The announcement by Jana Partners and the California State Teachers’ Retirement System (CalSTRS) of a campaign to force Apple to enhance parental controls on its iPhones by tinkering with software has understandably dominated the airwaves for much of the week.
With no financial or governance criticisms apparent, this is indeed a new departure for an activist. And Apple, for all its wealth, remains a peculiarly vulnerable company – few others would be guaranteed the same media scrutiny (perhaps Wells Fargo, chosen as a likely target by Reuters’ Breakingviews survey respondents, would come close).
While most will judge the campaign by its immediate outcomes, both on Apple’s share price and on the steps it takes to address the investors’ concerns, the pivotal issue will be how successful Jana is at raising assets for its Jana Impact Capital fund. CalSTRS, which has nearly $800 million invested with environmental, social and governance (ESG) specialists, is finalizing external manager proposals for four new ESG mandates after a year’s search but has no immediate plans to invest in Jana’s new fund, a spokesperson told me yesterday.
George Soros And The Human Uncertainty Principle
The division between academic economics and the way traders look at the market is deep. The efficient market hypothesis assumes that markets and valuations are always pushing towards an equilibrium, and evidence to the contrary gets pushed aside as fluctuations or statistical deviations. But the dot com bubble, the
Activists have already dialed up their commitments to ESG issues, leading to some frustration on the management side that issuers have been on the defensive. Nelson Peltz this week said his Trian Partners were “big believers” in ESG, while Blue Harbour Group signed the United National Principles on Responsible Investment (UNPRI) last year. ValueAct Capital Partners says on its website that investing in and managing companies for the long term “requires the highest standards of integrity, a deep understanding of industry structure and business strategy, and a consideration of relevant social, ethical and environmental issues.”
Some of these efforts are viewed with more credibility than others, but there is widespread evidence that it is activists, rather than companies, that are internalizing the mood of the times. Few have been placed on the defensive quite as much as Bill Ackman, who once faced questions about how he squares investing in Oreo-manufacturer Mondelez with criticism of “society-damaging” Coca-Cola.
In any case, fundraising on the back of ESG is both new and interesting. Activists' assets under management appear to be stagnating, or growing slowly. In contrast, the impact investment market is already $114 billion and growing 17-18% per year, according to the Global Impact Investing Network (GIIN). Just 14% of the total is invested in public equities, and given the long/short equity hedge fund community has had a tough time with pension funds recently, the opportunity is obviously too good to pass up.
At the very least, subscribing to ESG principles ticks a few boxes on due diligence questionnaires. A successful launch for Jana Impact could change how seriously activists take the topic. Already, Jana has won praise for being ahead of its peers. CamberView Partners, a shareholder engagement advisory firm, says Jana’s campaign will give Barry Rosenstein’s firm a “‘halo’ effect” among the investment community.
With Exxon’s shareholder proposal woes last year, issuers had plenty of warning about the importance of ESG engagements. Less noticed this week, Hermes EOS launched its U.S. stewardship efforts with the hiring of Tim Youmans from CECP: The CEO Force for Good. Hermes, the former British Telecom pension fund manager, still invests for some clients but has also carved out a business engaging with companies on behalf of asset owners. The first full week of 2018 suggests that the pressure is going to be applied faster than expected, and from unexpected quarters.
Management teams targeted by short sellers sometimes comfort themselves that anonymous research is unlikely to get quite as much traction, much less lead to a public confrontation. Earlier this week, however, Marc Cohodes doorstepped MiMedx CEO Parker Petit at a JP Morgan investor conference, challenging his nemesis to answer a string of questions raised by Viceroy Research and Aurelius Value over the past four months. MiMedx’s chief executive largely avoided Cohodes’ queries, asking instead for questions from “real shareholders,” according to a Periscope video filmed by STAT’s Adam Feuerstein.
On Thursday, Cohodes published a follow-up report citing another audience member’s question about the company's issuance of restricted stock. MiMedx, which has adopted an almost unheard-of fierceness in response to the short sellers, has not yet commented on the incident. But earlier this week Petit issued a statement saying, “We apologize to our shareholders for having to endure this illegal short selling activity, and we will continue to do our utmost to bring this activity to closure.”
Quote of the week comes from Trian Partners CEO Nelson Peltz, who told a live audience at a Reuters Breakingviews event this week that he was not concerned about greater shareholder engagement reducing opportunities for activism:
“If every company is living up to its potential, we’ll give the money back and I’ll go to the beach. That’s one of the concerns I don’t have.”
Article by Activist Insight