On becoming an activist board!

The Securities and Exchange Commission has proposed significantly increasing the threshold for money managers like hedge funds that must file 13F documents, but that would be a wrong move for companies and investors alike. 

General Motors Co said on Tuesday it was acquiring an 11 per cent stake in U.S. electric truck maker Nikola Corp, worth about $2 billion, and will team up with the company to make a pick-up truck.

Shareholder disputes arise in both good and bad economic times. While such disputes have risen steadily since the 2008 financial crisis, the emergence of coronavirus (COVID-19) is expected to lead to a significant uptick in disagreements within the ranks of the many companies struggling to rebuild in the face of a global economic downturn. Amid COVID-19 and in a post-pandemic environment, the growth and evolution of shareholder disputes will remain a key feature of the corporate landscape in the years ahead. FW: To what extent are you seeing an increase in the number of shareholder disputes in today’s business world ? Williams: We have seen a steady rise in shareholder disputes since the onset of the 2008 financial crisis and are already seeing signs of a further uptick in the trend brought on by coronavirus (COVID-19). This is highly likely to continue in the post-pandemic world. These involve both public and privately held companies across a wide variety of industries, including in the financial sector, as well as in the oil, gas and construction sectors. Bédard: Shareholder disputes and corporate disagreements constitute a steady stream of international disputes – they are perhaps the most frequent type of disputes handled by arbitration counsel at large corporate firms. Shareholder disputes arise both in good and bad economic times. But challenging financial situations probably bring additional sources of tension inside corporate organisations. Typical drivers of shareholder disputes are a lacklustre economy, disappointing financial results and major corporate reorganisation. The global COVID-19 pandemic may generate a surge in shareholder disputes, as a difficult business climate intersects with individual corporate struggles to manage unprecedented circumstances.

Shareholder activism has been on the rise in Japan. Will the trend continue in the post–COVID-19 world? Shareholder activism in Japan rewards shareholders with positive abnormal returns, at least in the short run. That’s according to a new study we conducted at the Monash Centre for Financial Studies. This finding suggests that by actively engaging with investee companies, investors could potentially unlock shareholder value. However, recent protectionist moves by the Japanese government may hinder such efforts, especially for foreign investors. Shareholder activism is broadly defined as the application of pressure by shareholders to influence or change company behavior. It comes in various forms and can involve public campaigns as well as private engagement between shareholders and companies. Unlike in the United States and Europe, where investors are increasingly focused on  environmental, social, and governance (ESG) issues, in Japan thus far business performance and governance have been shareholder activism’s dominant focus. Until about a decade ago, public shareholder activism in Japan was rare, and nearly always unsuccessful, particularly when it involved hostile campaigns by foreign investors. The most famous of these came in 1989 when US investor T. Boone Pickens made a bid for three board seats at Koito Manufacturing Co. Toyota, a key Koito shareholder and customer, along with other shareholders, voted it down. It was one of several high-profile early examples of cross-shareholdings — a common feature of corporate culture in Japan — and the use of business ties to suppress activist shareholders.

What happens to companies in the years after they are targeted by an activist hedge fund? Often, there is a shift towards short-term value creation at the expense of long-term competitiveness and sustainability, and a transfer of wealth from stakeholders to short-term shareholders, according to new research published in the Strategic Management Journal. [...] At a time when activist hedge funds are gaining power and influence, providing comprehensive evidence on the long-term financial and non-financial implications of their activities is critical. For policymakers, our results suggest that restraining activist hedge funds can help build more competitive and sustainable companies over the long term. It would be prudent to enforce regulations that require activist hedge funds to hold onto their shares for longer periods of time and penalise them when they sell out early and leave a company worse off. For corporate executives, it is necessary to anticipate defense strategies for when activist hedge funds come knocking. In almost all cases, activist hedge funds depend on the support of other shareholders to back their proposed interventions. The better executives are at communicating their companies’ long-term value creation story to existing shareholders, the more success they will have defending against short-term interventions. For investors who care about sustainability, it is worth carefully dissecting one’s investment portfolio. Today, many individuals and organisations are unknowingly invested in activist hedge funds through their pension funds and endowments. Socially-minded investors should ensure their capital is not supporting investment strategies that risk undermining their personal social priorities.

A couple of crosscurrents are occurring within the oil industry. While many corporate boards are defeating efforts by activists to disclose more and more climate risks, most are already taking bold action to curtail their CO2 emissions. The broader question is whether large institutional investors and shareholder activists are increasing value by demanding more transparency. One school of thought concludes that as long as they are in tune with their fiduciary roles, they have a right to pursue societal objectives. For companies to profit over the long-term, they must, therefore, act not just in the interest of their stockholders but also for the benefit of the communities where they reside.  Others, though, see the current pressures as overkill. Corporations, generally, already provide investors with essential data, critics say. They note that if left to their own devices, the activists would micromanage companies. Their concern is that no matter what measures businesses take to limit their carbon footprints, they will never be enough. If that is the case, then other areas that need oversight will be neglected and shareholders will get hurt. 

