Shareholder Activists: Barbarians in the Boardroom or Capitalism’s Unlikely Heroes? 

Activist investors have been called many things over the past decade, from barbarians in the boardroom to capitalism’s unlikely heroes. More often than not, they’ve been considered a threat.

But the days when activist investing was limited to a small coterie of Midtown Manhattan hedge funds poring over “sum of the parts” valuation metrics and recommending companies increase the size of their annual share repurchases now seems almost parochial.

Today, companies face a wider array of demands from their investors, reflecting concern for the preservation of both shareholder and stakeholder value. As Diligent’s Modern Governance Summit 2022 in Austin heard last month, activist campaigns are much more reflective of the world in which companies operate, and investors expect boards and management teams to hear them out.

In a panel discussion on Preparing for Shareholder & Stakeholder ESG Activism led by Josh Black, editor-in-chief of Diligent’s Insightia news and data product, Veena Ramani, the research director at FCLT Global, Loren Braswell, a managing associate in Sidley Austin’s shareholder activism practice, and Mark Grothe, a senior analyst at proxy voting adviser Glass Lewis, broke down recent trends in shareholder activism, including some of the highest profile ESG campaigns of the past two years.

A More Holistic Shareholder Supremacy

“There are many different stripes of investors who use these tactics, and there are many possible outcomes,” noted Ramani, in reference to the broad adoption of activist tactics.

“Long-term investors also use activist tactics too,” she added. “Activism, particularly when long-term investors are involved, represents a failure of engagement… Long-term investors participate in activist campaigns only when they’re not being heard by the company.”

Braswell agreed that the idea of prioritizing shareholders’ interests was being approached more holistically with the rise of ESG investing.

“There should be a symbiotic relationship between shareholders and stakeholders, particularly with an ESG issue,” she told the panel. “The long-term health of a company is really tied in with stakeholders.”

Back in 2019, the decision by the Business Roundtable – a committee of CEOs – to put stakeholder-value on par with that of shareholders was considered contentious. But since then, investors have interwoven issues such as climate change, diversity, equity & inclusion (DE&I), and human capital management with economic narratives.

Indeed, the intertwining of ESG and economic factors is key to winning support from Glass Lewis, one of the research bodies that support the institutional investors charged with deciding who wins a proxy contest. “When those factors are driven by each other and make a difference in terms of long-term value, that’s when you get a good ESG campaign,” said Grothe, who works on Glass Lewis’s activism desk.

Making It Work

The shock boardroom coup at ExxonMobil in June 2021 hung over this past proxy season, but it wasn’t repeated.

Instead, activists racked up a string of high-profile losses. At McDonalds, Carl Icahn’s insistence that the company had broken a decade-old pledge to end the use of restrictive accommodation for pregnant pigs found little resonance with other investors. At Guess, the 40% shareholding of the founding family ensured that despite independent shareholders largely agreeing with Legion Partners Asset Management’s argument that multiple sexual harassment lawsuits against the company’s chief creative officer had been bad for the brand, there was little change in the boardroom.

Even Engine No.1’s latest campaign, pushing for more extensive recycling practices at Coca-Cola, was notable because the drinks company has been the most receptive to change out of the three issuers the investor approached, not because it had been backed into a corner.

Nonetheless, Ramani noted that investors believe companies have had long enough to think through the impact of climate change and that shareholder proposals are starting to zero in on climate transition planning. “Companies need to have and articulate a long-term value creation plan that asks and answers questions about climate,” she told the audience.

What’s Coming Next?

Grothe explained that Glass Lewis’s framework starts with the question, “has there been a compelling case for change?” That stymies a number of single-issue ESG campaigns, because when overall company performance and board oversight is up to scratch, the proxy adviser won’t recommend for change just because an ESG demand seems like an improvement.

That will remain the case even with the introduction of the universal proxy card, a mandatory change that will require companies to list activist nominees on their own proxy ballots, and vice versa. Previously, each side had to file its own card, and unless they attended the meeting, investors could only vote for one side’s candidates.

Insightia reporting suggests the change is making proxy contests slightly more attractive to ESG-focused activists and Braswell agreed that the new rule is likely to lead to more fights next year. “One of the biggest deterrents in the past has been the cost of soliciting votes,” she said. “That’s no longer the case.” 

But that doesn’t necessarily mean results will improve.

“Single-issue ESG activism won’t get a lot of support,” confirmed Grothe. But in a tight contest, the ability to choose a greater mixture of candidates might lead to some subtle differences in the recommendations.

For more information and insight, read the latest reports from Insightia here.

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josh black
Josh Black

Josh Black is a Vice President at Diligent and the Editor-in-Chief of Insightia, a Diligent financial news and data company focused on shareholder activism, proxy voting, compensation and corporate governance. Josh is a frequent speaker at industry conferences and an expert for the media. His weekly newsletter on developments in shareholder activism, as well as Insightia’s monthly magazine and frequent special reports, are among the most widely read analyses of what is happening in the investment world.