Activist Activity–The Shifting Tides Of Shareholder Engagement In The U.S. And UK.
While standards, regulations, and styles vary, we are witnessing an increasing number of parallels between U.S.- and UK-style shareholder engagement, particularly due to an increased acceptance of activist campaigns.
In the early days of shareholder activism, there were markedly different activist campaign strategies in the two jurisdictions—the U.S. associated with more hostile, public proxy fights, and the UK often reaching settlement behind closed doors. As such, the question often arises: How different are European and U.S. activist practices?
David Trenchard, founder of David Trenchard Consulting, believes this places inaccurate limits on activism as a single strategy or style. “What I think people mean when they ask this question is: ‘Will we see aggressive U.S.-style proxy battles in Europe?’ The answer to that is that, whilst aggressive approaches can’t be ruled out, they are far less likely to be the starting point in Europe.”
The UK may never see such highly publicized, media-driven campaigns as that of stereotypical U.S. activist investors, though Jan Weber, Managing Partner of Morgan Stanley, says we’ve seen a “big convergence in the activism styles of both countries in recent years.”
“While there has been a long tradition of extensive shareholder engagement behind closed doors in the U.K, we have recently witnessed increasing willingness of U.K. institutional shareholders to seek a public forum for the right cause,” he says, adding that the shift goes both ways: “If you look at the U.S., there is a trend away from a focus on proxy contests towards European-style settlements behind closed doors.”
From Hostility To Viability—The Growing Acceptance Of Activist Investors
Andrew Honnor, Managing Partner of Greenbrook, recalls the “natural deep skepticism” between management and activist investors in Europe two or three years ago. “That is no longer the case,” he says. “I think now in Europe if you run an activist campaign, and you explain your case, you will be given the benefit of the doubt and there’s no longer the fundamental innate hostility toward activists that there was.“
In the United States, 2016 saw a slight decrease in the number of U.S. activist campaigns, but that figure has almost doubled in the UK. “The UK was the scene of 43 public campaigns in 2016, compared to 27 in 2015, based on data from Activist Insight,” Weber says. “I think it’s a remarkable outcome if you consider that we had the ‘Brexit’ referendum somewhere in between, and some macro uncertainty and forex volatility as a result, and activity around activism was not deterred.”
“The concept of proportionality is widely different between U.S. fights and European ones, where shareholders in Europe expect an activists demands regarding the level of board representation to be proportionate to the level of shares held,” says Cas Sydorowitz, CEO of Georgeson. “In the U.S. it is far easier to get several directors elected even when activist has less than 5% of the issued share capital.”
According to Lazard’s quarterly “Review of Shareholder Activism in 2016” report, there has been a slight decrease in the overall number of activist campaigns in the U.S. However, a record number of shareholders initiated campaigns for the first time. Thirty-seven investors engaged in public activism for the first time, making up a quarter of all campaigns.
As activist activity increases in frequency, companies are becoming better equipped to reach settlement, resulting in significantly shorter time periods between a campaign’s inception and its conclusion—the average settlement time is down from 146 days in 2013 to 60 in 2016.
“With the demonstrable success of shareholder activists and a growing recognition that they can and do behave in a way that benefits all shareholders, traditional investors are increasingly welcoming of activists alongside them on the register and are keen to work with them,” Trenchard says. “Critically, however, this only works where the activist has built up a relationship of trust.”
Management-activist collaboration is becoming increasingly evident as activists become less aggressive and more measured and reasoned. “ What you want to do is be seen as an investor, a long-term investor with legitimate concerns, not a short-term opportunist,” Honnor explains.
As we see an increase in activists designing comprehensive strategy geared toward long-term value, the stereotypical activist is gradually departing from the antiquated corporate raider stereotype. We find that companies seeking better engagement tactics are occasionally turning to activist investors to facilitate long-term value.
“Activist investment funds usually have the mandate—and consequently the resources—which allow them to undertake deep, forensic analysis which broader portfolio managers are simply not able to attempt,” Honnor explains.
