The Significance for Boards and Managements of the JANA/CalSTRs Letter to Apple

Ethan A. Klingsberg is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here) and Who Bleeds When the Wolves Bite? By Leo E. Strine, Jr. (discussed on the Forum here).

Over the past couple of years, we have seen traditional, actively managed funds, such as Neuberger Berman, borrow activist tactics and push for changes to accelerate increases in share prices. In parallel with this arguable trend toward convergence between actively managed funds and activist funds, a chasm appeared to be developing elsewhere in the investor landscape as pension and passive strategy funds increasingly focused on “social good” issues, while brand name activist funds remained primarily focused on nearer term financial performance and returns. But the activists desperately need the support of the pension and passive strategy funds, as evidenced by the proxy contests over the past year where support from these funds was neither predictable nor easily locked up. The announcement on January 6, 2018 by JANA Partners, a high profile activist fund, and CalSTRs, an outspoken pension fund, that they have teamed up to accumulate a $2 billion equity position in Apple for the purpose of launching a specific “social good” campaign is the strongest indication to date that the magnitude of assets under management focused on social good matters cannot be ignored and that even a successful activist fund like JANA needs to burnish its reputation in this area. 

The letter from JANA and CalSTRs to Apple, which focuses on forcing Apple to figure out a way to mitigate the horrible impact on teenagers arising from overuse of smartphones, explains, in less cynical terms than this post, the rationale behind this convergence between the goals of maximizing shareholder value and pursuing social good, and emphasizes that this convergence is especially relevant in the technology sector:

“There is a developing consensus around the world including Silicon Valley that the potential long-term consequences of new technologies need to be factored in at the outset, and no company can outsource that responsibility….

“[T]here is also a growing societal unease about whether at least some people are getting too much of a good thing when it comes to technology, which at some point is likely to impact even Apple….

“[P]aying special attention to the health and development of the next generation is both good business and the right thing to do….

“Increasingly today the gap between “short-term” and “long-term” thinking is narrowing, on issues like public health, human capital management, environmental protection, and more, and companies pursuing business practices that make short-term sense may be undermining their own long-term viability. In the case of Apple, we believe the long-term health of its youngest customers and the health of society, our economy, and the Company itself, are inextricably linked, and thus the only difference between the changes we are advocating at Apple now and the type of change shareholders are better known for advocating is the time period over which they will enhance and protect value.”

Borrowing from tactics used in numerous campaigns aimed at forcing companies to change operational and financial strategies, JANA and CalSTRs announce in the letter their assembly of a team of experts on the issue in question and call on Apple to meet with JANA, CalSTRs and their experts and to form a committee to address this issue and, of course, for their experts to serve on this committee.

What does this development mean for Boards and managements? Just the way attention to “good governance” hot button issues has been critical to maintaining relationships with your long-term stockholder base, attention to “social good” matters is equally important. The activists are on to the social good angle and are aggressively building bridges with the institutional shareholder community on this front. Look out for activists, in their campaigns to disrupt corporate strategy to accelerate returns, not to hesitate to start leveraging perceptions of weaknesses by companies on “social good” matters into support for their campaigns. Ironically, a lot of the corporate governance provisions of which stockholders are most critical (e.g., dual class capital structures and classified boards) are those that can be most valuable for giving a board and management space to focus on “social good” and the long-termism praised in the JANA and CalSTRs letter.

In sum, there is definitely schizophrenia in the investor community: The activists are now sometimes posing as long-term, social good investors; the traditional actively managed funds are sometimes taking on the role of activists; and the pension and passive strategy funds that purport to be focused on the long-term are continuing to advocate against corporate governance provisions that can give boards and managements space to play the long game. Attention to your approach to corporate governance and social good issues, and understanding their relationships to your baseline fiduciary duties and your stockholder profile, is an important step toward being able to navigate this investor landscape.

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