Published 4 March 2022 by Audra Walton
You are probably familiar with the expression ‘janus-faced’. Janus is the Ancient Roman god of beginnings, gates, transitions, time, duality, doorways, passages, and endings. He is usually depicted as having two faces, and in modern times, the expression ‘janus-faced’ has been used in the context of having two contrasting characteristics—a face with two different sides.
This is the face of activism today.
Shareholder activism today
Shareholder activists have historically been a defined set—funds like Elliott Management, Icahn Associates, Pershing Square, Starboard Value, Teleios Capital and CIAM to a name a few, all with a clear strategy of buying shares to effect change within the company. How they try to effect that change, and the themes they are concerned with, varies from activist to activist, but the principle motivation of investing is shared: unlock value by instigating change.
The new activist
Today’s new breed of activist doesn’t have that motivation as an inherent investment driver. In fact they can’t be characterised by any shared investment driver. They include all sorts of types of funds, each motivated by a desire to protect their investment and create long-term value rather than instigate short-term change to unlock value quickly.
For example, asset manager Man Group would not describe itself as an activist investor, yet it mounted a revolt against HSBC last year over the bank’s fossil fuel financing. It built an investor coalition worth $2.4tn, and its actions resulted in new climate change plans at the bank. Royal London Asset Management, also not an activist investor, targeted Glencore, demanding a net zero pledge and a 2030 target—a battle it won with 94% vote in favour.
“Active funds that engage over ESG factors may arguably be considered activist,” Silvia Pavoni, Economics Editor at The Banker (and now Sustainable Views editor at the FT) wrote recently. These are funds that are demanding change from companies, participating in coalitions and using their voting power. They are the new activists. And there are lots of them, scrutinising historically ‘good’ companies they have owned for years. They are looking to protect investments by improving the E, S & G—and the big institutions are increasingly voting in their favour.
For example, Vanguard’s support for environmental and social proposals put before boards by shareholders jumped to 20% in January-June 2021, from 6% for the same period in 2020. Its support for workforce diversity proposals — asking companies to disclose more information about their gender and racial composition — shot up to 50% from 17% the year before. And BlackRock doubled its support for shareholder proposals in 2020-21 compared with the previous year.
But perhaps the clearest illustration of the new face of activism is in Activist Campaign Types. Traditional activist campaigns revolving around appointing personnel, pushing for M&A, removing personnel and changing capital structure are notably down year on year, and in many instances significantly down if compared to 2019. And what is up? Opposing M&A, environmental, governance and remuneration campaigns—the focuses of our new type of activists.
So it could be argued that the janus-face of shareholder activism is actually more of a sea change: a fundamental shift in what it means to be an ‘activist’. Afterall, traditional activists and ‘new’ activists are now working together. “Allianz Global Investors (AllianzGI) and Cevian Capital are urging shareholders to join them in voting against companies that fail to align executive remuneration with climate targets,” a recent Activist Insight article wrote. Yes, Allianz Global Investors, the firm with offices in over 20 locations worldwide and over 3,000 employees, managing EUR 500 billion in assets on behalf of institutional and retail clients. And yes, Cevian, the well-known shareholder activist investor. Face one, and face two, joining forces. The FT summed up the trend nicely in its article, “Climate Change: asset managers join forces with the eco warriors.”
Moreover the traditional activists that are still going at it alone are now on the ESG bandwagon. The relatively small hedge fund, Bluebell Capital Partners created a ‘one share ESG campaign’ in which the firm seeks to purchase just one share in companies that it believes have poor ESG practices. Chris Hohn’s TCI put forward proposals at Aena, Airbus and Alphabet calling on them to devise a plan to quantify and reduce emissions—inciting the Say-on-Climate campaign. And Elliott called on Evergy to redirect funds from share repurchases toward infrastructure spending, including renewable investments—a battle they won. These are just to name a few. The chart below (Source Skadden Report: Activist Investing In Europe 2022) shows how much activists themselves feel ESG will be prioritised in their campaign demands looking forward: a staggering 80% strongly believe that it will.
What it means for companies
One can draw the obvious conclusion that companies are at greater risk of activism now than they ever have been before. But what is less obvious is a solution for reducing the vulnerability.
The catch-22 of all of this for many companies is that investing in ESG will hurt profits, and conversely, that a laser focus on profits will ignore ESG. Companies therefore find themselves increasingly exposed to one face of activism the more they work on repelling the other.
Improving ESG commitments, transparency and performance in the context of a wider overall business strategy that serves to improve the financial position of the company, is of course the ideal solution. But it is one that takes time and a balancing of many factors that will no doubt not all be agreed on by directors or shareholders.
We are not after the ideal solution however when it comes to reducing vulnerability. As critical as ESG performance is to long-term value creation, what is more important in the short term when it comes to activism, is the direction of travel. A meaningful improvement in the E, S, and G, coupled with continuous investor engagement and capital markets communication should be enough to ward off today's activists, most of the time.
The trick is ensuring the Investor Relations team knows who the shareholders are on a fund-by-fund basis, has a compelling (and genuine) equity / ESG story, and is proactively communicating it to the markets. All the good work a company is doing with regard to ESG can be in vain if those three things aren't happening—because it is very likely key stakeholders won’t know the positive efforts being made.
Activists aren’t only funds that buy your stock with the intention of making material changes quickly. They are also your current shareholders looking to protect their investment for the long term. Identifying those shareholders and communicating with them clearly to highlight the positive ESG work you are doing is your best bet for survival. And that is not beyond the capabilities of any company.
As the Romans say, ‘Carpe Diem’.
CMi2i, the world’s leading forensic capital markets intelligence firm, specialises in the world’s most accurate Equity & Debtholder identification service and supports issuers and their advisors with their ESG investment, investor relations, M&A, AGMs/EGMs, corporate governance, shareholder activism and capital restructuring goals through its integrated approach. The company has supported more than 1000 corporate transactions and over 500 clients worldwide.