Who, What, When, and How?
Posted by Mary Ann Cloyd,
PricewaterhouseCoopers LLP, on Tuesday, April 7, 2015
Editor’s Note: Mary Ann Cloyd is leader of the
Center for Board Governance at PricewaterhouseCoopers LLP. The
following post is based on a PricewaterhouseCoopers publication,
Who are today’s activists and what do they want?
Shareholder activism spectrum
“Activism” represents a
range of activities by one or more of a publicly traded corporation’s
shareholders that are intended to result in some change in the
corporation. The activities fall along a spectrum based on the
significance of the desired change and the assertiveness of the
investors’ activities. On the more aggressive end of the spectrum is
hedge fund activism that seeks a significant change to the company’s
strategy, financial structure, management, or board. On the other end
of the spectrum are one-on-one engagements between shareholders and
companies triggered by Dodd-Frank’s “say on pay” advisory vote.
The purpose of this
post is to provide an overview of activism along this spectrum: who
the activists are, what they want, when they are likely to approach a
company, the tactics most likely to be used, how different types of
activism along the spectrum cumulate, and ways that companies can both
prepare for and respond to each type of activism.
Hedge fund activism
At the most assertive
end of the spectrum is hedge fund activism, when an investor, usually
a hedge fund or other investor aligned with a hedge fund, seeks to
effect a significant change in the company’s strategy.
Some of these activists
have been engaged in this type of activity for decades (e.g., Carl
Icahn, Nelson Peltz). In the 1980s, these activists frequently sought
the breakup of the company—hence their frequent characterization as
“corporate raiders.” These activists generally used their own money to
obtain a large block of the company’s shares and engage in a proxy
contest for control of the board.
In the 1990s, new funds
entered this market niche (e.g., Ralph Whitworth’s Relational
Investors, Robert Monks’ LENS Fund, John Paulson’s Paulson & Co., and
Andrew Shapiro’s Lawndale Capital). These new funds raised money from
other investors and used minority board representation (i.e., one or
two board seats, rather than a board majority) to influence corporate
strategy. While a company breakup was still one of the potential
changes sought by these activists, many also sought new executive
management, operational efficiencies, or financial restructuring.
During the past decade,
the number of activist hedge funds across the globe has dramatically
increased, with total assets under management now exceeding $100
billion. Since 2003 (and through May 2014), 275 new activist hedge
funds were launched.
percent of today’s activist hedge funds focus their activities
on North America, and 32% have a focus that spans across global
regions. The others focus on specific regions: Asia (15%),
Europe (8%), and other regions of the world (4%).
The goals of today’s
activist hedge funds are broad, including all of those historically
sought, as well as changes that fall within the category of “capital
allocation strategy” (e.g., return of large amounts of reserved cash
to investors through stock buybacks or dividends, revisions to the
company’s acquisition strategy).
The tactics of these
newest activists are also evolving. Many are spending time talking to
the company in an effort to negotiate consensus around specific
changes intended to unlock value, before pursuing a proxy contest or
other more “public” (e.g., media campaign) activities. They may also
spend pre-announcement time talking to some of the company’s other
shareholders to gauge receptivity to their contemplated changes.
Lastly, these activists (along with the companies responding to them)
are grappling with the potential impact of high-frequency traders on
the identity of the shareholder base that is eligible to vote on proxy
that hedge fund activism improves a company’s stock price (at
least in the short term), operational performance, and other
measures of share value (including more disciplined capital
investments). Others contend that, over the long term, hedge
fund activism increases the company’s share price volatility as
well as its leverage, without measurable improvements around
cash management or R&D spending.
“Vote no” campaign
Moving down the
activism spectrum are “vote no” campaigns where an investor (or
coalition of investors) urges shareholders to withhold their votes
from one or more of the board-nominated director candidates.
These campaigns are
rarely successful in forcing an involuntary ouster of a director,
because at most companies this would require support from a majority
of outstanding shares—not just a majority of the votes cast at the
meeting, which is a much lower threshold. But, particularly when the
challenged director is not the company’s CEO/chair, a “vote no”
campaign can influence the candidate to voluntarily withdraw from the
election. If the level of “negative” vote was relatively significant,
a director may be replaced during his/her subsequent term.
These campaigns are
usually sponsored by public or labor pension funds.
Further down the
spectrum is sponsorship of a shareholder proposal (or, more often, the
threat of a shareholder proposal).
