What are the big trends you’re seeing around activism at the moment?
It has been said for several years now that no company is immune to activism, regardless of size or geographic region. This is especially apparent this year with activist situations involving BHP Billiton, General Motors, Nestlé, Arconic, ADP and Procter & Gamble. Companies that were previously considered immune to activism are now frequently targeted. The reach of activists is expected to remain this expansive for the foreseeable future.
The largest index funds, Vanguard, BlackRock and State Street, hold an increasingly significant percentage of the shares outstanding of the large and mega-cap companies by virtue of the massive inflow of capital to these funds over the last several years. The support of even one of these funds is often enough to determine the outcome of a proxy contest.
The increased focus and voice of these index funds on corporate governance is an issue that cannot be ignored. Companies that fail to take heed of the guidelines set forth by these powerful shareholders will find themselves without a strong hand if an activist shows up. Activists will frequently look for governance weaknesses to bolster their argument that change is needed, and that good performance is naturally aligned with good governance.
The tactics employed to reach retail shareholders are quickly evolving. We have seen activists mail individual video players to garner votes in a proxy contest, and companies send instant messages with voting instructions via Facebook. The irony of our interconnected world is that it is more challenging than ever to get people’s attention. Companies as well as activists need to be creative to make their messages stand out from the daily noise of people’s lives.
To what extent are governance issues being considered in activist or contested situations today compared with three years ago? To what degree is governance being used simply as a vehicle to gain support for financially driven change?
More than ever, governance is a critical piece of any activist situation. While most shareholder activism will be focused on improving shareholder value, the activist landscape continues to be altered by the powerful voices of the large index funds regarding governance standards. These funds have taken a thought-leadership role on how a long-term and sustainable perspective should inform the board’s decisions.
Gender diversity in the boardroom will continue to be a prominent area of focus. The August 31 letter sent by Vanguard’s CEO Bill McNabb to directors of public companies sent a very clear message about expectations for board and governance structures, compensation and risk oversight. McNabb states: ‘When the board contributes the right mix of skill, expertise, thought, tenure and personal characteristics, sustainable economic value becomes much easier to achieve.’ Any campaign for shareholder support will have to pay close attention to the governance expectations of its shareholders.
What are the top three things a company should be thinking about in terms of preparedness when it comes to shareholder activism?
To further quote from McNabb’s letter, ‘you can’t wait to build a relationship until you need it.’ I often liken preparedness for shareholder activism to foreign policy. The greater your level of engagement and diplomacy in times of peace, the greater likelihood that you will be able to avoid times of conflict. The three things a company should focus on are:
Know your owners. It is important to closely monitor your stock ownership and stay informed on the differing perspectives and priorities of your various shareholders. This will outline your shareholder engagement strategy to both investment and governance personnel, which will lead to more informed decision-making by management and the board. Additionally, a close eye on the trading in your stock helps to provide an early-warning system should an activist start to accumulate a position.
Know your company. You must have an honest and objective sense of how your company is performing in relation to its stated objectives and peers as well as how your board and management are contributing to that performance. This assessment should be done as though you were looking at the company through the eyes of an activist. You should be aware of any weaknesses you may have and employ an ongoing self-evaluation process.
Know your team. Having a collaborative team of outside advisers that knows your company intimately will help you in your year-round engagement and evaluation process, thus positioning you to minimize the threat of activism and maximize your chances of being successful should such a threat become unavoidable. You want a team that has experience in peacetime as well as conflict so that you do not have to transition to a new set of advisers if conflict arises. Having a previously established relationship of trust and confidence with these advisers will make it much easier to respond effectively to a shareholder activist.
What are some of the most common mistakes you see companies making when it comes to handling an activist or contested situation?
The most common mistakes include taking shareholder support for granted: just because a shareholder was complimentary about your story in the recent past does not mean it will not be supportive of an activist’s effort to bring fresh ideas and perspectives to your board. Listening objectively to your shareholders and thoughtfully evaluating feedback is as important as articulating the corporate vision. By making these efforts, companies are more likely to have engendered credibility and support for their strategies before an activist even emerges. The IRO must provide management with as unfiltered an assessment of shareholder sentiment as possible and enable an ongoing dialogue between management and shareholders.
