Activism Has Peaked, This Veteran of Shareholder Clashes SaysBy
Former ISS manager Cernich plans paper on the topic this year
Activist investors have toned down rhetoric in strategy shift
Activist investors like Nelson Peltz and Dan Loeb can send stock prices swinging the moment they disclose their positions. And lately they’ve been using their war chests to target some of the world’s biggest companies, including Procter & Gamble Co. and General Motors Co.
Chris Cernich offers a bit of consolation for executives and directors who fear they’ll find themselves in the activists’ crosshairs: It won’t get any worse.
Corporate America has reached peak activism, according to Cernich, who scrutinized hundreds of activist clashes while leading a team of analysts at proxy adviser Institutional Shareholder Services Inc. The funds may have gotten bigger and bolder, but so have passive investors, which the activists need to vote for their proposals.
“It’s not going to be the Wild West much longer,” said Cernich, 53, now a founding partner at Strategic Governance Advisors who plans to publish a paper on the topic this year. Many problems at companies are going to get resolved through discussions with institutional shareholders who have begun taking matters into their own hands, he said.
His theory rests on the idea that the line between activists and institutional investors has blurred. Money managers such as Vanguard Group Inc. and BlackRock Inc. now employ dozens of specialists who press companies on compensation, governance and strategy. Today, those discussions can resemble talks a business would typically have with activist investors, he said.
As a result, investors with closer board ties may be less likely to side with activists, according to Cernich, who has a doctorate in American literature from the University of Michigan and spent several years honing his carpentry skills making high-end furniture. He worked at Ford Motor Co. and Proxy Governance Inc. before joining ISS in 2010. Last year, he wrote a research note comparing spats between family members in corporate boardrooms to Shakespeare’s King Lear.
During his six years at ISS, Cernich oversaw shareholder vote recommendations on about 1,000 deals and 250 proxy contests. He departed in 2016 to co-found New York-based SGA, an arm of public relations firm Sard Verbinnen & Co.
On Tuesday, P&G shareholders will decide whether to give Peltz a seat on the company’s board. The Cincinnati-based consumer-products giant is the biggest firm to ever face a proxy fight.
Not everyone agrees with Cernich’s thesis.
Although passive asset managers push companies more aggressively than they did five years ago, they probably won’t replace activists, said Kai Liekefett, a partner and head of the shareholder-activism response team at Vinson & Elkins LLP. “They don’t want to jeopardize their access to the boardroom and the C-suite, they don’t want to get their hands dirty, and it’s costly.”
Activists are targeting bigger companies in part because they simply have more money to invest, said Peter Michelsen, president of advisory firm CamberView Partners LLC. Assets managed by activist hedge funds grew to $166 billion in 2014 from $23 billion in 2002, according to a working paper from professors John Coffee of Columbia Law School and Darius Palia of Rutgers Business School.
Still, increased engagement by institutional investors probably won’t diminish activism, Michelsen said. Those talks can help reduce acute governance problems but won’t “address financial issues over the short- or mid-term,” he said.
‘Threshold for Shame’
Meanwhile, years of strong results have helped activists cast off their reputations of being bare-knuckled corporate raiders solely focused on short-term performance. Some have altered their approach. Third Point’s Loeb, for example, has toned down his rhetoric, and Trian Fund Management’s Peltz showcases his commitment to corporate citizenship. That may help win support from passive money managers who emphasize long-term results.
And boards occasionally need to face pressure before they take action, said Anne Sheehan, head of corporate governance at the California State Teachers’ Retirement System, the second-largest pension fund in the U.S. with $213.7 billion of assets as of Aug. 31.
“Some directors have a very high threshold for shame,” she said.
— With assistance by Scott Deveau