Activists are Knocking
By Julie Neitzel
Over the years, changes in regulations and the public marketplace have prompted investors to voice their concerns in the boardroom. Shareholder activism is an established asset class with constant growth, and activist investment funds comprise an asset base in excess of $200 billion. While it might seem as though activism is a recent phenomenon, it has been underway for more than nine decades.
The first credited case of activism took place in 1927, when Benjamin Graham pressured Northern Pipeline Co. to distribute excess cash to shareholders. He ran a proxy fight to put himself on the board of directors at a time in which intervening in a company’s governance was a unique path for fund managers. Graham won his proxy battle the next year and eventually became one of Warren Buffett’s mentors.
Activism generally involves shareholders of a publicly traded company who want to instigate corporate change. That can include “light activism,” such as submission of a shareholder resolution, or “heavy activism,” which can entail changes in board members or corporate strategy.
Institutional activists include hedge funds such as Elliott Management Corp., which has undertaken campaigns for decades against major organizations like Hess, Comcast and Samsung, and the country of Argentina. BlackRock Capital Investment Corp., an asset management firm with more than $5 trillion in assets, maintains a dedicated investment stewardship group that centralizes annual proxy voting. That creates a powerful voice in more than 150,000 proxy votes each year, with a mission to enhance and protect the long-term value of client assets. Institutional investors—such as BlackRock, Vanguard and the California Public Employees’ Retirement System—own more than 70 percent of U.S. large-cap stocks, which enables significant impact in the proxy voting process.
While the most-prominent activism involves large companies such as Apple, Herbalife and Clorox, nearly 75 percent of it is directed at smaller companies, those with market capitalization of less than $1 billion, says Keith Gottfried, a Morgan Lewis partner who leads a national activist defense practice. He says activism is a complex phenomenon and that boards should be aware of it and prepared for it.
Activists generally focus on unlocking value for shareholders by identifying misaligned executive compensation, ineffective management and governance, financial underperformance, lack of proper communication of long-term strategy and other operating issues.
It is largely a U.S. phenomenon, but it’s spreading. Recent high-profile cases in Europe include AkzoNobel and ThyssenKrupp. The challenge with international activism is that corporate law varies by country. Mastering the local rules of the activism game will create new opportunities across the globe.
Given the expected continued growth of shareholder activism, corporate boards can most effectively prepare by practicing good corporate governance, effective shareholder communications and appropriate financial performance, and “thinking like activists.” ↵
Julie Neitzel is a partner and adviser with WE Family Offices in Miami and a board member of the Miami Finance Forum, The Miami Foundation, the Florida chapter of the National Association of Corporate Directors, and Heico Corp. Contact her at julie.neitzel@wefamilyoffices or 305.825.2225.