ExxonMobil, the US energy giant, has bowed to shareholder pressure and will publish a report on the impact of climate change on the company’s business.In a regulatory statement made yesterday, Exxon said the board had reconsidered a proposal from the New York State Common Retirement Fund, and will push ahead with a climate change statement.
Exxon said: “Consistent with ExxonMobil’s corporate governance guidelines, the company’s board of directors has reconsidered the proposal requesting a report on impacts of climate change policies (Item 12) that the New York State Common Retirement Fund submitted for the 2017 annual shareholders meeting.
“In reconsidering the proposal, the company sought input from a number of parties, such as the proponents and major shareholders. As such, the board has decided to further enhance the company’s disclosures consistent with the Item 12 proposal and will seek to issue these disclosures in the near future. These enhancements will include energy demand sensitivities, implications of two degree Celsius scenarios, and positioning for a lower-carbon future.”
Forbes’ Christopher Skroupa interviewed Charles Elson of the University of Delaware’s John L. Weinberg Center for Corporate Governance about what we can expect in next year’s proxy season:
I think you’re going to see a lot more direct involvement between shareholders and directors than before – whether it’s with a non-executive chair of the board, or head of the governance committee, I think there is a real desire on the shareholder side to directly engage with the party who directly represents them, the director, rather than simply engaging with management.
I believe you’re going to see more calls for discussions, obviously subject to the requirements of Regulation Fair Disclosure, but, ultimately, much more engagement. My suspicion is that, from the board’s perspective, it will be more of a listening and awareness exercise, as opposed to discussions, because the law is very strict on what kind of conversations can take place.
For a director, listening carefully to the concerns of investors saves the directors a lot of trouble down the road. Even more importantly, it helps them better analyze management’s actions at the companies which they oversee…[Boards are] going to have to listen to the concerns that the activists express. It’s not the messenger, it’s the message that’s important here. Companies need to become responsive to the message that the activist is carrying. If everything was going beautifully, the activist would never show up.
With Cardinal Health’s surprise announcement early Monday that it will separate the roles of chairman and CEO and fill the chairman position with an independent director, the Teamsters claimed victory in their push to get the company to do that.
“Cardinal Health’s announcement of leadership changes ahead of Wednesday’s shareholder meeting demonstrates the strength of a growing investor movement led by the Teamsters to hold America’s largest drug distributors accountable for their role in fueling the opioid epidemic,” said Ken Hall, general secretary-treasurer of the Teamsters, in a statement Monday.
“The bar has been set — no more business as usual. Cardinal’s decision to appoint a new CEO and transition to an independent board chair, as demanded by the Teamsters, signals that our message for strengthening corporate governance and setting a new tone at the top is getting through.”
A new study in the Academy of Management Journal by Joseph S Harrison, Steven Boivie, Nathan Sharp and Richard Gentry documents the link between outside pressure and board member departures.
Using a sample of directors of S&P 1500 firms between 2003 and 2014, we argue and find that negative media coverage and downgrades by star equity analysts are positively related to director exit, even after controlling for firm performance, overall media visibility, and negative events such as lawsuits and financial restatements. We also find that director status intensifies the effect of negative media coverage on exit, serving as the board chair attenuates the effect of star analyst downgrades on exit, and director tenure intensifies the effects of both negative media coverage and star downgrades on exit. In post-hoc testing, we provide further evidence of director reputation maintenance by demonstrating the counterintuitive finding that negative attention from the media and star analysts also increases directors’ likelihood of joining the boards of other S&P 1500 firms.
IRRCi has a new report: The Impact of Shareholder Activism on Board Refreshment Trends at S&P 1500 Firms
Activism drives down director ages. Dissident nominees and directors appointed via settlements (hereinafter Dissident Directors) were younger, on average, than directors appointed unilaterally by boards (hereinafter Board Appointees) in connection with shareholder activism. Study Directors (the combination of Dissident Directors and Board Appointees), regardless of who recruited them, were generally younger than their counterparts across the broader S&P 1500 index. While Dissident Directors generally reflected a wider range of ages, insurgent investors and incumbent boards both favored individuals in their fifties when picking candidates. This preference for nominees in their fifties aligns with practices in the broader S&P 1500 index over the same period.
Activism does not promote gender diversity. Less than ten percent of Study Directors were women. While the rate at which females were selected as dissident nominees or Board Appointees in contested situations increased over the course of the study, it trailed the rising tide of female board representation in the broader S&P 1500 universe. There were zero female Dissident Directors in 2011, two in 2012, and three in 2013. Similarly, there were two female Board Appointees in 2011, but zero in both 2012 and 2013.