The goal of these
investors is usually to encourage one of four types of change.
A change to the
board’s governance policies or practices (e.g., declassify the
board, adopt majority voting, limit the company’s ability to shift
legal fees to unsuccessful shareholder litigants, remove exclusive
forum bylaw provisions, provide transparency around succession
planning, provide proxy access), or a change to the board
composition (e.g., increase board diversity, name an independent
director as chair);
A change to the
company’s executive compensation plans (e.g., a change in vesting
A change to the
company’s oversight of certain functions (e.g., audit, risk
A change to the
company’s behavior as a corporate citizen (e.g., political spending
or lobbying, environmental practices, climate change or resource
scarcity preparedness, labor practices)
Recently, some investors have also used shareholder proposals
to address more fundamental changes to corporate strategy
(e.g., break up the company, sell certain assets, return
capital to shareholders, or retain an advisor to evaluate
alternative ways to increase shareholder value). These
proposals are usually related to a more assertive activism
campaign, as discussed under “Hedge Fund Activism.”Source:
PwC analysis, The Conference Board, Proxy Voting Analytics
(2010-2014), November 2014.
are sponsored by a wide range of different types of investors:
compensation and risk/audit oversight proposals are usually
sponsored by public pension funds, labor pension funds, or
individual investors. These investors believe that these changes may
promote more effective corporate governance (including more reliable
financial reporting), and that good governance enhances shareholder
social proposals are usually sponsored by labor pension funds, ESG-oriented
investment managers, religious groups, or coalitions of like-minded
investors. These investors believe that these changes may provide
broader societal value which also—over the long-term—benefits the
corporation and all of its stakeholders.
proposals are usually sponsored by hedge funds as a component of a
more assertive activist campaign.
Say on pay
On the more passive end
of the spectrum are investor activities triggered by a company’s “say
on pay” advisory vote proxy item. These activities are usually limited
to letters to a company (typically directed to the compensation
committee of the board) or meetings/phone calls with the company
(typically involving the company’s general counsel, corporate
secretary, and/or compensation committee chair).
The goal of these
conversations is, generally, either to effect a substantive change to
the compensation plan, or to alter how it is described in shareholder
A wide range of
investors participate in this type of “activism,” including
traditional asset managers, mutual funds, pension funds, and
individuals. Since “say on pay” is a proxy item presented to all
shareholders for an advisory vote, all shareholders who vote generally
must form a view about the company’s executive compensation plans. A
subset of these voting shareholders may decide to convey these views
to the company; doing so generally does not require a significant
amount of resources. These investors are particularly likely to do so
if they believe the plan does not align pay with performance, contains
objectionable features (e.g., certain vesting terms), or utilizes
inappropriate performance metrics.
is a company likely to be the target of activism?
Although each hedge
fund activist’s process for identifying targets is proprietary,
most share certain broad similarities:
The company has a low
market value relative to book value, but is profitable, generally
has a well-regarded brand, and has sound operating cash flows and
return on assets. Alternatively, the company’s cash reserves exceed
both its own historic norms and those of its peers. This is a risk
particularly when the market is unclear about the company’s
rationale for the large reserve. For multi- business companies,
activists are also alert for one or more of the company’s business
lines or sectors that are significantly underperforming in its
investors own the vast majority of the company’s outstanding voting
The company’s board
composition does not meet all of today’s “best practice”
expectations. For example, activists know that other investors may
be more likely to support their efforts when the board is perceived
as being “stale”—that is, the board has had few new directors over
the past three to five years, and most of the existing directors
have served for very long periods. Companies that have been
repeatedly targeted by non-hedge fund activists are also attractive
to some hedge funds who are alert to the cumulative impact of
A company is most
likely to be a target of non-hedge fund activism based on a
combination of the following factors:
How can a company effectively
prepare for—and respond to—an activist campaign?
We believe that
companies that put themselves in the shoes of an activist will be most
able to anticipate, prepare for, and respond to an activist campaign.
In our view, there are four key steps that a company and its board
should consider before an activist knocks on the door:
evaluate all business lines and market regions. Some
activists have reported that when they succeed in getting on a
target’s board, one of the first things they notice is that the
information the board has been receiving from management is often
extremely voluminous and granular, and does not aggregate data in a
way that highlights underperforming assets.
boards) may want to reassess how the data they review is aggregated
and presented. Are revenues and costs of each line of business
(including R&D costs) and each market region clearly depicted, so
that the P&L of each component of the business strategy can be
critically assessed? This assessment should be undertaken in
consideration of the possible impact on the company’s segment
reporting, and in consultation with the company’s management and
likely its independent auditor.
company’s ownership and understand the activists.