The new proxy voting rule changes were justified based on allegations, mostly made by corporate managers, that proxy advisor recommendations are error prone, rife with conflicts of interests and that proxy advisors wield outsized influence over the shareholder voting process.

High-performance boards are adapting to the reality that we are working in a virus-charged world, adjusting their governance protocols accordingly. Thinking unthinkable scenarios is no longer a fantasy exercise, it is pragmatic risk management. The challenge is to emerge from these paradigm shifts stronger than before, with the ability to sustain and increase value for all stakeholders.

Research shows CEO turnover is higher in US firms than those in Europe and the UK, with 28% of US bosses departing after less than 36 months at the helm. When Expedia’s chief executive Mark Okerstrom stepped aside over strategic disagreements in December, it came after just two years in charge. By leaving after such a brief spell at the top he joined a significant leadership trend: the US beats both the UK and Europe in speed of CEO turnover. According to new research, US companies are more likely to change their lead executives in under three years than companies in Europe and the UK. The research, from shareholder advisory firm SquareWell Partners, reveals that 28% of US corporate leaders parted company with their employers in three years or less. European companies are more likely to offer patience to their lead executives: 29% of their departing leaders are in post for nine years or more, while only 8% exit after less than 36 months at the helm. The largest proportion of departing UK leaders served between six and nine years. Average tenure across all territories for a lead executive is a little shy of seven years. In its report, looking at data for the 18 months to June this year, SquareWell describes the figures as “demonstrating the willingness of US boards to act more quickly in replacing a lead executive”.

When RWC’s Japan Active Engagement team started work more than 15 years ago, “activism” was associated with high-profile attempts by mainly foreign investors to force change at Japanese companies through ownership. “Engagement” was an unfamiliar concept — so much so that there was no Japanese word, and one had to be imported from English: “engage-ment-o”. Interactions between investors and managers were then essentially interrogative. Investors asked the questions and managers, more or less, gave the answers. The notion that investors might make suggestions for changes in the ways in which companies were managed was, at best, novel and, at worst, anathema to Japanese company managers. Many hitherto successful activist investors in other regions who had high hopes of Japan were met with resistance, resentment or policies designed to block their efforts. This led to Japan’s reputation for “value traps”, where poor corporate governance held back investor returns. [...] Pre-Abenomics, 96 per cent of companies held their shareholder meetings on the same day — that number is now 30 per cent. Recent reports suggest that overt shareholder activism is now almost as common in Japan as it is in the US and confrontational events which would have been inconceivable 20 years ago now occur quite often, some with positive results. The lure for these activists is not limited to corporate Japan’s infamous cash pile, or the potential returns from disaggregating keiretsu (group of companies with interlocking business relationships and shareholdings) behemoths from their conglomerate discounts. The appeal also lies in the change in corporate attitudes that, in a country that values consensus, has now reached critical mass.

The pandemic has forced many struggling companies to focus on increasing their bottom line. At the same time, recent protests have strengthened the calls for greater diversity at work. And now, according to three studies, there’s evidence that investors don’t think that organizations can do both at the same time. According to three new studies, there’s a belief that a focus on diversity detracts from efforts to maximize shareholder value (it doesn’t). [...] Study #1: Adding Women To Board Decreases Market Value

The first study found that as firms increase the number of female directors on their boards, their market value decreases. [...]

Study #2: Female Board Members Get Fewer Shareholder Votes When Company Is Struggling

In a second study, forthcoming in Organization Science, researchers examined 50,202 board director elections from 2003 to 2015 and found that female board members typically get more support from shareholders than their male counterparts. [...] Study #3: Corporate Social Responsibility Is Perceived As Signal Of Waste By Activist Hedge Funds

Activist hedge funds seek out companies that they believe are not maximizing shareholder value, and then they make a large enough investment in that company so that they can influence the company’s management and decision making.

Investment banks turn to technology as Covid-19 is set to spur a wave of activist campaigns. UBS has launched a new big data tool to help clients fend off the threat of activist investors, as investment banks brace for a rush of such campaigns in the wake of the coronavirus crisis. The Swiss bank, which has been building a team of investment bankers to help companies defend against activist campaigns in Europe, has launched a new digital system to help companies predict the risk of being targeted by activists — a major driver of mergers and acquisitions activity in recent years. While activist investors, which take large stakes in companies in a bid to agitate for change at the top of the organisation, largely stepped back in the early days of the Covid-19 pandemic so as to give executives breathing space, they have since returned. In May, $3.3bn of activist capital was deployed, according to data from independent investment bank Lazard, which was a 159% increase on March. Darren Novak, head of activist defence at UBS, said that Covid-19 was likely to exacerbate the problems of companies and provide an opportunity for activist investors in the second half of this year. “We anticipate seeing more M&A-related activist campaigns that will likely focus on seeking future opportunities for a quick sale or divestiture when M&A markets reopen,” he said. [...] UBS’s new system — called GUARD (Global Utility for Activism Risk and Defence) — aims to quantify the risk of a company being targeted by an activist by looking at 220 million data points and analyses more than 5,000 historical activism campaigns. UBS follows a number of its competitors by launching sophisticated technology tools that can help both streamline the deal-making process and help clients assess the risk of an activist threat.

