Active managers ‘overwhelmingly’ support shareholder activism

Jul 09, 2019
Poorly governed company more likely to lose against activist, notes new SquareWell Partners study

Almost nine in 10 active managers (87 percent) say shareholder activism is a useful force in the market, according to a new study from SquareWell Partners.

The survey takes in the views of active asset managers with approximately $10.4 tn in assets under management. 

Of the many goals set out by shareholder activists, board-related, governance-focused activism is most likely to garner support from active asset managers, at 79 percent. This drops down to just 53 percent for board-related, strategy-focused activism. M&A activism is least likely to get the support of active asset managers, at just 21 percent.

Despite the high levels of overall support for shareholder activism, SquareWell notes that reservations remain. On the activist side, more than half the active managers surveyed say ‘activists care only about their interests, which tend to be short term’ (58 percent) and ‘activists fail to consider the entirety of the business’ (53 percent). 

The survey also highlights criticisms around the way companies deal with activists. Just over a quarter (26 percent) of the active managers surveyed complain that ‘board and management cater to activists’ demands too quickly’ or that activism ‘distracts the board and management’s attention’ (21 percent).

The research further looks at the ways in which active asset managers make decisions on whether or not to support an activist’s campaign, highlighting a multi-pronged approach that takes in the arguments of the activist and its investment time horizon, the views and opinions of a range of sources including sector analysts or brokers, proxy advisers and credible media outlets, and the views of other investors. Forty-three percent say they speak with peers when considering an activist situation (versus 38 percent that do not). Almost a fifth (19 percent) of respondents did not answer this question.

What investors want

When it comes to who makes the final decision around voting on an activist situation, SquareWell says that ‘even at active managers, stewardship teams are becoming more front office.’ Most decisions in these situations are now made by a combination of the stewardship team and investment professionals at 45 percent, with just the investment professionals making the decision 37 percent of the time and just stewardship teams coming in at 18 percent.

So what do these asset managers want when it comes to corporates dealing with an activist? Essentially, they want to see companies engaging with shareholder activists – but only once arguments have been analyzed and a strategic plan has been formulated. As SquareWell warns: ‘Active managers expect companies to act strategically and respond only when needed: do not rush into a ‘PR war’.’

Putting your board to work is welcomed, too, with 64 percent noting that engagement with independent directors helps to ‘strengthen trust’ in a portfolio company. 

It’s also important to remember that, as SquareWell notes, the ‘majority of activists test the viability of their campaign before going public’, and with 58 percent of active managers saying they are willing to engage with an activist before a campaign has been made public, it makes sense to be proactive in your engagement, too.

The research highlights the key factors active investors take into account when assessing a target company, with performance versus peers coming top, followed by management quality and board quality, while engagement history is also highly ranked. 

Overall though, a major factor under consideration is governance. As SquareWell states: ‘A poorly governed company is more likely to lose against an activist’, with 87 percent of active managers saying they are more likely to support an activist if it is seeking to improve a company’s corporate governance practices.

The top five governance concerns noted by active asset managers responding to the survey (ranking from 45 percent up to 65 percent) are capital allocation decisions, collective board expertise, board independence, chairperson quality and executive pay.

 

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