Active but not activist, passive investing but not passive governance, highly engaged shareowner. Does anything have its own name any more?
Charlie Munger: Invert And Use “Disconfirming Evidence”
Earlier this week, our neighbor across the Avenue of the Americas AllianceBernstein (AB) published an article by Chief Investment Officer Sharon Fay on the power of large, actively managed funds to engage with their portfolio companies.
Entitled “The megaphone effect,” its argument is explicitly positioned as a response to the rising influence of passive index funds and activist investors. “In our view, active equity managers are best positioned to stimulate change, to promote corporate improvements—and to increase the power of activist investing in the future,” Fay writes.
“Passive investing often doesn’t have the teeth that active investors have,” Ali Dibadj, a senior equity research analyst at AB told me in an interview this week. “It is very good for engagement at the broad level – the macro – but implementing changes at the micro level can be even more beneficial to investors.”
AB is putting its money where its mouth is, seeding an incubated fund – AB Concentrated Engagement – for Dibadj to test the benefits of working with management teams to unlock value. “The fund engages very deeply to improve [environmental, social, and governance characteristics], capital allocation, and operational performance for the long-term,” he explains. “We invite our portfolio companies to engage with us openly; we believe we can help them make better decisions with our research. It’s free consulting from experts.”
“The megaphone effect” does not name names, even when giving examples of AB’s purported achievements. But Dibadj says there is already an effort to systematize and spread engagement experience across the firm, allowing managers of other portfolios to draw on the tool, as well as in-house analysts and, on occasion, outside consultants.
Coming a week after T. Rowe Price set out its approach to engagement, AB’s intervention is part of a more vocal stance from the “active but not activist” community. Faced with brutal outflows from active funds and apparently into passive ones, attention-grabbing letters from index fund CEOs, and greater all-round interest in ESG issues, active managers are being pushed into the limelight. A few, such as the smaller Neuberger Berman, have even run proxy fights.
“The passives have dominated the conversation to date and the large actively managed funds are looking for a greater voice,” says CamberView Partners’ Head of Activism Defense Derek Zaba.
Importantly, however, AB like T. Rowe Price does not believe activists should have to do its dirty work. “We don’t really do requests for activists,” Dibadj adds. “Even if we disagree, we have good relationships with our management teams, and have great research, so I don’t think we need to.”
AB’s efforts will no doubt meet with some skepticism. While active managers can and should play a significant role – AB, T. Rowe, Fidelity and Neuberger Berman collectively own $1.6 trillion in U.S. equities – their impact has been limited by the perceived strength of passive inflows and the dispersion of influence between portfolio managers. Given active managers can sell stocks, issuers might drag out engagements in the hope of avoiding the problem. Hence the need for active managers to point out that they aren’t so unreasonable but won’t be a pushover either.
Inevitably, performance will be the bottom line. But Zaba points to another dynamic worth watching that will help the larger funds. Activists will continue to court both active and passive institutions as a means of effecting change, and companies will have to seek support from the same quarters. “As the market has consolidated,” he says, “the views of the more concentrated active players will matter even more.”
This week saw the first use of the universal ballot, raising more questions than it answered. SandRidge Energy ended up losing four board seats to Carl Icahn in its proxy contest Tuesday, settling with the activist to add an additional nominee from each side to an expanded eight-person board because the vote for the final nominee was “too close to call as of the close of the polls.”
The result came just a day after the Oklahoma-based oil company warned that the activist was seeking to “manipulate” the vote by recommending different voting strategies to different shareholders, an option created by the contradictory recommendations of the proxy voting advisers. (Presumably, SandRidge believed Icahn was telling shareholders that his third-best tally was a few votes shy of victory and that switching from fourth-best to third would help elect an extra nominee, when the third board seat was already secure and he was really bolstering the decisive candidate for the majority of the slate.) Ultimately the company’s complaint was moot, since Icahn undoubtedly won a majority of the board.
The situation shows the universal ballot “can work,” says Bruce Goldfarb , because “Investors in this campaign were able to choose who they wanted on the board.”
“It’s a demonstration that there are complications but were its use mandated, people would get comfortable with that,” he added. “Perhaps all the Icahn nominees would have been elected [using a traditional ballot]. I suspect the results would have come out the same.”
Another situation where the ballot did work somewhat as expected was at Mellanox Technologies, an Israeli company that settled with Starboard Value on Wednesday. Starboard started out seeking to replace the entire nine-member board but reduced its slate to eight even as the company added three more members. The two sides agreed this week that two Starboard nominees and a third, mutually agreeable candidate would join the board – a relatively small number of changes, reflecting the fact that only six of the 11 directors were on the board at the beginning of 2018. For companies facing the threat of a control election, the universal proxy may be a good option after all.
Article by Activist Insight