Recent Poll Says Outside Shareholders Bring Change: Other Factors Determine Extent
By Skytop’s Editorial Team / March 21st, 2022
Activist investors from outside of a company’s region continue to buy into companies to effectuate strategic changes, ones believed to increase performance.
According to Lazard’s 2021 Review of Shareholder Activism, published by its Capital Markets Advisory Group, M&A and board change remained the most common among global campaign objectives, consistent with multi-year averages. Not surprising to market practitioners, CEO turnover within six months of a campaign launch has been observed at a higher rate, especially in Europe. Do activist investors and institutional shareholders from outside a company’s region break through tradition and help company boards and management achieve a new level of realized potential?
The general answer is yes, they do.
But the debate continues on the level of impact, and under what conditions. In this analysis, we summarize the perspective over perspective of Skytop readers on this timely and relevant trend.
Question #1: If the shareholders of a company are no longer mostly located in a company’s locale, what is the most significant impact?
Slightly over half of the respondents (54%) believe that global shareholders drive shifting practices, allowing for new ways of addressing how to engage, especially in the areas of boards, shareholders and management. This seems consistent with the findings cited in Lazard’s review. Congruent with this, it’s reasonable to conclude that there would be a need to re-align values. 23% believe that this short term chasm will create new challenges in the engagement process, whereas 23% believe that changing expectations of company performance will reflect more of a blended perspective of local and global shareholders.
Corporate governance legal expert and Skytop Contributing Author, Arthur Kohn, disagrees, sharing that, “I don’t think that the geographic separation of a public company from its shareholder base in and of itself is likely to have predictable consequences for governance of the company.” Adding to this, Josh Black, Editor-in-Chief at Insightia, global expert and Skytop Contributing Author, argues that, “The mobility and ambition of activist investors and rapid globalization of passive strategies will likely test the engagement strategies of all companies in open markets over the next few years.”
In short, outside influence brings new engagement opportunities. However, it in and of itself is not necessarily the core driver of change.
Board director and investor, Steven J. Pully, offers that engagement strategy aside, outside investors bring new areas of focus for boards and management. Specifically, he states that, “Some new global shareholders will also focus more on areas of performance beyond stock price, focusing for example on ESG, governance, and regulatory issues in different ways than the company had previously confronted such issues.”
Supporting Arthur Kohn’s and Steven J. Pully’s points respectively, Japan-based activist investor executive, James Han, Partner, GO Investments, believes that, “23.08% is not that large of a change in expectations, perhaps fiscally, but the focus will be on new global practices on Corporate Governance issues.”
Law firm, Herbert Smith Freehills, offers the following insights taken from content published on its site, entitled, “Active Shareholders, Influencing Deals Remains Front-Of-Mind For Interventionist Investors”, concurs and adds that, “With increased focus on, and regulatory tightening of, corporate governance and ESG regimes, we expect activism to rise more generally in the region as the bar is lifted and investors seek to hold companies to account, including in the context of M&A deals.”
Skytop readers say:
Question #2: Do you expect that the globalization of shareholders will elevate standards of performance asked for by investors?
Respondents offer a less conclusive perspective on whether global shareholders elevate standards of performance. 46% have mixed views. 31% say yes, whereas 23% say no, that non-local investors raise the performance bar.
Eleazer Klein, Partner at Schulte Roth and Zabel LLP, is more conclusive than our respondents when stating in a recent conversation with Skytop Editor-in-Chief Christopher Skroupa, “And global shareholders are more used to holding companies accountable with tools available in many jurisdictions. It may not be a new standard, but it is a higher standard.”
Josh Black offers that, “Many investors are expanding their reach because they anticipate greater financial performance from previously underweight markets but are also bringing new disclosure and stakeholder management expectations.”
Steven J. Pully states, “In certain situations, the globalization of shareholders will change standards of performance for companies in those situations where a company’s global reach and popularity brings more than a focus on stock price.” He then adds that, “Some new global shareholders will also focus more on areas of performance beyond stock price, focusing for example on ESG, governance, and regulatory issues in different ways than the company had previously confronted such issues.”
Although investors are moving their capital into companies where they feel they can have an impact, the process of unlocking company potential can be more challenging than expected due to cultural and legal differentiators.
For instance, according to the Harvard Law School Forum on Corporate Governance, “In early 2020, another London-based hedge fund, The Children’s Investment Fund (TCI), launched its “Say on Climate” campaign (modeled after the “Say on Pay” executive compensation initiative), which has resulted in more than 20 companies, including Unilever, Moody’s, Canadian National Railway, Rio Tinto, S&P Global and the Spanish airports operator Aena, committing to hold Say on Climate votes.”
Another example refers to Prudential. Activist hedge fund Third Point successfully forced the multinational insurer to separate its U.S. business and its Asia business, arguing that the divestment would save costs and reduce the company’s carbon footprint.
Skytop readers say:
Question #3: Do you see the globalization of shareholders as a way to influence regional change for non-investor stakeholders?
About half of our respondents (46%) share that global shareholders and their new ideas will help companies manage in an ever increasingly fast changing world. Only 16% disagree, with more than one-third (38%) believing that their impact is mixed. They believe their influence depends on the needs of management and boards to gain outside perspective on what might disrupt their performance.
David Katz, Partner at Wachtell, Lipton, Rosen & Katz, added in a recent conversation with Skytop Editor-in-Chief Christopher Skroupa, “The potential impact of ESG on a company’s various stakeholders is unfolding as companies integrate ESG into their operations.”
Arthur Kohn adds that, “The globalization of share ownership is likely to reinforce the long-term trend that we have seen of concentration of ownership in the hands of large institutional owners. That, in turn, enhances the leverage for those large institutions to cause boards and managements to act in their interests, rather than the interest of other stakeholders, whether those interests are more local or regional, or are global interests focused on the environment, worker rights or other social issues. Globalization of share ownership will, therefore, I think likely lead advocates for softening of the shareholder primacy model to have additional headwinds to contend with.”
Josh Black adds that, “While investors often need the support of local governments to change corporate culture, there is no doubt that a greater mix of shareholder types can influence boards.”
Nestle Waters, now rebranded as BlueTriton Brands, their bottled water, and the State of California issue is one example. Hitting the press in 2017, and fast forwarding to recent news, The Guardian reported that, “California water officials have moved to stop Nestlé from siphoning millions of gallons of water out of California’s San Bernardino forest, which it bottles and sells as Arrowhead brand water, as drought conditions worsen across the state.”
Further from The Guardian’s April 27, 2021 article, the draft cease-and-desist order, which still requires approval from the California Water Resources Control Board, is the latest development in a protracted battle between the bottled water company and local environmentalists, who for years have accused BlueTriton Brands of draining water supplies at the expense of local communities and ecosystems.
This is one example of broader stakeholder activism that has converged onto the shareholder activism agenda. Activist investor Third Point argued that BlueTriton Brands is too comfortable with the status quo and was not keeping up with the pace of change.
Skytop’s readers say:
It seems that the impact global shareholders have on company performance is in areas beyond core financial considerations. In a broader sense this reflects emerging standards values embedded in ESG, climate change and long term value.
Please share your thoughts in the comment section below.
