The New Era in Shareholder Activism, featuring Innisfree’s Arthur B. Crozier
|In last week’s Governance Watch webcast on the New Era of Shareholder Activism, James Langston, Partner at Cleary Gottlieb Steen & Hamilton, Pamela Codo-Lotti, Global Chief Operating Officer – Activism and Shareholder Advisory at Goldman Sachs, and Arthur Crozier, Chairman of Innisfree M&A Incorporated (which represented Engine No.1 in its landmark proxy fight against ExxonMobil) discussed the latest developments in, and their predictions for, shareholder activism.
Here are some of the key insights:
Shareholder activism with a big “A” – aimed at changing the strategic direction of a company – has roared back to pre-pandemic levels in the U.S. But there are striking differences from the past. 70 percent of activist campaigns are now being led by new or occasional activists, presenting an extra challenge for companies to figure out the activists’ playbooks.
Companies are facing multiple activists in their stock at the same time with different and sometimes contradictory demands. Multiple activists can arrive at once, with approaches shaped by their time horizon (e.g., short-term activists focusing on selling company assets and longer-term activists focusing on consolidating). In a multi-activist scenario, companies may want to align themselves with an activist that has a longer-term perspective.
The COVID-19 pandemic has accentuated the role of big index funds. In addition to a new group of activists who set up their own shops during the past year, we have seen big index funds – BlackRock, Vanguard, State Street – increase their focus on, and support for, E&S campaigns.
Companies that underperformed their peers during the pandemic should step up their preparedness efforts. During the pandemic, activists focused on investing in industries that were battered but not beaten (such as travel, hospitality, retail) and especially on companies that did not readily adapt to “the new normal.” With the markets recovering, activists are now poised to move quickly and harvest their investments in these firms.
A critical element in the ExxonMobil proxy fight was the direct link between the environment and long-term value creation. This garnered support from major index funds. The fight also underscores the need to cultivate relationships with long-term investors over time, build credibility, and be responsive to their concerns. Disclosure is pivotal in addressing investors’ information requirements and demonstrating how the company links E&S issues to business strategy.
ESG activism has moved beyond shareholder proposals and is proving successful when it combines a focus on both values and long-term value. ESG is being used both as a central focus, as in the ExxonMobil proxy fight, and more commonly as a wedge issue that accompanies an activist’s central thesis about value. Companies need to be able to tell their ESG story authentically, reliably, and effectively – with a focused narrative backed up by data.
Deal activism has also expanded, with an evolution in “bumpitrage” and campaigns challenging deals now coming from all angles. A relatively modest premium can place a target on a company. Communications and IR teams need to be brought in at the outset – you need to be able to communicate the headwinds you see if you continue with the status quo, without scaring away investors or your deal partner.
Activism aimed at removing the CEO (or “Alpha by decapitation”) is occurring but still faces a high bar as campaigns against a CEO are less likely to lead to a successful settlement than campaigns for board seats, a change in strategy, or M&A. A change in CEO is still more likely to be the consequence than the initial focus of an activist campaign.
Activism outside the U.S. continues to evolve. Before the pandemic hit, U.S. activists were increasingly focusing on targets in Europe and Asia. Due to lower vaccination rates and economic growth outside the U.S., international activism has not returned as quickly and much of it is homegrown. This could very well change with U.S. activists looking abroad again, as Europe and Asia emerge from the pandemic and governance in Asia has become more “westernized.”
Founded in 1997, Innisfree M&A Incorporated (New York), along with its wholly-owned subsidiary Lake Isle M&A Incorporated (London), is a high-stakes shareholder engagement firm, delivering shareholder intelligence, strategic advice and proxy solicitation services to the world’s leading corporations and investors when it matters most. Its integrated approach and unsurpassed analytics–ActiveIQ™–set Innisfree apart as the firm of choice. Innisfree provides expert advice on a wide range of matters, including shareholder activism, executive compensation proposals, corporate governance issues and investor relations.
With an experienced professional staff in New York, London, Pittsburgh and Richmond, VA, Innisfree has represented hundreds of clients in over 20 countries. www.innisfreema.com
Innisfree M&A Incorporated
Arthur B. Crozier, 212-750-5833