Shareholder Activism Is On The Rise: Caution RequiredThe Acquirer's Multiple
Here’s a great article at Forbes about a new generation of activist shareholders:
Historically, large institutional investors pursued purely financial strategies and kept a low profile in governance. This may no longer be the case. In a manner vaguely reminiscent of the corporate raiders of the 1980s, a new generation of activist shareholders is on the rise.
And these players are big fish. Some of the biggest institutional activists include BlackRock, with more than $6 billion in assets under management, followed by the Vanguard Group, with $5 billion. Institutional funds – such as pension funds, insurance companies, endowments, banks, and hedge funds – have initiated public campaigns to leverage their influence on firms and pressure management for change.
Activists vocalize their concerns by engaging in conversations with management and meeting the board directly. If consensus is not reached, they may make their demands public through open letters, white paper reports, shareholder proposals and proxy contests.
Their agenda typically involves issues related to corporate governance, such as replacing management, dividend payouts, new director appointments and executive compensation. However, increasing numbers of activist campaigns seek influence within the strategy domain, which was traditionally the prerogative of executives.
According to a 2018 report by Activist Insight, the number of companies around the globe receiving governance-related proposals from activists has steadily increased, with growth averaging about 11% for the last four years and campaigns targeting 805 companies worldwide in 2017. The pool of funds deployed in these campaigns is expanding, reaching over $200 billion in 2016, up from just $47 billion in 2010. The movement is also expanding geographically: approximately twenty percent of total activist shareholder funds are now deployed outside the English-speaking world – and national campaigns have been launched in various European countries, including France, Germany, Switzerland, Italy and Spain.
Large institutional funds, whose participation in shareholder activism was previously considered atypical, are now getting into the game. The California Public Employees’ Retirement System (CalPERS) pioneered this strategy by pressuring companies it invests in to adhere to norms of corporate governance. Through its list of governance and sustainability principles, CalPERS actively endorses the appointment of independent directors, the formation of board committees, CEO succession initiatives and the appointment of non-executive chairs.
These changes received considerable exposure in the media and many companies changed their governance approach after CalPERS acquired part of their stock. The CalPERS strategy has been accompanied by positive financial returns (about seven percent for the past twenty years), prompting other institutional funds to follow suit. Favorable regulatory changes aimed at empowering minority shareholders have put the movement in the mainstream among medium-sized investors, including hedge funds.
Whether large or small, underperforming or a market leader, no firm can immunize itself from becoming a target of activist investors. Large hedge funds, such as those managed by Carl Icahn, Nelson Peltz, Dan Loeb and Bill Ackman, are publicly agitating and generating media buzz by confronting the boards of iconic global companies such as Apple, PepsiCo, Rolls-Royce, Nestlé and Danone.
The recent appointment of Peltz, the founding partner and CEO of Trian Fund Management, L.P., to the board of P&G exemplifies a turning point in what is said to be the biggest proxy fight in history. Ever since his fund’s decision to acquire a $3.5 billion stake in P&G in 2016, Trian has been lobbying to include a representative on the company’s board – a move that the management and directors have actively resisted.
While the P&G board initially managed to block Peltz’s bid for directorship, he challenged the decision. After both sides spent millions of dollars on proxy battles, including Trian publishing an extensive 94-page white paper detailing proposed strategic changes for the company,
Peltz declared victory by a slim margin. Yet only time will show the magnitude of the anticipated shake-out. During its earlier campaign at PepsiCo, Trian managed to win board appointment through a proxy fight, lobbying for the need to split Frito-Lay from the Pepsi beverage division.
Only a year after gaining the board seat, the fund divested its stake in the company without waiting for the implementation of the key goal of their campaign, making a fifty percent return on its investment.
Following the example of US-originated activist campaigns, European activist hedge funds have mushroomed. The Swedish firm Cevian Capital has driven public battles in flagship Nordic companies such as Erickson, Volvo and Danske Bank. Despite market volatility, the fund has become one of the best performers in Europe with 19.4% returns in 2016.
Previously dormant pension funds are now looking zealously at the large profits that activist hedge funds have generated in the bull market. Similar to CalPERS, the Norwegian sovereign wealth fund Government Pension Fund Global recently approved a list of governance guidelines that emphasized “good” governance principles for companies receiving its funding.
Although the activist agenda may sound appealing to shareholders, existing research has not managed to confirm a positive effect of shareholder activism on long-term firm value. While the view of shareholder activists as corporate visionaries is becoming increasingly dominant, those who have studied this subject carefully do not necessarily agree.
For instance, research on companies targeted by shareholder activists shows that activist investors can both increase and destroy firm value. Factors such as the state of the target firm and the objectives and influence of the investors can play an important role in explaining the effects of activist campaigns on corporate outcomes.
While markets generally react positively to activist involvement, critics of the movement raise concerns about the skewed interest of activist initiatives. This is because activists may not wait to see through the promised changes, instead capturing the momentum of media exposure followed by positive reactions from the stock market and choosing to divest their shares before their proposed strategy is implemented, as Trian did with PepsiCo.
Should minority shareholders be on the alert when an institutional investor enters the firm? Shareholders should strive to maximize the positive impact of entry – better control of managerial discretion – while being ready to prevent any value-destructive strategies.
Corporate shake-outs can make firms leaner and are powerful tools for increasing managerial efficiency. However, they should not be a tool for squeezing out short-term financial gains at the expense of long-term development and profit. Thus, shareholders must carefully examine the value enhancement potential of a firm targeted by activists. As with any mechanism of corporate governance, shareholder activism is not without its flaws, but when used appropriately, it can have a significant positive impact.
You can read the original article here – Forbes – Shareholder Activism Is On The Rise: Caution Required.
For more articles like this, check out our recent articles here.
Article by Johnny Hopkins, The Acquirer’s Multiple