Shareholder activism has evolved significantly since its inception in the 1980s. No longer targeting solely smaller, poorly performing U.S.-based firms, activist investors are increasingly making their presence and demands known to large, multinational companies, and an activist movement is emerging in the United Kingdom and Europe.
What’s the issue?
Activism, long considered a pernicious practice, has been reborn and rebranded. The success of activist hedge funds has encouraged significant cash flows into new and existing funds, giving encouragement and rise to even greater levels of activist activities. And activism may be even more prevalent than the numbers suggest, as shareholder campaigns are often waged (and resolved) behind closed doors, particularly in Europe, thus remaining unaccounted for in year-end tallies.
Activists motivated solely by short-term gains have become less dominant. Governance-focused investors seeking policy changes are proliferating as well as those focused on legislative imperatives, such as Say on Pay advisory votes required by Dodd-Frank; proxy rule changes on shareholder proposals and new standards established by Dodd-Frank for compensation committees. Activists have been steadily setting their sights on larger targets across all industries. In 2013, the average market capitalization of announced activist targets was more than $30 billion, nearly four times the average market cap just five years earlier.
Why should an IRO care?
Activists are getting better at their game, and increasingly triumphant at seeing their demands met, such as obtaining Board representation. In contested situations activists have been able to pick up at least one Board seat in more than half of the companies targeted in each of the last five years and similarly successful in 65% of proxy fights in 2013.
The identity of key activists, what they want and how they operate are constantly changing. For targeted companies, the run-and-hide defense is no longer viable. IROs must proactively seek to communicate management actions effectively and offensively. They must also continually monitor their company’s vulnerabilities. Activists have broadened their agendas, and may be seeking to compel any of several actions, rankings from return of cash to shareholders, divestiture of assets or non-core businesses, changes in management or governance structure or operational strategy to outright sale of the company. Two particular governance issues gaining activist support are the ratio of CEO pay to the median pay of all employees, and environmental/social/governance (ESG) and corporate social responsibility (CSR) activities and reporting.
IRO Action Checklist
- Stay aware of activist activity, whether it is taking place in your company, at a peer or even in the larger corporate community. Names, issues and tactics are a constantly changing dynamic.
- Actively monitor the company’s shareholders and trading, tracking institutional investor, asset management firm, private equity group and hedge fund investment.
- Watch voting patterns and relationships between investors to see if holders are acting in alignment.
- Regularly communicate with the largest institutional shareholders to impress upon them the soundness of corporate strategy and interest in improving shareholder value.
- The role of proxy advisory firms is changing; be attuned to their increasingly larger role in activist campaigns. Two firms, Institutional Shareholder Services and Glass Lewis control a majority of the market and advise institutional investors holding an estimated $30 trillion in assets.
- Social media is increasingly becoming a favored means to transmit activist rationales and demands. Make sure your media team is geared up to deal with a potential activist tweeting away about your company.