August 2021 | 

Shareholder Activists and the Targets: A Perfect Storm

shareholder activists and the targets

The number of activist shareholder campaigns is way up this year, and if the pace continues, it could be record-setting. For investors seeking to influence change by funding activists, and for those working with or advising activists, knowing who to target in an increasingly crowded and competitive field is critical. For those on the corporate side hoping to fend them off, understanding their criteria, and how we got to the current level of activity, is crucial. A new program from Wharton’s finance department provides an in-depth look for both sides with an eye on the ultimate goal: creating value.

A Perfect Storm

Wharton finance professor Kevin Kaiser, who co-directs Shareholder Activism: Activating Change for Value Creation, says a few key factors are driving the increase in activist campaigns. First, “companies were given a reprieve from fixing fundamental problems in 2020. COVID gave them cover from sub-par management, and activists were relatively quiet. They’re not going bankrupt, but they’re operating with significant problems and behind on addressing them, and their share price may be down.”

Second, he notes that there is a lot of money in the system, so companies that are destroying value have been getting away with it. “Government liquidity may have given them cover, so they are able to keep financing themselves. Their employees are happy because they have jobs, and customers are happy because they’re still getting the product or service. On the surface everything looks okay, but as Warren Buffett said, ‘Only when the tide goes out do you find out who’s been swimming naked.’ Activists see that management is not doing its job and may step in to address it.”

Third, activists are targeting more large companies compared to previous years — and, according to a report by Lazard, those activists now include smaller funds, which are “increasingly leveraging sophisticated strategies to gain broad shareholder support and successfully target large-cap companies.” In this perfect storm, no one is safe.

ESG (Environmental, Social, Governance) and Activists

Kaiser says that while the Wharton program focuses most closely on governance issues, environmental and social ones are closely related, and firms that ignore them do so at their peril. “In terms of governance, activists look at board composition, independence, diversity, remuneration, and separating the chairman from the CEO role.”

But good governance also includes listening and being accountable to every stakeholder. When it comes to environmental and social justice issues, that’s key because, as Kaiser explains, “if it’s something your employees and customers care about, and you’re not addressing it, you’re underperforming. You should be continuously adapting in response to their concerns, while making management decisions that support the value of your company.”

The latter point is an important distinction because there are many environmental and social justice concerns, but the choice of what your stakeholders focus on is arbitrary — and tending to your company’s value doesn’t require you to address all of them. Here’s an example: plastic straw bans began about five years ago in an effort to reduce pollution and protect oceans and marine wildlife. Their use is now prohibited by companies and cities around the world. But the production of paper used for books and newspapers is one of the largest sources of air, water, and land pollution in North America — and there is no movement to ban books.

When it’s clear that environmental and social issues are important to your stakeholders, addressing them is key. “The board on its own doesn’t lead the charge,” says Kaiser, “but responds to society. It has an obligation to address these issues when they have an impact on the value of the company. If you’re not addressing them in a way that activists agree with, they will step in and try to push you to do it. That’s what’s happening with Exxon now. The company is under attack because a lot of activists think they are not responding effectively or quickly enough to climate change.”

Change or Die

Intensifying the perfect storm, the pandemic brought a number of environmental and social issues to a head, and large groups of stakeholders are demanding, and creating, radical change. To those issues, Kaiser adds rapidly advancing technologies and regulatory demands — all of which companies must address. “The whole world is changing,” he says. “It can’t look like it used to. If you don’t have good governance and you aren’t adapting, you will quickly get into trouble. Even without potential pressure from activists, if you aren’t changing, you may be killing your company.”

Kaiser says the notion that activists represent only shareholders is a false one — and ignoring who they are and what they want can get even well-managed companies in trouble. “Activists are the voice of the people,” he explains. “They represent customers, employees, suppliers, and environmental and social causes. If you destroy value, it affects every one of these groups.” And that means you could be the target of a future campaign.