The popular image of the activist investor is a slick and merciless Wall Street financier, relentlessly pursuing financial reward, perhaps best epitomized by Gordon Gekko and his philosophy that ‘greed is good’ in the film Wall Street.
Much has changed since the 1980s, when that movie was made, and shareholder activism today is a popular and powerful investment strategy, with billions of dollars managed by specialist funds whose purpose is to change corporate strategy and hold management of underperforming companies accountable for their shortcomings.
Activist Insight, a consultancy, estimates that investors target around 750 public companies globally each year. The activists are often welcomed to the shareholder register by other investors, seen to be the catalyst to unlocking value, while at the same time they generate fear and loathing in the boardroom, which sees an activist intervention as criticism of company management, strategy or governance – or all three.
And the activist agenda is not restricted to public companies. The experience of the Abraaj Group, the Arabian Gulf region’s largest private equity firm, which has crumbled under attack from disgruntled investors that include the Bill & Melinda Gates Foundation, is a warning that private firms can just as easily come into activists’ cross hairs.
Critics and targets of activists argue that they have no proven leadership skills, no knowledge of managing a company and no industry experience beyond what they have gained by investing other people’s money. But whether you love them or hate them, activists perform a valuable function, bringing new thinking to corporate strategy and acting as the voice of the shareholder in the boardroom.
Activism is also on the rise. This year is the first where activist funds globally have outnumbered activist funds in the US. And markets where activism was previously unthinkable, such as Japan, are having to learn how to manage activist funds taking high-profile positions in listed firms: so far this year, 19 Japanese companies have faced public campaigns from international and domestic activists.
Leaving specialist activist investors to one side, there is a more recent trend in the institutional investment world, which is making activism far more widespread. This ‘universal activism’ is driven by the rise of ESG investment, the demand for diversity and equality, the appearance of climate risk on companies’ risk statements and the rise of ethical investing.
Perhaps surprisingly, the rise of ethical, ESG and climate elements in investment decisions are not confined to active managers. Increasingly they are driving the actions of passive funds, too: 10 exchange-traded funds with ethical rules have listed on the London Stock Exchange so far this year, compared with six in the whole of 2017, taking the total to 31. These passive tracking vehicles are actually active in nature, taking investment decisions based on ethical scorecards.
A typical example of the way fund managers are coming up with ever-more sophisticated ways of driving ESG and ethical considerations to the top of companies’ agendas comes from Legal & General Investment Management (LGIM), a $1 tn UK money manager. LGIM launched a fund in May this year that will allocate more capital to companies that score well for gender diversity at board, executive, management and workforce level compared with their weight in an index of about 350 large and mid-sized listed British businesses. Companies with neutral or bad gender scores will receive less capital. LGIM has put its money where its mouth is, seeding the fund with £50 mn ($66.3 mn).
Ethical investing is not new and some sectors have been in the sights of ethical activists for years, of course. The mining, defense, tobacco and alcohol industries have all had to deal with demands from activists that might seem to challenge their very right to exist. But if one lesson can be learned from these battles, it is that the firms that listen, understand and adapt to investor concerns have survived. Those that have tried to fight the advance of the activists have gradually disappeared.
Activism in the Gulf
Why should any of this matter for organizations and leaders in the Gulf Cooperation Council (GCC)? The simple truth is that the activism trend would not exist unless there was demand for it. Both passive and active fund managers apply ethical filters to their buy decisions because their end-investors demand it.
And the millennial generation demands a higher level of ethics and governance from its invested companies than their parents do. A YouGov poll of UK savers conducted last year found that 13 percent of 18-34-year-olds with a pension think it is their responsibility to ensure their money is invested ethically, compared with only 6 percent of 45-54-year-olds and 7 percent of the over-55s.
The demographics of the Gulf, with the younger generation far outnumbering the older, means this world view will only gain influence and traction here. And companies and their investor relations teams need to take this on board, understand the drivers – and adapt. Universal activism is coming to the Gulf. It will be welcomed by shareholders, facilitated by asset managers, and inspected by regulators, rating agencies and journalists.
Another reason GCC companies need to be aware of activism is that as US and European activists increasingly compete for targets at home, some are starting to seek new hunting grounds in emerging markets where their prey is less sophisticated. And three of the six countries of the GCC are now established members of the emerging market universe, where investor activism, scrutiny and tough questioning are part of the territory.
GCC companies should face up to this trend, and they need to adopt the best techniques to deal with activists very quickly. The plain fact is that the arrival of activists on the shareholder register is a given. Companies that acknowledge this fact and take steps to cohabit with the universal activists have a far better outlook than those that ignore the trend.
Oliver Schutzmann is CEO of Iridium Advisors