Shareholder Rebellion

04 February 2020

Investors are increasingly taking on company boards as they demand change on everything from management pay to environmental policy.

Once upon a time, shareholders were meek and mild. Bloated bonuses for high-earning chief executives and lucrative, easily-redeemed long-term incentive schemes seemed to pass them by. Years of underperformance, strategic errors or even apparent board incompetence went largely unpunished, save for sarcastic remarks of semi-professional serial annual meeting attendees.

All that companies suffering from executive largesse or inaction seemingly had to do in the face of pressing corporate imperatives was keep paying the dividend and topping up the free AGM tea and sandwiches. Institutional investors would tick the boxes to enable the merry-go-round to continue and individual shareholders didn’t seem to matter.

Now, shareholders with pockets deep enough to matter to the share price, are becoming increasingly vocal, while less well-heeled activists are noisily using corporates to publicise causes ranging from carbon emissions to world poverty.

This year, asset manager Standard Life Aberdeen suffered a major revolt over the pay of its new finance chief. Banks Barclays and Standard Chartered, shopping centres group Hammerson, and engineering concern John Wood Group faced opposition to executive remuneration reports, while environmental and social action groups targeted fossil fuel extractors, arms companies and pharmaceutical groups. At a more strategic level, companies are also facing an increasing number of attempts by activist hedge funds and other specialist investors to force a change in their performance.

Roots of discontent

What is driving shareholder rebellions? Are they good or bad for investors and how should shareholders respond? Shareholder activism is not new. Groups such as Pirc, ISS and Glass Lewis have long been vigilant on corporate governance breaches and shareholder votes.The ante has been upped in recent years, however.
Globally, the number of companies receiving governance-related proposals from activists increased by 11% a year between 2014 and 2018, according to a December 2018 report by Activist Insight. The report says 805 companies worldwide were targeted by activists in 2017, while the pool of funds deployed in such campaigns increased from $47 billion in 2010 to more than $200 billion by 2016.


Born from crisis

One driver is clearly the global financial crisis of 2008. This brought many corporations to their knees, putting pressure on boards to rebuild value. Traditionally, much of this kind of shareholder activism stemmed from US activist hedge funds, such as those managed by Nelson Peltz and Carl Icahn. However, it has become a global movement, with about 20% of all activist shareholder funds now deployed outside the English-speaking world, according to the Activist Insight report.

The 2008 crisis also catalysed some of today’s shareholder rebellions differently by highlighting the failure of the shareholder value philosophy that they claimed was driving their strategy and actions. “Unflinching and dogmatic reliance on shareholder value has justified many takeovers, mergers and other investment decisions that have been carried out in its name,” says Professor David Grayson, Head of the Doughty Centre at Cranfield University in Bedfordshire. “But, instead of creating value, they have delivered just the opposite.”
Prof Grayson also reports a ripple effect across more traditional institutional investors, who have conventionally taken a long-term, hands-off approach, only putting pressure on boards behind the scenes after well-publicised underperformance.

Some of the world’s biggest funds groups, such as BlackRock and the California Public Employees’ Retirement System (CalPERS) are now casting their nets wider. Larry Fink, the investment manager who oversees assets of almost $6 trillion as Chairman and Chief Executive of BlackRock, ignited debate among business leaders and policymakers in January last year when he wrote a letter to chief executives declaring that companies needed to do more than making profits. Prof Grayson believes this is a sign of our changing times, with activist groups like Extinction Rebellion staging well-managed protests and other groups mounting global environmental and social campaigns. “Total adherence to the narrow thinking of shareholder value leaves businesses unprepared for the environments and issues they must now contend with,” he says.


A slow rebellion

Despite the increase in activism, change is arriving slowly. According to a survey published in August by the Chartered Institute of Personnel Development and the High Pay Centre, shareholder revolts have had “little impact” on restraining runaway pay across FTSE100 companies.

The study found that between 2014 and 2018, investors approved all FTSE100 company pay policies that were presented to annual meetings, with levels of support of 90% or more.


Good for investors

Fundamentally, activist investor campaigns should be good for all shareholders, since their intention is usually to boost the price of stock that, after all, anybody can buy. Shareholders who feel particularly strongly about what they are investing in can even engage in their own activism investing. A number of funds are now aimed at “ethical investors”, pledging never to buy shares or bonds in companies dealing in tobacco, alcohol, defence or other frowned-upon activities.

Louis Jamieson, Equity Analyst at Sanlam, says: “A number of funds now cater for discerning investors with strong environmental or social concerns.” Bear in mind, however, that historically, returns from shares in companies that such funds are barred from investing in have sometimes outperformed “ethical” or “environmental” investments.


Four investor revolts

  • Bus and train operator FirstGroup responded to a campaign by activist investor Coast Capital by changing its chairman and vowing to sell its Greyhound and British bus interests, while winding down its UK rail interests.
  • Merlin Entertainments acceded to a £5.9 billion takeover by the founding family of LEGO just a month after US-based activist investor Valueact Capital called on the company to seek out a buyer to take the group private.
  • Royal Dutch Shell adopted its first short-term carbon dioxide emissions target earlier this year to avert a shareholder rebellion.
  • BT Group received a 34% vote against its remuneration report last year after approving a £2.3 million payout to former Chief Executive Gavin Patterson.

Tips for investors

There’s a lot to think about if you only want to invest in companies that reflect your ethical standards. At Sanlam, we can help you build an investment portfolio that is right for your values.

  • If a stock or fund does not align with the things you care about, find another one.
  • Consider whether the  management team has the credentials to lead and grow this kind of business.
  • Are there activities you won’t invest in? There should be a fund with similar boundaries.
  • Consider the stated purposes of the companies you invest in. How do they seek to reward stakeholders?
  • Don’t panic if a hedge fund or other activist buys a stock you also own. It may be good for the share price.

This article reflects the views of the author at the time of writing and is not a personal recommendation. Past performance is no guide to the future. 

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