Activist shareholders have become one of the most significant forces in the field of corporate investment, and their influence deserves some analysis.
Firstly, though, it is important to set out exactly what an activist shareholder is – and isn’t.
The label instantly conjures up images of social or political activism, involving large marches through major cities, sloganeering placards and rousing chants. However, this is somewhat misleading.
While activist shareholders who are trying to draw attention to particular social or ethical causes are part of the picture, they are only a relatively small one.
At a broad, mainstream level, activist shareholders are concerned primarily with corporate governance – ensuring that firms optimise themselves as profit centres for the maximum benefit of their wider, shareholding communities.
That tends to involve announcing themselves as stern critics of the companies concerned, as a means of getting the results they are looking for.
So, how does that work?
One of the most remarkable things about activist shareholders is that they don’t always hold large stakes in the firms they are attempting to influence.
Instead, they use the megaphone of publicity as a means of leveraging a corporate’s inherent desire to do the right thing by its investors – thereby breaking through pockets of resistance to fresh ideas that may lurk within the senior management team.
This is typically achieved via three methods, which often run in parallel:
1. Demands An activist will push for a specific move that they consider will remedy a certain part of the business that is currently underperforming, or even outright failing. For example, they will lobby for the replacement of a specific executive, or for the adoption of a new strategy. In some cases, a senior figure from the activist side will press for a seat on the corporate’s board, in order to have a greater voice there. Each demand will typically be accompanied by a press release, or similar announcement, enabling the activist’s request to gain traction in the media.
2. Campaigns These are far more sweeping, concerted efforts to achieve change, and often occur when an activist has a laundry list of dissatisfactions with multiple areas of the corporate’s leadership, strategy and even structure. A campaign typically encompasses a whole range of demands, and will often be supported by a media blitz that will require a significant commitment of resources on the activist’s part to initiate and sustain.
3. Proxy contests To boost their chances of success, an activist may attempt to rally support for their demands among co-shareholders, by reaching out to them and seeking to utilise their proxy-voting power on key issues in corporate ballots. In this way, the activist may garner a loose coalition of multiple shareholding entities that are broadly sympathetic to their views and assertions.
As you may have guessed from the sheer effort that activists put into making their presence felt, they are extremely unlikely to be individual shareholders.
Rather, they are corporates that have chosen to invest in other corporates. Indeed, many of them are dedicated investment funds. And, crucially, their influence is growing.
According to recent figures from specialist market intelligence firm Activistmonitor, the UK was by far the busiest European nation for shareholder activism last year, with 23 campaigns launched, compared to 20 in 2017.
That rise included a pickup in the industrial sector of 156%.
Some of the most widely publicised instances of UK-related shareholder activism in 2018 were:
1. Vulcan Value Partners v GKN As GKN’s largest shareholder, investment firm Vulcan urged it to reopen talks with turnaround specialist Melrose Industries, following GKN’s decision to reject Melrose’s £7bn cash offer for the company.
2. Elliott Management and Sachem Head v Whitbread A pair of hedge funds pressured the UK’s leading hospitality firm to sell off Costa Coffee, which Coca-Cola subsequently purchased for £3.9bn. The sale spurred a double-digit rise in Whitbread’s share price.
3. Gatemore Capital Management v Wincanton In the spring of 2018, investment house Gatemore lobbied logistics provider Wincanton to divest one of its two primary divisions. In Gatemore’s view, Wincanton’s structure was at odds with itself, consisting of an asset-light, low-margin retail and consumer arm with open-book contracts and a closed-book, asset-heavy and high-margin industrial and transport wing.
4. Crystal Amber Fund v De La Rue Many people would not have heard of banknote printer De La Rue until it hit the headlines in April last year for failing to secure a government contract to produce the UK’s post-Brexit blue passports. Following that debacle, Crystal Amber pushed for a series of changes at the firm to make it more profitable, warning that it was ripe for a takeover. Crystal Amber co-founder Richard Bernstein told the media: “If you set this business up from scratch with the contracts it had, and its customer base, you’d be looking at £900m to £1bn value [but] the market values it at £530m.”
5. Sherborne Investors v Barclays After taking a mere 5% stake in Barclays in March last year, New York-based Sherborne immediately began an aggressive push for fresh thinking at the bank, which it considered to be underperforming. In particular, Sherborne sought a boardroom seat for its high-profile leader, Edward Bramson. While Barclays rebuffed him in December, Bramson reiterated his demand as recently as January.
In just those five UK case studies, there are a variety of reasons why the relevant shareholders staged their interventions, with each case revolving around big decisions, big brands and big money.
But the UK share of this phenomenon is only part of a wider story.
According to research from Activist Insight, in partnership with law firm Skadden, by the end of Q3 2018, activist shareholders had issued demands to 112 companies across Europe – 17% of which are valued at more than $10bn.
And in a global review of shareholder activism throughout 2018, law firm Schulte Roth & Zabel pointed out: “The number of companies publicly targeted hit record highs in the US, Canada, Japan [and] Australia… Non-US targets made up a record haul of 47%, passing 400 for the first time.”
It is important to note that activist shareholders are becoming increasingly adept at using social media to drive interest in their campaigns.
In a recent article at Ethical Boardroom, lawyers at Olshan Frome Wolosky’s Activist & Equity Investment Group pointed out: “Shareholder activists have the ability to gain a significant advantage in election contests by hitting social media to communicate with shareholders and solicit votes.”
Ways in which that may be expressed include:
Once traffic from those channels has started to come in, the piece explained, an activist can examine the analytics generated by audience visits, then tweak and refine its communications in accordance with the results.
The lawyers pointed out: “In the US, notable examples of social media action during the 2017 proxy season included Elliott Management’s successful activist campaign at Arconic and Pershing Square’s proxy contest at Automatic Data Processing. Outside the US, Elliott Management used Facebook in its campaign to maximise value at BHP Billiton.”
According to Iain Dey, a senior director at business-PR giant Edelman, the professionalism that activists are applying to their work is winning fans and nurturing potential converts.
In a November 2018 column for City AM, Dey noted: “A staggering 85% of British investors say that they are willing to work alongside reputable activist investors to force change at stilted companies, according to the latest annual Edelman Institutional Trust Barometer – and 75% of fund managers say that they are interested in employing activist tactics themselves.”
Crucially, he stressed: “Investors also reckon that 82% of companies are ill-prepared to deal with this activist revolution, which gets bigger by the day.”
That lack of preparedness can lead corporates to make rookie mistakes that risk hurting relations between themselves and the activists that have approached them.
In a May 2018 piece for Harvard Business Review, corporate-law professors Frank Partnoy and Steven Davidoff Solomon wrote: “Unfortunately, when a CEO learns that an activist has bought a substantial stake, they typically call outside counsel to mount a defensive strategy.
“What we can tell you, based on our expertise as lawyers and experience as investors, is that the moment one party calls in outside counsel and puts that counsel forth openly and in meetings, any hope for good relations walks out the door.”
Dialogue is key to avoiding a warlike atmosphere, they noted: “CEOs need to engage activists, but without capitulating to every demand. Truth and transparency can do much to head off unnecessary toxicity.”
The professors advised: “Remember that an activist shareholder probably has been preparing for months before announcing a campaign… Ask them: Are they simply planning an easy fix or trick, like a capital structure change or dividend payout? Or do they have valuable operational insights? Is there some pre-emptive action you might take to address their concerns?”
They added: “Preparing for an activist [also] includes thinking about transparency and media scrutiny. Ask yourself what would happen if all of your conversations with shareholders became public.”
Click here for the full Activistmonitor report.
Matt Packer is a freelance business, finance and leadership journalist