Another pitfall is having an executive or board member speak ‘off the reservation’ in an activist situation. Activists will look to expose divisions within the company that can be quickly exploited. It is important that debate and discussions stay within the boardroom and that a consistent message is communicated to the investor community.
Finally, companies should avoid taking the low road. Arconic’s Klaus Kleinfeld sent a letter to Paul Singer of Elliott this past spring without his board’s approval, in which he tried to associate Singer with embarrassing past behavior. This quickly boomeranged on Kleinfeld, leading to his prompt departure from the company and paving the way toward a settlement in which three Elliott nominees were placed on the Arconic board.
What advice would you offer to IROs finding themselves in a contested situation for the first time?
Quickly gather all relevant participants – management, board, advisers – and establish clear lines of communication so that your efforts are co-ordinated. One of the biggest advantages an activist has is speed and agility. You do not want to find yourself on your heels each time the activist communicates with your investors either through the media or in proxy filings. The ability to anticipate the activist’s next moves as much as possible and to respond quickly and effectively to it will be key to winning shareholder support.
Thirty-eight companies subjected to public demands in first half of 2017
A sea change in shareholder activism across Asia has seen the number of companies publicly targeted more than double between 2013 and 2016, according to Activist Insight data.
As many as 38 companies had been subjected to public demands by the end of the first half of 2017, more than in 2013 as a whole and setting the stage for a projected year-end total of 65. And while 2017 volume is anticipated to fall slightly, activism is far from losing momentum.
Activist Insight editor-in-chief Josh Black says: ‘Although activity remains dramatically lower than in the US, several developments suggest activism in Asia will continue to increase, including governments pushing for improved corporate governance, new domestic activist fund launches, and the ready availability of opportunities.
‘Deterrents, such as controlled companies and suspicion of outsiders can be dispelled with sustained effort. But activists have been working more closely with management teams and gaining their trust before or in place of going public with demands.
‘Witness Elliott Management’s second campaign at Samsung, Third Point’s share buyback campaign at Fanuc – where few gave Third Point a chance – and efforts by behind-closed-doors activists such as Taiyo Pacific Partners, which told us this summer that it takes executives on a kind of industry sabbatical to teach them about finance.’
The report also reveals that activists are increasingly looking to foreign institutional investors and family offices as fertile ground for their campaigns.
‘Foreign institutional investors tend to be more independent of local banks and pension services and therefore have a different mind-set, as well as being influenced by western governance standards. Family offices may also have fewer ties and be more interested in profitable investments than relationships,’ says Black.
The data was compiled by Activist Insight for a special report entitled Activist Investing in Asia.
Between 2011 and 2015, just 8.4 percent of nominees put forward by both activists and targeted boards were female
Shareholder activists’ director picks to join company boards are on average whiter, younger and more likely to be male than their counterparts across the S&P 1500 – and so are the counter-nominees put forward by companies, according to a new study.
Given their short-term focus on change, activists are less likely to nominate women and ethnic or racial minorities, Institutional Shareholder Services (ISS) and the Investor Responsibility Research Center Institute (IRCCi) found in their research of board nominations between 2011 and 2015. But when an activist targets a public company with a candidate or slate of candidates, the company’s own nominations in response are also less diverse than the S&P 1500 averages, the study found.
Between 2011 and 2015, only 8.4 percent of nominees put forward by both activists and the boards they targeted were female. During the same period, the female share of new board appointees in the S&P 1500 rose from 17.1 percent to 24.5 percent, according to the report.
Only three activist fund firms – Starboard Value, Engaged Capital and Clinton Group – selected a female nominee in more than one contested situation, according to the report. These three firms account for 76.2 percent of the total female nominees by activists between 2011 and 2015. Only one woman, Cynthia Jamison, was selected more than once, both times by Starboard Value during its engagements with Darden Restaurants and Office Depot, the study found. Starboard Value is also one of only two activist funds to have nominated ethnic or racial minorities in more than one board contest during this time – with Icahn Group being the other.
Ninety-five percent of the nominees covered by the study were Caucasian, whereas minority representation in S&P 1500 boardrooms increased from 9.3 percent to 10.1 percent during the period at issue.
‘Shareholders and directors need to better understand the significant boardroom transformations that occur when activist investors target companies,’ ISS special counsel and report co-author Patrick McGurn says in a statement on the report.