Companies routinely monitor their ownership base for significant
shifts, but they may also want to ensure that they know whether
activists (of any type) are current shareholders.
the “risk factors.” Knowing in advance how an activist
might criticize a company allows a company and its board to consider
whether to proactively address one or more of the risk factors, which
in turn can strengthen its credibility with the company’s overall
shareholder base. If multiple risk factors exist, the company can also
reduce its risk by addressing just one or two of the higher risk
engagement plan that is tailored to the company’s shareholders and the
issues that the company faces. If a company identifies
areas that may attract the attention of an activist, developing a plan
to engage with its other shareholders around these topics can help
prepare for—and in some cases may help to avoid—an activist campaign.
This is true even if the company decides not to make any changes.
expect to engage with both members of management and the board.
Accordingly, the engagement plan should prepare for either
Whether the company
decides to make changes or not, explaining to the company’s most
significant shareholders why decisions have been made will help
these shareholders better understand how directors are fulfilling
their oversight responsibilities, strengthening their confidence
that directors are acting in investors’ best long-term interests.
are often most effective when the company has a history of ongoing
engagement with its shareholders. Sometimes, depending on the
company’s shareholder profile, the company may opt to defer actual
execution of this plan until some future event occurs (e.g., an
activist in fact approaches the company, or files a Schedule 13d
with the SEC, which effectively announces its intent to seek one or
more board seats). Preparing the plan, however, enables the company
to act quickly when circumstances warrant.
In responding to an
activist’s approach, consider the advice that large institutional
investors have shared with us: good ideas can come from anyone. While
there may be circumstances that call for more defensive responses to
an activist’s campaign (e.g., litigation), in general, we believe the
most effective response plans have three components:
consider the activist’s ideas. By the time an activist
first approaches a company, the activist has usually already (a)
developed specific proposals for unlocking value at the company, at
least in the short term, and (b) discussed (and sometimes consequently
revised) these ideas with a select few of the company’s shareholders.
Even if these conversations have not occurred by the time the activist
first approaches the company, they are likely to occur soon
thereafter. The company’s institutional investors generally spend
considerable time objectively evaluating the activist’s suggestion—and
most investors expect that the company’s executive management and
board will be similarly open- minded and deliberate.
areas around which to build consensus. In 2013, 72 of
the 90 US board seats won by activists were based on voluntary
agreements with the company, rather than via a shareholder vote. This
demonstrates that most targeted companies are finding ways to work
with activists, avoiding the potentially high costs of proxy contests.
Activists are also motivated to reach agreement if possible. If given
the option, most activists would prefer to spend as little time as
possible to achieve the changes they believe will enhance the value of
their investment in the company. While they may continue to own
company shares for extensive periods of time, being able to move their
attention and energy to their next target helps to boost the returns
to their own investors.
engage with the company’s key shareholders to tell the company’s
story. An activist will likely be engaging with fellow
investors, so it’s important that key shareholders also hear from the
company’s management and often the board. In the best case, the
company already has established a level of credibility with those
shareholders upon which new communications can build. If the company
does not believe the activist’s proposed changes are in the best
long-term interests of the company and its owners, investors will want
to know why—and just as importantly, the process the company used to
reach this conclusion. If the activist and company are able to reach
an agreement, investors will want to hear that the executives and
directors embrace the changes as good for the company. Company leaders
that are able to demonstrate to investors that they were part of
positive changes, rather than simply had changes thrust upon them,
enhance investor confidence in their stewardship.
Epilogue—life after activism
When the activism has
concluded—the annual meeting is over, changes have been implemented,
or the hedge fund has moved its attention to another target—the risk
of additional activism doesn’t go away. Depending on how the company
has responded to the activism, the significance of any changes, and
the perception of the board’s independence and open-mindedness, the
company may again be targeted. Incorporating the “Prepare” analysis
into the company’s ongoing processes, conducting periodic
self-assessments for risk factors, and engaging in a tailored and
focused shareholder engagement program can enhance the company’s
resiliency, strengthening its long-term relationship with investors.
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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