Companies have been using online technologies to conduct their AGMs with varying degrees of success. The pandemic has caused the postponement of thousands of AGMs or forced them to be adapted for online. Existing proxy voting technology has proven valuable in this period as a physical presence is not possible
Tech providers can facilitate interactions during digital AGMs but regulations have not always kept pace with these developments
Many markets are still reliant on physical votes and documents, posing problems that will need to be addressed. As the 2020 annual general meeting (AGM) season hit its stride in March, several countries were already enforcing social distancing measures or restricting travel because of the COVID-19 pandemic – posing a formidable obstacle to shareholder meetings. Most companies have since either postponed AGMs or moved them online. UK-based proxy voting and research company Minerva Analytics reported coverage of roughly 800 shareholder meetings globally in March, compared with almost 1,000 last year. This imples a significant number of postponements even in the early stages of the pandemic.  Regulatory requirements in the UK and Europe mean that postponements can only last so long; AGMs usually have to take place within the first six to eight months of a business year. This has prompted many firms to introduce different forms of virtual events and AGMs with varying levels of shareholder interaction. Proxy voting agency International Shareholder Services (ISS) reported that almost 3,000 listed companies around the world had moved to virtual meetings as of 13 May.

The prevailing wisdom is that activist investors can drive corporate short-term behavior singlehandedly. The prevailing wisdom is wrong. At just 0.3% of total global equity assets under management (AUM) in 2018, activists depend on the support of long-term investors for their influence. Without clarity on long-term shareholders’ views, companies perceive short-term pressure coming from their investors and assume the activists speak for the entirety of the shareholder register. Having a strong investor/corporate dialogue well before an activist campaign arises is the way to encourage companies to proactively improve the drivers of long-term value creation—such as bolstering their governance, honing strategies for growth, and engaging with long-term investors. Strong long-term performance is the best way to limit opportunity for an activist campaign. Indeed, rather than being a spectator, long-term investors have a significant role to play alongside companies to counteract short-term activist behaviors. It is well within the power of these long-term investors to either amplify or dampen the short-term impact of activism, serving as essential players of the activism ‘game.’

The pandemic-related lockdown has affected all market participants, including activist investors. According to data from the Bloomberg Terminal, two relatively new players, Bulldog Investors LLC and Bluebell Capital Partners LP, have joined perennial leader Elliott Management Corp. at the top of the list of activists by the number of campaigns conducted. Bulldog has conducted 15 campaigns as of May 1, followed by Elliott with six. Newcomer Bluebell joins four others with three campaigns during this period. Unlike many activists who target operating companies, Bulldog Investors LLC generally takes positions in under-performing closed-end funds. Closed-end funds are pooled investment vehicles that raise capital through an initial public offering. The fund will list shares on an exchange. Unlike open-end funds, such as mutual funds, which can issue and redeem shares daily based on the fund’s net asset value (NAV), the number of shares in closed-end funds is fixed. Investors will trade shares with other investors, rather than with the fund. Most closed-end funds will make capital gains distributions to investors annually. [...] Bluebell is a long-term investor focused on European public equities. According to the firm, Bluebell “invests in attractive businesses at a significant discount to intrinsic value and seeks to increase shareholder value through constructive engagement.” Bluebell has recently taken positions in Swiss fund manager GAM Holding AG, Cineplex Inc., apparel maker Hugo Boss, and German airline Lufthansa.

Activist shareholders have increasingly focused on ousting top bosses since the coronavirus pandemic took hold of the global economy, according to a new report from investment bank Lazard. In the second quarter, so far, 50% of all campaigns by shareholder activists have involved attacks against boards or management teams, compared to a consistent 33% in the first quarter of 2020 and the whole of 2019. The removal or replacement of top executives at European companies has become a more prominent demand since the onset of the coronavirus pandemic, according to the report. Lazard Head of European Shareholder Advisory, Rich Thomas, told CNBC’s “Squawk Box Europe” on Tuesday that leadership is “never more important” for activist investors than in times of crisis. “That is why we are seeing leadership of companies firmly in the crosshairs of many activists and activist campaigns,” Thomas explained, adding that the coronavirus crisis has taken away some of the traditional tools available to shareholder activists. “The shareholder base does not want to hear about cost reductions, job cuts, they don’t want to hear about return on capital, but when the question is about leadership, and how the board and management is steering the company through this crisis, that can be a little bit more receptive,” Thomas added.