This lack of diversity is due, in part, to candidates with financial experience being increasingly favored. ISS and IRCCi define this as someone who has experience of acting as a financial officer, auditor or public accountant, or of overseeing people in that role.
Speaking to IR Magazine last month, Jeff Sanders, vice chair and co-managing partner at Heidrick & Struggles’ board and CEO practice, said that only 5 percent of CFOs are ethnically or racially diverse among the Fortune 500. ‘Boards have to be more creative about how they think about sourcing talent,’ he said.
More open-minded on age
Despite the lack of gender and ethnicity diversity in their director choices, activists tend to be open to considering directors from a broader age range than the boards they target, according to the study. The average age of nominees put forward by activists was 53 – more than three years younger than the average for nominees put forward by boards.
Just under two thirds (59.8 percent) of activist nominees were in their 50s or 60s, compared to 78.9 percent of boards’ nominees. Activists nominate more candidates in their 30s and 70s, according to the study.
‘Anecdotal media coverage, often fanned by anti-activist communication strategies, still tends to myopically focus on two long-standing dissident nominee stereotypes: the still wet-behind-the-ears 20- or 30-something-year-old hedge fund analyst, and the older, male, over-boarded crony of the fund manager,’ the report’s authors write. ‘These long-standing stereotypes appear to be outdated.’
Past 18 months sees as many Israel-headquartered firms targeted as in all of previous three years
Activist shareholders are waking up to the opportunities presented by a maturing Israeli stock market, according to new data from Activist Insight.
Twelve companies were targeted over the last 18 months, the activist research firm says. While that’s not a high number by comparison with markets accustomed to activist activities like the US, the number is equal to all the campaigns seen over the previous three years.
Seventy percent of the companies targeted were in the healthcare or technology sector, and Activist Insight warns that ‘Israel’s abundance of companies in favorite activist sectors such as pharmaceuticals, biotech and software, as well as its open market, are likely reasons it has remained a popular source of targets.’
Just 35 percent of public campaigns were waged by foreign investors, with dual-listed firms the most likely targets, according to local practitioners. But Activist Insight notes a growing domestic activist scene as well.
‘Shareholders have taken advantage of Israeli law, which allows 1 percent shareholders to nominate directors,’ explains Activist Insight in a press statement, adding that ‘68 percent of demands were board-related, with only 9 percent M&A-related due to a sometimes protectionist culture. But advisers familiar with proxy fights in the country say they can be contested – ending up in litigation.’
Israel also appears to be a ‘popular hunting ground’ for short-sellers, with 21 campaigns against Israel-headquartered companies since 2013.
Almost a third of US targets in first half of year were large caps, shows Activist Insight data
Shareholder activists renewed their appetite for US large caps in the first half of the year, with almost a third of companies subjected to public demands by activists having a market cap of more than $10 bn.
‘Activists have responded to a turnaround in the markets by making ever more concentrated bets on large-cap companies,’ notes report editor Josh Black in a press statement.
In fact, more than 100 large-cap companies were targeted in the first half of 2017 – a number that exceeds the total of any year since 2010 and crosses ‘a threshold approached in recent years’ (numbers of large-cap companies targeted in 2015 and 2016 were 94 and 96, respectively).
Small-cap companies are the next most popular target for activists so far this year, with this group accounting for a quarter of all public campaigns, representing a 3 percentage-point increase. Mid-caps accounted for 19 percent, up 2 percentage points from the first half of 2016.
These increases have come as activists have moved away from micro-caps (14 percent in the first half of 2017, down from 19 percent in the same period last year) and nano-cap companies (11 percent this year, down from 17 percent in the first half of 2016).
‘Despite high profile campaigns at Nestlé and BHP, activism in Europe and Asia appears flat or slightly down,’ adds Activist Insight in its press release.
Steve Wolosky, partner at Olshan Frome Wolosky, advises hedge funds and investment partnerships on activist situations. In this interview we talk about the current trends in shareholder activism and what IR teams should be looking for when researching activists.
Number of CEO exits almost doubles within the first year of activist engagement, according to research
Activist shareholders are casting their eyes beyond the boardroom to focus on the corner office, fueled by an increasing focus beyond simply financial performance to issues such as operations and governance.