Disclosure As Transparency—Measuring the Window
Weber finds that ever-improving technology could be a catalyst for higher demand on increasingly frequent disclosure. “With ever improving technology, systems and controls are we heading towards a business world where companies are compelled to publish monthly, weekly, or even daily trading updates electronically? Once it becomes technologically feasible, is it desirable?”
Regulated information is mediated to increase efficiency—it is up to the companies to provide comprehensive reports specifically filtered to relevant information. While a certain strategic repositioning or operational restructuring may seem to produce little quarterly return, Weber explains, it may still be in the interest of long-term value creation.
“There is the question as to whether [institutional shareholders] are equipped to assess these strategic opportunities and see beyond quarterly performance benchmarking: Are they really equipped to be the stewards in stormy water for these companies? The result is that the professional activist shareholder with vast resources and analytical capabilities is better suited to help these companies actually achieve long-term value creation,” he says.
The outcome depends on whether the activist employs a “quick-win playbook” of deconstructing a company or putting it up for sale, Weber continues: “They need to show that they’re in for the long run.”
Navigating The Fourth Estate—Media Relations In Activist Campaigns
Trust can be established between issuer and investor, but the media both in the U.S. and the UK will determine the reputational repercussions of an activist campaign.
“The European media are becoming much more aware and understanding of the different kinds of activist, but, what I would say is, if you argue that there are very logical investment arguments for most activist approaches, I think you can differentiate yourself by the tone and style of how you engage,” Honnor says. “The financial media can be extremely influential during the argument to the attention of stakeholders, and I think particularly if there’s a strong retail investor base, deploying the argument effectively with the financial media can very helpfully advance the case in terms of the logic and the strategy that you want to deploy.”
Creating a preliminary framework anticipating an activist campaign ensures minimal public relations fallout, Trenchard says, especially considering the level of media manipulation involved in the modern activist approach.
“Successful activists understand the value of good PR and will have sophisticated communications strategies and processes in place as well as developed relationships with the opinion leaders in the media well before an engagement becomes public,” he explains.
The role of media in company reputation is not limited to potential activist bids. As technological advances continue playing an exponentially relevant in corporate governance, cyber breaches have become a larger component in reputational defense.
“In a different situation, unimpressive media performances in the aftermath of a breach have significantly undermined not only a CEO’s standing, but triggered customer attrition and significant downgrades to forecasts,” Benedict Hamilton, a Managing Director at Kroll says.
Above and Abroad—Engagement Trends Ahead
As we move into a new age of engagement with shifting trends and standards, activism continues to top the agenda globally for issuers and investors, both passive and activist. “Europe remains a magnate for activists with the UK being one of the markets most likely to see more campaigns.” This, Sydorowitz explains, is driven by a heightened level of transparency in the markets combined with higher levels of communication among investors.
Hans-Christoph Hirt, Executive Director and Co-Head of Hermes EOS, has witnessed a significant change in engagement practices in Germany in particular. “Historically, investors could thus hear from the chair once a year at the annual general meeting. Practice—at least among larger German companies—has changed significantly over the last decade, partly because investors, not least those from abroad, have sought dialogue with the chairs of supervisory boards.”
Like Germany, there had been limited interaction between board members and investors in the U.S. until a few years ago. An analysis of recent trends in engagement shows that executive compensation continues to rank high on the list of concerns for investors, given the implementation of say on pay. “Shareholders are under great political pressure and client pressure to hold companies to account for seemingly excessive pay,” Sydorowitz says. “The alignment between executive pay and performance for shareholders is a significant metric being analysed.”
Sydorowitz also predicts that the U.S. will see a major shift in activist trends, given the new presidency. “It is worth noting that Carl Icahn is an advisor to Trump, and is himself one of the great activist investors who has moved share prices at some of America’s largest companies with a simple tweet.” While he may not be sure whether or not Trump’s presidency will impact activists directly, Sydorowitz believes that some of the largest U.S. activists will begin looking overseas for potential target companies.
Regardless of recent developments in activist practices and standards, Hirt maintains that one element of shareholder engagement still stands: “There is high-quality academic evidence that shows that engagement pays off financially and non-financially.”
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.