compensation, proxy access, special meetings, or voting rules.
  • Unlike big-time activist investors, gadflies are small stockholders.

Understanding Gadflies

Named after small insects that bite and annoy livestock, the gadfly looks to irritate a corporation's management until it acts or compromises on shareholder concerns. Questions regarding executive compensation or inconvenient annual general meeting locations are often brought to light by a gadfly.

A gadfly adds value for other shareholders by vocalizing his concerns and inciting action. Such investors are activist shareholders who advocate for changes in corporate governance by offering proposals for votes at annual meetings. Proposals offered by shareholders must be placed on the agenda and offered up for a vote at the next annual shareholders' meeting.

Because most proposals raise issues that company management tends to avoid, they often trigger a confrontation, forcing management to urge the shareholder base to vote it down or act on a compromise. Such proposals can deal with environmental concerns, social responsibility, corporate political spending or lobbying, executive compensation, proxy access, special meetings, or voting rules.

Unlike activist investors such as Carl Icahn or Bill Ackman, who buy large stakes in a company for the possibility of directly influencing a company’s board of directors, gadflies are stockholders who have held a minimum of $2,000 in a company’s equity for at least one year.

The Impact of Gadflies on Corporations

Proponents of shareholder activism contend corporate gadflies are at the heart of a rising shareholder democracy that focuses attention on key issues that would otherwise remain obscured. Gadflies play a key role in empowering small investors against corporate managers who may not be acting in their best interests. Most gadflies tend to focus on issues of a religious, public policy, or social investing nature, but issues centering on corporate governance policies, such as executive compensation, are more likely to gain traction with voting shareholders.

According to Sullivan & Cromwell LLP, a total of 657 shareholder proposals have been submitted to date in 2020. The large majority of these proposals still focused on environmental and social governance proposals (such as related to climate change), as well as governance.

Critics of shareholder activism point to the enormous cost incurred by companies to respond to shareholder proposals. The critics state that the cost that companies bear to deal with gadfly proposals is $87,000. The contention among some critics is a number of individual activists are acting on behalf of labor unions in an effort to demonstrate shareholder populism for union issues.

Although institutions such as pension funds are active in submitting shareholder proposals, in 2014 and 2015, the largest number of proposals has been concentrated among a small group of individuals who may be motivated by personal interests. Together, John Chevedden, William Steiner, and James McRitchie were responsible for one-third of shareholder proposals introduced through mid-2015.