The Changing Face of Activism

James E. Langston is partner and Claire Schupmann is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

As we enter 2021, shareholder activism continues to evolve. The traditional campaigns waged by repeat activists leveling familiar critiques will undoubtedly persist into the new year and beyond. But by now most companies are well-versed in the old activist playbook and have developed their own game plan. In past years, some became their own activist and dismantled or reshaped their companies before the first shot was fired. Others rightly believed their strategic plan was the right path and focused on execution while remaining on high alert and preparing behind the scenes in the event an activist emerged. And still others became ensnared in activist attacks and sought a truce unless the price of peace was too great. Against this backdrop, a new world of activism with a different set of rules continues to emerge. In the coming era, we expect that activist-like fire will come from new directions, shareholder engagement will become more visible and louder, and ESG and stakeholder purpose in many cases will be the tip of the spear. This is the activist landscape that boards must be prepared to navigate in 2021.

The New Constructivists and Activists

For the last several years, the lines between activists and other investors have continued to blur. Activists have sought to become private equity investors, long-only investors have adopted an activist mentality and now financial sponsors are turning into constructivists (and in some cases, full-bore activists). Financial sponsors are well-positioned to engage in their own brand of public equities constructivism. They have an abundance of capital to deploy with over $850 billion in dry powder reported as of Q3 2020. They also have a deep bench of investment professionals and turnaround experts with sector-specific insights and relationships capable of driving the M&A activity and operational enhancements that have become the hallmarks of activist campaigns.

In fact, last year several name-brand financial sponsors built significant stakes in public companies using activist-like techniques, such as continuing to amass their positions during the 10-day window after the 5% threshold was crossed but before the Schedule 13D filing was made and using derivatives to increase their economic exposure. We have also witnessed an uptick in large-cap financial sponsors acquiring stakes in public companies and confidentially filing for Hart-Scott-Rodino approval to increase their stake—another classic activist pressure tactic. Many of these situations have resulted in constructive engagements, with representatives of the financial sponsor welcomed to the company’s board of directors, and others have yet to spill out into the public spotlight. But other engagements have not been as constructive, with one $30 billion AUM private equity manager waging a short-slate proxy contest at a tech company and another activist fund joining forces with an independent financial sponsor to mount a hostile takeover at a property data firm.

As the market for buyouts and traditional private equity investments becomes increasingly competitive, we expect financial sponsors and other non-traditional activist investors to continue to become more active in their approach to engaging with public companies as an alternative method for achieving returns. Unsolicited acquisition approaches and bear hugs by financial sponsors will also continue to rise, and financial sponsors’ Schedule 13F filings will be monitored–much like those of activist funds—to track their next move. At the same time, more alliances between activists and financial investors can be expected to emerge and drive even more unsolicited M&A activity and hostile campaigns. The message to boards and management teams is clear:

  • Today’s investors are more active and engaged with boards than ever and we expect that trend to continue.
  • Not all financial sponsors are the same—while many will not behave like activists, some will. Companies cannot rely on the traditional categories of investor –g., activist, long-only, financial sponsor—as a predictor of behavior and objectives.
  • Companies must be nimble and prepared to respond to approaches by investors who have objectives and playbooks that differ from those of traditional activists.

Engagement Becomes More Visible and Louder

Today, more shareholders—including institutional and traditionally long-only investors—are harnessing the power of public disclosure to amplify the impact of their voices and votes. Last year, BlackRock dramatically ramped up its publication of voting bulletins profiling how it voted in high-profile situations and why. BlackRock also recently expanded its quarterly stewardship reports to disclose portfolio-wide engagement and voting decisions, including details on which companies it engaged, the number of engagements and the topics discussed. Vanguard and State Street are not as prolific—yet—but are also providing the market with greater insight to their engagement activities. Several long-only investors have followed suit, with Neuberger Berman announcing it will publicize how it will vote in advance of shareholder meetings at 25 more of its portfolio companies each year. At the same, pension fund managers—including the New York City Comptroller, CalPERS and others—have ramped up their demands to remake corporate America and effectively wield shareholder proposals as a weapon when their demands aren’t met. For further discussion of shareholder engagement developments, please see Shareholder Engagement Trends and Considerations in this memo.

Although different from traditional shareholder activism, this brand of activism is on the rise and can be quite potent. In this new era, boards and management teams should be prepared to do the following:

  • Use the increased transparency regarding shareholder stewardship activities to your advantage—learn from the successes as well as the mistakes of others.
  • Stay abreast of key shareholders policies and voting decisions—particularly at peer companies—to identify potential areas of focus.
  • Understand that what you say to shareholders—even if not an activist—can become public and structure dialogue with this in mind.

Shareholder Activism and ESG Activism Collide

In last year’s memo, we predicted that “stakeholder activism—or the convergence of shareholder activism and social activism—will continue and eventually move beyond the ESG realm.” In many ways, that’s exactly what happened in 2020, with impact and ESG-focused investment strategies increasingly becoming mainstream. In June, Inclusive Capital Partners—ValueAct’s former Spring Fund founded by Jeff Ubben—embarked on a mission to “partner with management and the boards of companies whose core business seek to achieve the reversal of corporate harm.” Later in the year, Engine No. 1–a new “impact-focused fund” led by former Andor, Jana and BlackRock executives–partnered with CalSTRS to launch a proxy contest at one of the largest U.S. energy companies for its alleged failure to adequately respond to evolving energy needs and emissions standards. At the same time, investment capital has continued to flow into ESG-focused investment strategies—according to a recent report, ESG capital has grown over 40% since 2018 and now represents one third of the $51.4 trillion in U.S. assets under management.

We expect each of these trends to accelerate in 2021. Activist campaigns focused on diversity and human capital management issues likely also will be in the cards. What should boards and management teams do? We recommend several measures:

  • Assess your ESG profile holistically and recognize it can be core not just to your corporate governance profile but also your long-term financial performance.
  • Be prepared to engage with stakeholders of all stripes—long-only investors, pension plans, governance gadflies, activists, etc.—and actively consider what they have to say and what actions they may take while doing what’s best for the business and stakeholders over the long-term.
  • View ESG as an area where you potentially can go on offense and not just play defense—attracting ESG capital can positively shape financial performance.
  • Recognize that you will be held accountable for delivering on ESG promises and so be prepared to practice what you preach.
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