2018 was a record year for shareholder activism. Lazard, the world’s leading financial advisory and asset management firm, confirmed this in their recently published ‘2018 Review of Shareholder Activism’. The report highlights growing evidence of the continuing hold of activism and its continuous growth as a key issue within the board room. So, what do boards need to know about activism going forward?
Firstly, boards need to familiarise themselves with the data surrounding shareholder activism. Particularly prevalent in US and Canadian financial markets, research confirms that 2018 saw a strong rise in shareholder activism with 226 companies in the U.S. targeted compared to 188 companies in 2017. Activist funds also invested a record $65bn of capital compared to $62.4bn in 2017.
The Harvard Business Review noted that management ‘generally view activists…as bullies who publicly express dissatisfaction with management and demand changes in the firm’. Yet the changing the role of activist stakeholders remains ambiguous for everyone in direct contact with them.
Here are 4 key ways boards can shape up and avoid falling into an activist trap:
1: The picture is changing
Investor activism is changing and with that change that is happening well beyond the U.S. The EU in 2017 adopted shareholder rights directives that encourage shareholder participation, which will aid activism in the future while in Asia, Japanese Prime Minister Shinzo Abe has also encouraged activism as part of overall corporate governance reform.
The Financial Times this February dubbed this new form of activism as ‘the corporate equivalent of Viking colonisation’. According to financial experts these changes include:
- Pacing themselves: Activist investors are biding their time and settling down for longer periods that previously
- Boardroom lobbying: Board members may find themselves being at the receiving end of subtle targeting from activist investors
- Longer term growth objectives: Activist stakeholders are maturing their pace of business and biding their time for longer growth targets.
2: Remember it is about the Return
The Institute for Governance of Private and Public Organizations in Montreal in their comprehensive 8-year study of hedge fund campaigns against U.S. companies found that the return of investment in an activist hedge fund was lower than investment into a standard fund.
Professor Yvan Allaire notes that from his study, ‘hedge fund activists are not really that great at finance or strategy or operations’ and that their tenure ‘almost never includes any growth initiatives’. Boards need to keep this at the forefront of their strategy when combatting against aggressive activist investors tactics.
3: Remember Board Bias Can be Detrimental
Boards according to experts, can remain agile in their dealings with activist stakeholders by remaining aware of how board room biases and tensions are manipulative fodder for most activist stakeholders.
According to Lazard’s research, activist tactics for reshaping the boardroom focus on just that. Kai Liekefett, head of shareholder activism at law firm Sidley Austin advises that stakeholders need to be engaged with to be sure that they do not become activists.
Boards need to focus on increasing their awareness of internal biases and counteract them carefully. Former activists Frank Partnoy and Steven Davidoff Solomon note that from their two year long experience as shareholder activists at Tejon Ranch, they found that, “A manager who understands that activists really only have power when they have a lever to persuade other shareholders should engage early to learn whether the activists’ concerns resonate with the rest of the shareholder base.”.
4: Activist Investors are more likely to target female CEOs
Research from published by the American Psychological Association in 2018 found that women came under the firing line with more intensity than men in the C-suite. Data published by the Harvard Business Review found that while 6% of male CEOs were targeted by an activist during the period in question, the same was true for 9.4% of female CEOs. Experts conclude that this kind of attention directed at female CEOs may help to embed the message that female leaders are less effective and weaker than men, playing into the hands of tired gender stereotypes. Research from Lazard also notes than in 2018, the profiles of activist director appointments fell short of the overall diversity found within the S & P 500.