The rise to prominence of the activist investor has certainly made life more challenging in company boardrooms. By building up a sizeable stake in a business, the activist investor is able to press for change and force the hand of company executives.
Last week, Coca-Cola announced in its fourth-quarter earnings conference call that it aims to increase the use of reusable packaging across its entire drinks portfolio to 25% by 2030.
This came after activist investor Green Century Capital Management and shareholder advocacy non-profit As You Sow pressed hard for this change.
In the UK, Unilever’s attempt to buy GSK’s consumer health business failed after shareholder demands to pull the plug on its pursuit left the board with little option but to walk away.
Its botched £50bn bid drew the attention of activist investor Trian Partners, which promptly initiated a stake in the consumer goods giant. The $8.5bn hedge fund, controlled by Nelson Peltz, has a reputation for demanding boards to implement reforms – as Procter & Gamble previously discovered.
Demanding reform
Back in 2016, Trian Partners demanded a stronger structure, more accountability and development of new brands. After a drawn-out proxy fight, Peltz took a position on the Procter & Gamble board in 2018.
His influence on the board is reflected in strong numbers. In May 2018 the P&G share price stood at $72.43 – it has risen sharply since – now standing at $156.82.
It appears Peltz is now looking to drive change at P&G’s blue-chip rival Unilever.
Referring to the Unilever case, Dale Robertson, fund manager at Chelverton Asset Management said the board had flown a kite regarding the proposed acquisition of the GSK business but had been told in no uncertain terms by shareholders that the £50 bid (which was turned down by GSK) would not be pursued further let alone increased. “There was huge pressure on the board of Unilever and a clear message that the current management had to get things right.”
After being pressed to drop its pursuit of GSK, Unilever proposed a new organisation model resulting in around 1,500 job losses globally. This included a 15% reduction in senior management roles and a loss of 5% of lower-level management roles. The group insisted the cuts would not affect factory teams.
Activist investors swooping on cheap UK targets
Other big UK names have registered on the radar of activist investors.
Cevian Capital has built up a stake in Vodafone and been pressing the board to be more aggressive in its restructuring in an effort to boost performance. It has also gone after life insurer Aviva and beleaguered academic publisher Pearson.
GSK has itself become a target for US manager Elliott Advisors, which also has its claws in SSE and housebuilder Taylor Wimpey.
Andrew Millington, head of UK Equities at Abrdn, believes that there is good reason for activist investors to look this side of the pond as well as in the US.
“The UK market is cheap relative to most other equity markets across sectors and on almost every metric, so activists are seeing there’s significant money to be made in UK stocks.
“The UK’s corporate governance standards are world leading, meaning minority shareholders have the ability to exert influence on company boards and make change happen. If activists make a compelling case which persuades other institutional investors, then they have a good chance of succeeding.”
More meddling in UK plc affairs on the horizon
Sarah Ketterer, chief executive of Causeway Capital Management, a US-based asset manager calling for a boardroom shake-up at Rolls-Royce told the FT recently: “The UK is a bargain basement right now, compared to the US, where there’s too much money chasing too few deals.
“There’s a confluence of undervalued companies and good corporate governance,” she added. “This means that with the right amount of persuasion, companies will do what they need to do to reward shareholders.”
Iancu Daramus, responsible investment analyst at Fulcrum Asset Management, agrees that we are likely to see more US-style activist intervention in UK corporate affairs.
“With almost half of activist campaigns in Europe targeting UK plc in 2021, we anticipate this will remain an area of focus”.
Success rates
But how successful are activist interventions likely to be? There may be some high-profile victories which take the headlines – but in general does activism pay off often enough?
“The campaigns will be as varied as there are companies, but one notable change is the increased willingness of large shareholders to support – and even initiate – activism,” Daramus says.
“Pressure from beneficiaries, who are increasingly demanding a larger say in how their investments are voted, is also playing an important role, particularly with regards to ESG topics. In 2021, almost twice as many E & S proposals received majority support compared to the previous year.”
Over the 2020-21 proxy season, Fulcrum supported over 66% of environmental and social resolutions. “This illustrates our belief that companies being pushed to step up on ESG issues can leads to creating shareholder value in many cases. But not in all – the challenge is conducting the in-depth analysis to tell the difference.”
Moving past reputation for short-termism
As to whether, as an asset manager, he would avoid companies that are being targeted, Darimus insists it depends on the company.
“Research we have conducted with our partners … shows that, on average, companies could increase their share price by as much as a third, on average, if they brought their ESG practices in line with those of top-rated peers.”
He adds: “If we believe in the need for change, we will lend our voice and seek to collaborate with like-minded investors to make it happen.”
Shareholder pressure is not always feasible or even beneficial. For private companies – including family and state-owned enterprises (many in the fossil fuel industry) – shareholders do not figure in the equation.
While activist investors play an essential role in holding companies to account, they have (on occasion) been accused by company boards of seeking short-term returns that could potentially damage longer term corporate growth prospects.
The reality in 2022 is that whether the motivation for activism is entirely principled or not; boardrooms cannot overlook them.
