8 blows in the activist battle royale
A version of this article also appears on corporatesecretary.com
At Skytop Strategies’ shareholder activism conference in New York last week, activists, board directors, corporate secretaries, IR experts and a handful of indexed pension fund giants mixed affably with only the occasional snarl or bleat. Adding to the surreal nature, the two event co-chairs dominating the day were, in the words of one speaker, the ‘opposing behemoths of the activist debate’: Wachtell Lipton, the champion of target companies, and Schulte Roth & Zabel, the activist’s samurai of choice.
They came to consensus, in a fashion, conceding on one side that ‘not all activism is bad’, and on the other, that ‘not all activism is good’. Activists are now constructivists and, instead of fighting them, boards should work with them.
The agenda was put together with the help of Jared Landaw, chief operating officer and general counsel at Barington Capital Group, an activist fund known for its successful campaigns at Darden Restaurants, Dillard’s and the Jones Group. Landaw has organized a number of activist investing conferences, including for the New York City Bar Association, always with the mission of bringing together thought leaders from both sides of the aisle.
‘The program was put together with a deep respect for the public company shareholder model. It may not be perfect, but it’s the best model we have,’ Landaw says in an interview. ‘The point of commonality that everyone in the room shared is an interest in making it function better, particularly at underperforming companies. Should shareholders have the ability to express their views and suggest changes? If the answer is yes, then exploring how it can be done in a way that is good for companies, good for shareholders and good for the economy as a whole makes a lot of sense.’
Skytop’s founder, Christopher Skroupa, who previously organized activist investing conferences for IMN, a conferencing company, has been exploiting his wide network of contacts to stage events mainly around corporate citizenship and sustainability since launching his firm in 2013. Full disclosure: IR Magazine was a strategic partner in the event.
There were as many different ways of taking in the conference as there were types of participants, so here’s but one:
1. After a years-long move toward settlements instead of proxy fights, a scary counter-trend is revealed: some activists wish they hadn’t settled. They may have placed a nominee or two onto a board but they feel that if they had held on for a proxy contest they could have scored a real mandate for change.
On the other side, a lot of long-only investors say companies have become skittish and are too fast to acquiesce. ‘If the company is comfortable with its business plan, knows it has the shareowners’ support and believes it has the right folks in the boardroom, we encourage the board to have backbone and continue to articulate that,’ cheered a pension fund.
2. A down market is good for activists, even though some have seen their holdings hit hard in recent months. The reason is simple: activist investors are value investors, so lower valuations produce attractive targets. Some observers predicted there will be a shakeout of smaller funds while bigger ones get additional investment. ‘If you have dry powder, it’s a great market. If you’re all invested and you have redemptions, it’s a crappy one,’ said a panelist.
3. Boards see the ranks of activists as tiered, with nine or 10 respectable – even desirable – ones, and a few dozen more ‘ankle-biters’, or smaller upstarts looking to get attention. A hidden benefit to companies: some activists are producing ‘really solid’ board nominees.
4. Even though there was a lot of airtime given to shortening activists’ 13D reporting window from 10 days to one, a well-known Wachtell Lipton hobby horse, most at the conference said it’s a dying cause and the SEC won’t budge.
5. Companies often see their main vulnerabilities to activism in performance, strategy or capital allocation. But activists and their advisers are obsessed with governance factors like term limits and board refreshment. Succession planning, diversity, over-boarding and staggered boards were also much discussed, while proxy access barely came up.
6. Corporate America’s shift from long-term investment to short-term shareholder payouts was invoked throughout. ‘The tradeoff of activism has been returning capital to shareholders instead of investing for the future,’ said one lawyer, inciting good-natured debate. But ‘it depends’ was generally the conclusion, with a pension fund saying, ‘We’re happy when companies want to return capital to us but we have to have a long-term vision.’
7. The massive rise in passive investment also got a lot of mentions, with most experts viewing it as a challenge for activists because index funds tend to vote with management. One activist investor said the level of support index funds give to activists was at an eye-opening low level. On the other hand, the fact that BlackRock voted with activists in 39 percent of last year’s 18 biggest proxy battles was seen by some as encouraging growth.
8. One thing all sides agreed on was the overarching importance of communication and engagement. ‘Every company, regardless of whether there are activist funds in your shareowner list or not, should be proactively articulating your business strategy for creating long-term value, and how your capital allocation supports it, as well as how the board composition is aligned with the business plan and watching out for risks,’ said a prominent investor.