Companies across the US, Canada, continental Europe and the UK had something of a respite from shareholder activism this year. The Covid-19 pandemic, coupled with uncertainty over the US election, saw the number of public campaigns globally drop from 757 by the end of Q3 2019 to 652 by the end of Q3 this year.
Numbers from Activist Insight show activism was down across almost all regions. In the US alone, those numbers were 412 campaigns by the end of Q3 last year and 367 for the same period this year. The exception is Asia, where a strong show in Japan actually led to an increase in the total number of campaigns.
The global dip in campaign numbers doesn’t necessarily mean support for activists has waned, however. ‘Asset managers and proxy advisers were more than willing to back activists this year, including in control contests (perhaps especially so),’ Josh Black, editor-in-chief of Activist Insight, tells IR Magazine, adding that he doesn’t expect ‘badly managed companies to get a pass next year.’
So what is in store for activism in 2021? There remains a lot of uncertainty, says Black, but he notes that ‘several prominent activists have already announced new investments, there’s been a shakeout in the markets and there’s probably more certainty about how companies will handle any further lockdowns or worsening of the pandemic. There’s lots of talk about a boom in M&A led by consolidation in certain industries and activists are expected to play a part in that process.’
On the other hand, he says balance sheet strategies are ‘largely out of bounds’ so activists will have to ‘prepare their theses carefully’.
The retail effect
This is echoed by Bruce Goldfarb, founder, president and CEO of Okapi Partners, who believes this has wider repercussions, too. ‘Activists of all sizes are doing a more thorough analysis of the shareholder base of a potential target – really digging into the makeup of the investors prior to launching any campaign,’ he tells IR Magazine. ‘This quest for information is one reason why investors vehemently opposed the SEC’s proposed changes to 13F disclosure. Identifying shareholders can be more of an art than a science, especially if the top holders are constantly changing.’
Goldfarb explains that activists will often contact Okapi to get a better understanding of the shareholder base of a potential target, ‘who the other shareholders are and what issues concern them. If there’s little chance of support from the rest of the shareholder base, it’s unlikely a sophisticated activist will move forward with a campaign.’
Goldfarb further notes that retail investors are playing an increasingly pivotal role in certain campaigns. ‘[Shareholder base evaluation] is especially important now that retail investors have had such a big impact on the investment landscape,’ he says. ‘Retail investors are notoriously hard to [engage] and both companies and activists need to understand how to reach that constituency and get it to take action. We’ve been involved in a number of campaigns where the retail vote really tipped the scales.’
The rise of climate activism
Ali Saribas, partner at SquareWell, says the consultancy is also anticipating a rise in activism next year ‘as markets learn to cope with Covid-19 and the news of a vaccine gives hope that ‘normalcy’ will return.’ The impact of 2020 could also see the pool of potential targets widen, he adds: ‘Companies that entered the pandemic weak will most likely be weaker, providing a large pool of candidates to target (at cheaper prices).’
Saribas says companies should expect a focus on strategy and board quality going into next year. ‘A clear, long-term strategy needs to be communicated by a credible team,’ he says. ‘For example, just this week, a group of shareholders blocked a highly dilutive rights issue and challenged the long-term strategy of Unibail-Rodamco-Westfield.
‘Investors also supported the addition of three shareholder nominees to strengthen Unibail-Rodamco-Westfield’s supervisory board to effectively oversee and challenge the management team. Factors determining board quality and effectiveness, such as independence, diversity, skillset, experience and time commitment are going to be in focus.’
Saribas warns companies that activists will be using governance shortcomings to boost support for their campaigns.
But a new and growing area of focus is what SquareWell terms ‘climate activism’. While Covid-19 put a spotlight on social and human capital issues, Saribas says this did not mean environmental issues were relegated. This is evidenced, he says, by the growing number of investors publicly supporting the Task Force on Climate-related Financial Disclosures – most recently Capital Group. He also points out that the pandemic has highlighted the level of disruption that can come from ‘unmanaged’ events.
As such, ‘investors’ expectations on how companies are managing climate change-related risks is going to increase further,’ he says. ‘Companies can therefore expect greater pressure from investors on climate change and, although only seven European companies were targeted by climate-related shareholder proposals in 2020, they should be prepared to face increased pressure either through engagement or shareholder proposals on the matter.’
As an example, Saribas points to the case of Spanish airport provider Aena, which has agreed to an annual vote on its action plan to tackle climate change – a world first – as a result of engagement by TCI Fund Management.