They're Not Ariana Grande, They're "Shareholder Vocalists"

My column published in The July 1 Financial Times.

The arrangement was once simple and at times standoffish: chief executives ran companies, and they consulted shareholders when they needed to.

But developments in recent weeks have shown how that arm’s-length relationship has turned into an urgent embrace. Today’s chief executives must be in constant conversation — if not direct collaboration — with their shareholders, or risk their jobs and their companies.

Shareholder activists have been pressing for these changes for decades, but have gained extra force since the financial crisis. Their success — coupled with changes in asset management — has changed how companies are run in three key ways. It is worth taking stock of how.

First, the activists have compelled shifts in broad aspects of strategy, capital allocation and corporate structure, as they are increasingly prevailing with minimal ownership stakes. The average capital deployed in activist campaigns has fallen from $301m in 2017 to $211m through the first half of 2019. This has gone hand-in-hand with decreasing resistance from boards. Of 67 US activist campaigns tracked by Lazard this year, only four have gone to a shareholder vote. Nineteen cases have already settled, as is likely will the vast majority of the remaining 48.

With this clout, activists are now weighing in both before and after big corporate decisions, be it Bristol-Myers Squibb’s $74bn purchase of Celgene, a rival drugmaker; or United Technologies’ blockbuster merger with Raytheon in defence. Elsewhere, activists have come in to publicly bless strategies unrelated to dealmaking, such as at SAP and Cerner, the tech groups.

Such “pre-activist” engagements, in which SAP extolled Elliott Management as a “fantastic” shareholder, are at the vanguard of public ownership trends. This has nonetheless altered the nature of management and board choices. Today, decisions are not so much decrees as suggestions open to further debate. This is why the smartest chief executives are spending ever more time with their shareholders, with the goal of building consensus and forestalling dissent.

One case in point is the $8.6bn merger between the casinos groups Caesars Entertainment and Eldorado Resort, which was announced late last month. Investor Carl Icahn, who had urged Caesars to put itself up for sale, put out a statement admitting he was doing something “I rarely do, which is to praise a board of directors for acting responsibly and decisively”.

He went on: “Unfortunately, there are far too many boards that, unlike Caesars, believe corporations are more like feudal systems than democracies; that stockholders are the peasants who represent a necessary evil that must be tolerated, possibly patronised, but certainly ignored.”

Second, for “active” managers — investors who seek to do better than indices — this has been a period of change, with $1.4tn flowing into exchange traded funds and other passive strategies over the past five years. How do they demonstrate the value they bring?

Coupled with pressure from institutional investors on environmental, social and governance (ESG) issues, it is ever harder for fund managers to silently buy and sell stocks. In response, they have started doing what was once unthinkable: speaking up themselves.

They are doing so not quite as activists with a capital A, who nominate rival director replacements, but as “vocalists” who will use letters, press campaigns and even the occasional tweet to influence management and other holders. Recommended The Top Line Tom Braithwaite Shareholders need to stand up and fight bad M&A

Most famous is the recent action by Wellington Management — historically massive and mute — to express its dismay at Bristol-Myers’ acquisition of Celgene. Traditional managers from Neuberger Berman and Invesco to T Rowe Price are doing the same. The volume of behind-the-scenes demand letters has, in Lazard’s experience, risen sharply as well.

It is as if the stock market has turned into a 24-hour Speakers’ Corner, where intellectual battle is now waged for public consumption.

Third, securities laws remain ill-equipped to handle this new reality of public advocacy. This places companies and other shareholders at a disadvantage to understanding the agendas of the new vocalist class.

We should anticipate legal squabbles over investor disclosures, and, ultimately, statutory changes to both the timing and the way ever-vocal holders reveal their portfolios and objectives. Expect related battles over the definition of “long-term” investment — such as whether that means two years or 10 — as ESG rubrics become more standard for investors.

None of this is to say that the old way was the best way to manage a company. This new model is just profoundly different. The chief executive of today should regard investor relations not as a dreary cattle call but as a strategic imperative. Developing a profound understanding of who owns a stock, and how — either by human or machine — is the next frontier.

#corporategovernance #shareholderactivism #shareholders #management #investing #investmentmanagement #activism