Later this month, for example, Buffalo Wild Wings and Rent-A-Center face shareholder votes on proposals asking for the removal of their CEOs. In both cases, the boards oppose the proposals. Spokespeople for Buffalo Wild Wings and Rent-A-Center declined to comment.
Activists are targeting CEO changes because of ‘a perceived need to become much more operationally linked to their investments in order to drive change,’ Peter Michelsen, president of CamberView Partners, tells IR Magazine. Michelsen says the days of activists focusing primarily on financials have gone, with activism having evolved to focus on governance, leadership and operational issues. ‘Often the CEO sits at the center of those perceived needs for change,’ he says.
The enhanced focus and influence of activists is partly down to a change in the perception of activists among other shareholders, according to Steven Balet, managing director at FTI Consulting. ‘Over time it would seem that institutional investors have got more comfortable with CEO change and activists have therefore become more emboldened to target CEOs,’ Balet tells IR Magazine.
Indeed, the number of CEOs departing a company almost doubles within the first year of an activist engagement, according to research last year from FTI Consulting. In any one-year period, the average CEO turnover among 2,500 companies studied was 16.6 percent between 2011 and 2015, FTI Consulting found. When an activist got involved but did not obtain a board seat, CEO turnover rose to 28.4 percent. When the activist did obtain a board seat, 34.1 percent of CEOs left the company, according to the research.
The numbers become even more stark over a 24-month time period. FTI Consulting’s data suggests that more than half (55.1 percent) of CEOs leave a company within two years of an activist obtaining a board seat.
Perceptions and track records
Balet says the perception of activists has changed considerably over the last 15 years, as they have built varying reputations and track records for themselves and their firms. For some activists, that can be a double-edged sword, with companies digging for information about them to build a defense around.
‘Now we see companies making sure that their shareholders are aware of the track record of activists once they’ve been placed on the board of other companies,’ Balet says. This goes beyond financial performance to encapsulate a range of other issues – such as layoffs, accounting standards, safety issues and governance issues – that could convey a cultural mismatch between the activist’s and the company’s priorities.
It has become common practice for companies ahead of a proxy contest to brief their shareholders on these issues surrounding the activists they’re in conflict with – using investor presentations and shareholder releases as primary briefing tools. These methods are also used to discuss the track record of individual board nominees put forward by activists.
Michelsen says an activist’s track record is material information to help investors make a decision, but he cautions that communicating it ‘should never be an attack, it should be very fact-based.’
Balet agrees, saying that companies need to avoid personal attacks or emotive language. ‘Your other investors are going to have more in common with the activist than they are with you as a company, so you need to take the high road,’ he says.
The number of boards that have discussed how to prepare for a shareholder activist increased from 55 percent in 2014 to 74 percent last year, according to research from Deloitte and the Society for Corporate Governance.
But the percentage of respondents targeted by activists actually decreased during the last two years, from 31 percent in 2014 to 27 percent in 2016. This is somewhat at odds with other research on shareholder activism, with recent reports from FTI Consulting and Activist Insight suggesting the number of incidents in the US has climbed from 135 in 2010 to 645 last year.
More than half (55 percent) of the respondents to the Deloitte and Society for Corporate Governance study say their boards are being updated on shareholder sentiment and concerns more than once a year.
The majority of respondents (61 percent) say the number of requests from shareholders to speak directly with board members has stayed the same over the last two years, though more than a quarter (28 percent) of large caps saw a slight increase in their numbers.
Three fifths (60 percent) report that at least one board member had been in contact with shareholders or a shareholder group in the last year. This is most likely to be the chairman, followed by the lead director and the compensation committee chair.
But two thirds of respondents don’t have a shareholder engagement policy beyond any stock exchange or regulatory filing requirements. Large-cap respondents are the most likely to have a policy, but only one in three (36 percent) say they do and that it applies to both management and the board.
This article was produced by ELITE Connect and originally published on the ELITE Connect platform
While the US and Europe enjoy many comparable parallels, the issue of activism remains a more significant concern for the former, with high-profile company cases such as DuPont serving as a perfect example. But why is activism more prolific in the US? And what can IROs do to minimize the chances of activism?
We hear from Keith Gottfried, partner & shareholder activism defense practice leader at Morgan Lewis & Bockius, and Paul Lee, head of corporate governance at Aberdeen Asset Management, who share their opinions on the subject.
