What is good for an activist is often good for other shareholders
In October 2017, Procter & Gamble (P&G), one of the largest US companies, announced that shareholders had rejected the proposal of activist fund Trian Partners to join its board of directors.
The difference in votes for or against the request was so small – a meagre 0.2 percent on more than 2 bn shares, that Trian asked for a recount. In December of that year, the company announced that Nelson Pretz, chairman of the fund, would join the board of directors after all. After the recount, the fund had won the vote by 42,780 votes, or 0.0016 percent of the voting shares.
The evolution of the activist
Activist funds, those that buy shares in a company to influence the management of the company, have not historically enjoyed a high reputation, seen as shareholders who sought only short-term gains at the expense of the long-term interest of the companies or their very existence.
This has changed in recent years, where activists are seen more as long-term investors, investing for strategic change in companies with underperforming or well-off management teams.
This new view brings to mind Michael Douglas as Gordon Gekko in Wall Street, as he addresses the Teldar Papers shareholder meeting, reminding shareholders that they are the real owners of the companies. In his speech he accused the directors of barely owning any shares in the company, while drawing high salaries and enjoying numerous corporate perks such as the use of a private jet in the face of very poor share price appreciation. Nearly 40 years after that film was made, the same situation is often repeated.
In the late 1960s, more than 70 percent of shares were held by individual shareholders. In recent decades, these have been greatly diluted in favor of institutional shareholders, who now own more than 50 percent of the shares – compared to just 20 percent now held individual shareholders.
We have also seen a significant reduction in the average holding period of shares over the last 25 years, while at the same time the weight of passively managed index funds has ballooned to a scale where they might represent 20 percent to 25 percent of the shareholding and have an important say in voting at shareholder meetings. The low fees of these funds mean they do not invest money in analyzing in detail the thousands of companies in which they are invested, yet their support is crucial for activist funds, as their vote can decide whether proposals go ahead or not.
A loss of control
In recent decades there has been a loss of effective shareholder control over the decisions taken by company management, despite growing regulation or the so-called agency problem. This marks activists as a more important cog in the wheel than ever before.
Individual shareholders do not have the resources or financial muscle to monitor company decisions and the sale of shares by an individual shareholder has little impact on the future of the share.
But an activist fund conducts a very detailed analysis of where a company can improve and where there are potential catalysts to increase value.
Weaknesses – such as deterioration in a company’s financial performance or profitability metrics, long-term low share prices, inefficient investments in terms of returns on capital, poor operational management, or lack of transparency and corporate governance – often attract the interest of these investors. While they might typically buy just 1 percent to 3 percent of the company initially, they will spend time and money to be able to make an attractive case for the support of other large shareholders such as pension funds, insurance companies or passive-management funds.
The activist toolkit
Once the areas for improvement have been identified, an attempt to dialogue with the company’s management or board of directors begins. These are usually private contacts. If the company rejects the arguments, the fund will go a step further by making its arguments, or a letter to the board, public. If the disagreement continues, the funds may present proposals at the shareholders’ meeting or formally request the resignation of some directors, seeking seats for the fund instead, from where they will seek to influence management more directly.
This public pressure, as in the recent case of Grifols, often encourages companies to strike deals with such funds.
In the presence of an activist, attempts by companies to deflect attention by dismissing them as opportunists are increasingly less popular with other shareholders or proxy advisors. What is good for an activist is often good for other shareholders, who are increasingly open to supporting such investors, as we saw in the case of the oil company ExxonMobil.
In the case of P&G, the role of Trian Partners was largely that of a strategic advisor, rather than an investor financially engineering a piecemeal sale of the company, as was the case in the early examples of the 1980s.
Nelson Peltz resigned from the P&G board at the end of 2021. During his tenure, P&G’s share price rose 86 percent against a 50 percent rise in the S&P index. In 2022 the company posted its strongest quarterly sales growth in decades, despite post-pandemic uncertainty. Considering the stock’s poor performance over the previous 10 years, P&G’s thousands of shareholders should carry a picture of Peltz in their wallets.
