Three months into 2021, activist campaigns have not come roaring back as quickly as expected.
The Number Of Activist Campaigns Is Down 15 Percent
Data from Activist Insight Online due to be released next week as part of our quarterly stats roundup show that around 240 companies worldwide have been publicly subjected to activist demands so far this year, 15% below the same period last year.
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
In large part, that reflects the much quieter beginnings to proxy season in Europe, Canada, and Australia, since the U.S. and Asia have held up slightly better. Certainly, it reflects a dearth of global M&A, although as I noted last week, opposition to deals is spiking.
But above all, the data appear to show a lack of fresh ideas. Only four out of 12 sectors have seen more companies publicly targeted in the first quarter of 2021 than in the same three months of 2020, when COVID-19 was starting to be described as a poison pill for shareholder activism.
Of those, consumer defensive and healthcare have increased their share of the total targeted companies by around three percentage points each when compared to the first quarter of last year – unsurprisingly, given the short window of opportunity created by the pandemic – while energy and technology have seen more action thanks to a recovery in commodity prices and surging valuations for tech companies. All else has sunk almost in unison, albeit industrials and financial services have found themselves particularly challenged.
Focus On Whole Company M&A
A lower number of impactful activist campaigns so far this year perhaps reflects that the interest of some funds has shifted slightly to focus on whole company M&A, through take-privates and special purpose acquisition companies (SPACs). At current rates, U.S. targets of impactful activist campaigns for the whole of 2021 could be fewer than 200, lower even than the 224 companies targeted in 2020.
One other explanation for the subdued level of activism in 2021 is that activists are still helping companies weather the pandemic (whether that help is welcome or not). Some industries are changing faster than management can keep up and, as usual, there is no shortage of advice from the sidelines. In the U.S., balance sheet and operational demands remain higher than before 2020, at least as far as first-quarter activity goes. However, activists are generally better at holding boards to account for poor historic performance, since investors often give boards the benefit of the doubt on big picture questions.
Activism, unlike the stock market but like almost everything else, is taking a little longer to come back than many of us would have hoped.
Josh Black, Editor-in-Chief, Insightia
This Proxy Season Will Bring A Backlash Against Remuneration
If the first quarter of 2021 is any guide, this proxy season will see companies vulnerable to new social concerns and a backlash against remuneration as companies recover from the impacts of COVID-19.
One of the issues we’ve seen gaining fresh traction is political transparency. Of the 201 shareholder proposals subject to a vote in the first three months of 2021, the shareholder proposal which received the highest level of support is John Chevedden’s request for lobbying disclosure at AECOM, which received 56.4% support at its February 24 annual meeting. Similar proposals calling for lobbying disclosure have fallen only slightly short of majority support at Walt Disney Co.’s and Maximus’ annual meetings this year.
Investors are also increasingly demanding disclosure of ESG issues, a shift that has been reflected in the increased willingness of the Securities and Exchange Commission (SEC) to consider ESG issues as material to investors, and therefore not eligible for exclusion from proxy statements.
Proxy voting guidelines further reflect fund managers having established expectations for access to ESG disclosure, with an increased number of asset managers such as EOS at Federated Hermes and BMO Global Asset Management supporting shareholder proposals requesting ESG disclosure.
Renewed Focus On Political Spending And Accompanying Disclosure
"In the wake of events this past January, there’s been a renewed investor focus on political spending and accompanying disclosure," said Allie Rutherford, partner at PJT Camberview. "Recent votes have made clear that some investors who have traditionally not been supportive of these proposals may change their approach when they feel it is warranted."
Human rights reporting proposals have also gained significant support this year, in direct response to the pandemic. The 18.4% support received for a proposal at Tyson Foods was equivalent to more than 80% support, when Tyson’s dual-class stock structure is accounted for. Similar proposals have been filed at companies such as Wendy’s, Lockheed Martin, and Exelon.
COVID-19 has also served to increase investor scrutiny on a multitude of governance concerns this proxy season, particularly compensation. In the first three months of 2021, support for remuneration proposals has declined in the U.S. and U.K., dropping below 90% at all U.S. companies to have held votes so far.
Seven remuneration proposals have failed to receive majority support in the first three months of 2021 at U.S.-listed companies. Acuity Brands’ and Enzo Biochem’s say on pay proposals received 32.8% and 36.2% opposition respectively, both a result of failure to align pay with performance and excessive bonus payments.
Support For "Say On Pay" Proposals
"Say on pay" proposals at U.K.-listed companies have all received majority support so far this year, but multiple plans have come close to failing, including Hollywood Bowl’s and Diploma’s remuneration schemes, which both received 54.3% support.
In contrast, support for remuneration at European-listed companies has remained steady, potentially a result of strict standards regarding compensation practices and ESG oversight.
Increased investor engagement with ESG concerns will begin to play a crucial part in remuneration issues, as investors such as BlackRock urge portfolio companies to implement ESG performance metrics in compensation.
"We are encouraged by the good practices implemented in a range of countries within Europe,” said Lisa Harlow, head of investment stewardship in Europe at Vanguard. "Clearly boards are taking ESG more seriously, developing proper disclosures, and considering how ESG relates to what skills they need on the board."
Looking forward, shareholders are tightening their requirements concerning company disclosures, which will not only result in increased support for environmental and social proposals, but also add an expectation for ESG to become a primary factor in executive compensation structures.
Rebecca Sherratt, Corporate Governance Editor, Insightia