Activism in the US is still thriving, according to Gottfried, who observes that 2017 has already been a particularly busy year for challenges. ‘As the year progresses, we’re continuing to see a lot of activism, with companies getting notices of nomination or being threatened with other activist campaigns,’ he says. ‘This shows no sign of slowing down, with small and micro-cap companies in particular still experiencing significant activism.’
The main catalyst for greater levels of activism in the US compared with Europe can largely be attributed to the differences in the relationships between companies and their shareholders, says Lee: ‘The relationship in the US hashistorically been so combative and mediated by lawyers that a significant gap has developed. It is into this gap that the activists have come, essentially an arbitrage play between the different views that have developed over time because of that failure of communication.’
The fact that European companies take more of a direct communications approach works in their favor. ‘In Europe there has been less of a gap allowed to develop, because there has tended to be better dialogue, better disclosure and better access to boards,’ Lee points out. ‘There is therefore less need, and less scope, for activists and arbitrage as the gap in opinions is less pronounced. As a result, the regular predictions that US activists will arrive shortly have all proven false over the years. The activists that have arrived in Europe or have grown in Europe are less noisy, more relational and fewer in number.’
In terms of the future, US companies’ relationships with their shareholders are slowly improving, ‘the gap is closing as companies are now working harder to build relationships with their long-term shareholders and board directors are making themselves more accessible to investors, though many written materials are still compliance-driven rather than communication-driven compared with European companies,’ says Lee.
Gottfried, however, advises that there’s still much work to be done around proactive positioning in the US. ‘Companies need to understand that, at the end of the day, they have two products to market: they have the product they sell to customers to bring in their revenue, and they have their shares, which they sell to investors,’ he notes.
‘They need to effectively market to both of these groups and think of their investors more like customers. Lots of companies don’t think they need to market their shares or sell their strategy and value creation plan, so they aren’t spending the same time and resources on their IR function as they do their marketing. It’s ironic that when they’re in an activist situation, companies are willing to spend the money and talk about strategic positioning and value creation, but this is something they should be concentrating on all along.’
For IROs working to minimize activism in either the US or Europe, Lee advises that a proactive communications and networking strategy is essential. ‘Often it is too late to act once an activist arrives, so IROs need to work to develop relationships with their investors, and particularly their long-term stable shareholders, to avoid gaps in understanding developing,’ he explains. ‘It is best to avoid these relationships being intermediated, and it’s crucial to listen to investor views so their thinking can be taken properly into account.’
Gottfried echoes this, and recommends that effective IROs employ the same tactics as politicians. ‘To effectively pre-empt activist challenges, companies need to be running their shareholder messaging like a political campaign,’ he advises. ‘Politicians are permanently in campaign mode, and companies should be using their IR function to do the same, communicating in a thoughtful and accurate manner their narrative on how they drive and build shareholder value, why investors should buy shares, and why the current board can be trusted to run the company.’
In this final installment, Black outlines his top tips for IROs if an activist shows up on their shareholder register.
Know the market and do your research
‘Any self-respecting IRO should be aware of the main activist funds out there and should be able to report to management that an activist has invested,’ Black says. ‘I think it always makes sense to hold a meeting to hear what the activist has to say. Usually the CEO is the person who holds the meeting… sometimes activists ask to meet with an independent director, especially if the CEO of your company is also the chairman.’
Understand the activist’s angle
‘The first thing is to understand what activists want,’ Black says. ‘They’re there to create money, not to make your life difficult.’
Brief your board and your shareholders
‘Once an activist gets to the point where you disagree with it and it still has conviction in its idea for the company, you’re probably going to get to a place where it becomes public,’ Black explains. ‘You should consult with your wider shareholder base and brief your directors. The board should already have heard any idea that an activist can come up with, no matter how outlandish you think it is… there’s a chance it will have to go to bat for your side when it comes to investor roadshows.’
Think like an activist
‘If an activist thinks your shares are undervalued or underpriced, you probably do too,’ Black notes. ‘You’re probably already looking at ways to improve the performance of your company… you should be highlighting to the market the ways you want to take the company forward. If you appear to be resting on your laurels, it becomes a much more difficult conversation.’