The trends in activism during 2017 have vastly contrasted those of 2016, where the size of the companies, and the amounts invested in each situation, are much larger. On top of that, activist investors have been focusing on targeting CEOs as well.
We spoke with Josh Black, the Editor-in-Chief at Activist Insight, a specialist provider of news and data on shareholder activism. For more information, go to www.activistinsight.com.
Christopher P. Skroupa: What have been the main trends in activism during 2017?
Josh Black: A number of things stand out.
First is the size of the companies targeted, and the amounts invested in each situation. Procter & Gamble is the largest company by market capitalization where an activist, in this case Trian Partners, has initiated a proxy contest. CSX and Automatic Data Processing both have market capitalizations above $40 billion. Bristol-Myers Squibb, which has a market cap of around $90 billion, settled with Jana Partners earlier in the year.
All of this is a marked contrast from last year, when there was a real dearth of larger targets. Historically, the growth of activism has been charted at least in part by the ability of funds to target big companies, and last year there was a view that the larger companies had protected themselves by being more proactive about making changes. It turns out that wasn’t exactly the case this year.
The second thing that stands out is the number of campaigns that revolve around a change of CEO. To add to CSX and ADP, there were quite brutal assaults on the leadership of Klaus Kleinfeld and Sally Smith at Arconic and Buffalo Wild Wings respectively. Jeff Immelt also left General Electric shortly after Trian Partners set stiffer targets for his annual bonus, having made clear that it was not happy with the pace of change.
Skroupa: Why have activist campaigns been so focused on targeting CEOs this year?
Black: There are different reasons for changing a CEO. Usually activists feel that a longstanding incumbent wedded to traditional ways of thinking is an impediment to transformational change of the kind that they are pursuing. The campaign at Buffalo Wild Wings, for instance, was really about transitioning to a more franchise-based model for its restaurants. Calling for the CEO to resign as the vote approached crystallized the choice that shareholders had to make and gives the activist more leverage in the boardroom.
Other reasons abound. CSX was an opportunity to introduce a very different kind of CEO, Hunter Harrison, who comes with his own operating philosophy. In some cases, activists just want better oversight if they feel performance has been slipping over a long period.
Another innovation has been running with an announced CEO candidate. At CSX and Arconic, this was made explicit, although neither was on the activist’s slate going into a proxy contest, and both situations ended with changes of management and settlement agreements. It’s a tactic that can add credibility, and possibly prove expensive. The activist has to find the candidate and if the campaign fails, it could be left with a bill for indemnifying the candidate against lost earnings from a previous post.
Also, targeting a CEO from the outset arguably sets a higher bar. Recently, a partner at Skadden Arps called for proxy advisers to be tougher on activists who propose removing CEOs from boards in proxy contests. At Procter & Gamble and ADP, activists have sought to dispel the impression they want a change in leadership. One risk in an activist campaign is overshooting; demand too much change and institutional investors will get nervous about the situation they might be left with.
Skroupa: What else has been notable about proxy contests in 2017?
Black: Primarily the cost. Based on proxy statement disclosures, activists and issuers expect to spend about $146 million in aggregate this year, which is close to the estimates for the past two years combined – and does not include estimates for ADP, where final proxies are only just being filed.
Admittedly, a lot of that figure is accounted for by Trian Partners and Procter & Gamble, which just goes to show what a windfall a mega cap proxy contest is. Trian is estimating it will spend three-times what it said it would spend at DuPont two years ago and Procter & Gamble has hired two proxy solicitors – the first time I can see that happening in a proxy fight since 2009. The massive retail component on the shareholder register and attendant need for repeated mailings, social media advertising and communications outreach really ramps up costs. When activists are laying out a few billion dollars on an investment and pitching everything on a big change in the company’s strategy, these costs are largely a drop in the bucket.
Of course, below the larger cap companies, typical proxy contests cost anything from a few hundred thousand dollars to about $4 million and there’s little sign of rampant inflation. Smaller activists running their first campaigns might wince at the costs if they lose, but both sides will say the biggest expense is the time and distraction.
Josh Black will be speaking at Engagement and Communication on Sept. 7, as well as Global Shareholder Engagement & Activism on Sept 28 and 29.
Black will be a moderator for Concurrent Breakout Session Findings Panel at the Sept. 7 program, and a moderator for It Only Takes Two: The Latest Tactics Used by Activists to Redirect a Board.