Activism Is On A New Course

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That was the proxy season that was, a six-month start to 2022 that threw in more than a few surprises and charted activism on a new course.

Increase In Shareholder Activism

One of the big takeaways from Shareholder Activism in H1 2022, Insightia’s statistical report, is the 5% increase in the number of companies targeted when compared with the same period last year. But depending on your focus, you might feel that activist investing is a different beast to before the pandemic.

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Of Insightia's 12 demand types, only four saw higher levels of activity globally than in the first half of 2019 – environmental, thanks to a whopping 80% increase since last year, social, remuneration, and returning cash to shareholders.

Asia led the way, with eight of the 12 demand groups hitting record H1 levels for the past four years. Demands to return cash to shareholders – a popular pre-pandemic demand – doubled from last year. And the number of seats won in shareholder votes hit a near-term record.

In the U.S. meanwhile, it still looks early to call a return to business as normal.

While shareholder proposals and ESG activism have continued to rise thanks to greater urgency from the nonprofit world and the permissive regulatory environment, traditional hedge fund activism has laid somewhat lower. Of those that went to a vote, only three activist slates succeeded in getting a new board member elected in proxy fights, while the number of unsuccessful contests, 12, is the joint highest since 2014.

The number of settlements also declined marginally. Yet deals at FedEx, US Foods, and Dollar General highlight that it was not a totally unrewarding proxy season.

Two seemingly unrelated trends did give the U.S. proxy season a bit of spice. First was a big increase in the number of companies facing demands to remove a board member of executive, already surpassing the figure for the whole of 2021.

The tactic, which can be appealing to an activist seeking to avoid the protracted expense or trading halts of a proxy fight or to personalize an adjacent demand, has recently been supported by ESG-related justifications. Indeed, 2022 has already seen Legion Partners Asset Management use a withhold campaign at Guess, several removal campaigns by Majority Action, and a rash of "anti-woke" campaigns. Others originated in entrenched boardroom battles, such as Aerojet Rocketdyne and Lifeway Foods.

The second trend worth noting is the greater push for dealmaking. Activist appetites for M&A might not have returned to their pre-crisis levels and could fall victim to greater economic uncertainty over the coming months. But it wouldn’t be surprising if the closing window for M&A motivates a lot of activism over the coming months.

By contrast with these markets, Australia, Canada, and Europe look more subdued (the U.K. is slightly more promising, as I've written recently). Only one sector saw an increase in demands in Europe from the first half of 2021 to the first half of 2022; energy. A strengthening U.S. dollar combined with the further globalization of environmental activist tactics could change that, as we've started to see in all three markets.

Josh Black, Editor-In-Chief, Diligent, Formerly Insightia

New Requirements For Proxy Advisers

Shareholder democracy is alive and well, with the Securities and Exchange Commission (SEC) voting Wednesday to rescind rules dictating how proxy advisers disclose advice.

The Proxy Voting Advice rule, proposed in 2019, established new requirements for proxy advisory firms supposedly aimed at increasing the transparency, accuracy, and completeness of advice issued to investors.

The policy required proxy advisers to disclose voting advice to issuers ahead of their clients, as well as ensuring clients were notified of any written responses to their recommendations from companies.

Since its conception, the rule has faced fierce criticism from shareholders, many of which argued that providing boards with early access to proxy adviser advice made it harder for shareholders to hold boards accountable and for advisory firms to deliver independent advice to their clients in a timely manner.

Investors say that receiving timely information on ballot items is more important than ever, especially as ESG proposals in particular are becoming more nuanced. Investors are voting more in line with proxy adviser recommendations this year for this very reason, something we explore in more detail in Insightia Monthly's June issue.

That is now set to change, with the U.S. regulator voting 3-2 to rescind certain conditions from the rule. Proxy voting advisers will no longer be required to give issuers a first look at advice to be sent to clients. Amendments also remove the requirement that issuer written responses be shared with proxy advisers' clients.

"We have continued to hear from many investors that certain conditions in the 2020 rule might restrain independent proxy voting advice," SEC Chair Gary Gensler said in a open meeting Wednesday. "It is critical that investors who are the clients of these proxy advisory firms are able to receive independent and timely advice."

This rule change has been welcomed by investors with open arms. In a statement seen by Insightia, The Council of Institutional Investors (CII) "applauded" the SEC for rescinding the "onerous provisions."

Yet those the proposal seeks to regulate argue further reforms are needed. Institutional Shareholder Services (ISS) pulled no punches in its responding statement, arguing the "draconian" rule "should have been rescinded in its entirety."

"Today's action misses the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation," ISS said. "We firmly believe the Commission's decision to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote exceeds the agency's statutory authority, is contrary to law, and is arbitrary and capricious."

The proxy adviser sued the SEC in federal district court in 2019 but the case was on hold while the new administration considered what parts of the rule to reverse. Oral arguments in this case are scheduled for later this month, ISS revealed this week.

The SEC will also have its hands full with another lawsuit, this time from corporate lobby group the National Association of Manufacturers (NAM) for offering what CEO Jay Timmons called "no justification" for abandoning "critical reforms designed to protect publicly traded manufacturers and their investors from unaccountable proxy advisory firms."

No matter how investor-friendly the reforms are, expect the scrutiny of proxy voting advisers to run and run.

Rebecca Sherratt, Publications Editor, Diligent, Formerly Insightia

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