Activism does not promote racial/ethnic diversity. Less than five percent of Study Directors were ethnically or racially diverse. While minority representation across the entire S&P 1500 board universe slowly increased over the course of the study, from 9.3 percent in 2011 to 10.1 percent in 2015, the rate at which individuals with diverse ethnic and racial backgrounds were selected as Dissident Directors and Board Appointees was relatively uniform and trailed that of the broader index by more than five percentage points.
Activism boosts boardroom independence. Study Directors were generally more independent than their counterparts across the broader S&P 1500. Not surprisingly, dissident nominees and directors appointed to boards via settlements were more likely to be “independent” than directors appointed unilaterally by boards in connection with shareholder activism. It is worth pointing out that the measure of “independence” focused on a nominee’s degree of separation from management rather than from the dissident. Indeed, as the examination of prior boardroom experience suggests, there may be questions of independence from activist sponsors for a subset of Study Directors.
Prior boardroom experience is not required. Boardroom experience does not appear to be a prerequisite for contest candidates. More than half of Study Directors held outside board seats. While most of these directors sat on either one or two outside boards, a sizable minority pushed the over-boarded envelope. Six Study Directors served on four outside boards, four on five outside boards, and one on six outside boards. Many of these “busy” directors appear to be “goto” nominees for individual activists. The serial nomination of favorite candidates raises questions about the “independence” of these individuals from their activist sponsors.
Investment professionals and sitting executives dominate the candidate pool for contested elections. Occupational data for the Study Directors demonstrates experience, qualifications, attributes, and skills (EQAS) preferences for nominees in contested situations. “Corporate executives” and “financial services professionals” were in a dead heat at the front of the pack. These favored occupations were not evenly distributed, as activists tended to select investors and incumbents tended to select executives. In fact, Dissident Directors were nearly three times more likely to be “financial services professionals” than Board Appointees, while Board Appointees were nearly twice as likely to be “executives” than Dissident Directors.
Leave it to the Americans to besiege European companies in August, when the entire continent is on holiday. It emerged this month that Corvex Management, an American hedge fund, had built up a $400m position in Danone, a French food giant. AkzoNobel, a Dutch paints-and-chemicals firm which has been under heavy fire from Elliott Advisors, a subsidiary of another American activist fund, agreed to appoint three new directors to its board. An even bigger skirmish is under way in Switzerland, where Third Point, an American fund run by Daniel Loeb, is seeking to shake up Nestlé, the world’s biggest food company. Ulf Mark Schneider, Nestlé’s new boss, is under pressure to present bold plans to investors in September.
Such tussles used to be relatively rare in Europe. But shareholder activism is on the rise, with restive investors demanding corporate overhauls. Armand Grumberg, a mergers lawyer in Paris, last year counted 70 such campaigns in continental Europe. He expects this year to be even livelier. “It is the new normal,” he says.
The surge in activism has several causes. As American activist funds jostle to find targets at home, some are seeking less well-trodden hunting grounds abroad. Relatively cheap European firms are tempting prey. Many Americans also see continental models of corporate governance as ripe for disruption. Americans (and Britons) think that boards must prioritise shareholders’ interests; Europeans, backed by courts, insist boards should also take the interests of staff, creditors and suppliers into account.
Carol Ryan writes approvingly about a small stake by an activist investor in a previously entrenched French company:
Danone can stomach a new activist investor. A stake reportedly taken by U.S. hedge fund Corvex Management in the French yoghurt maker may be small, but would bring welcome pressure on management to meet its new margin target. Danone was once shielded from a Pepsi bid by the French state. If new investors bring good ideas and discipline, such defences won’t be necessary.
Keith Meister, the founder of Corvex and previous right-hand man of activist Carl Icahn, owns approximately 0.8 percent of Danone’s share capital, according to Bloomberg. The bite-size holding means Corvex is in no position to make aggressive demands, such as its ongoing attempt to derail a merger between chemicals groups Clariant and Huntsman.
Still, Meister’s arrival steps up pressure on Danone Chief Executive Emmanuel Faber to make the $53 billion dairy group more efficient….Some needling might be useful at a company that has previously disappointed investors with poor execution.
Danone has become emblematic of impregnable French companies ever since the French government scuppered reported interest from Pepsi back in 2005, making the yoghurt maker appear takeover-proof….
Were Corvex to bring useful ideas and discipline, it would make Danone more efficient, more profitable and more expensive to a would-be buyer. That’s a far more reliable form of takeover defence.
Shareholder and hedge fund activism has become an influential force in German corporate life over the past 15 years or so, both in terms of corporate governance improvements and value creation, with approximately 400 campaigns launched by 100 (predominantly foreign) activist hedge funds against 200 of the country’s 650 public corporations.
Until recently, it was the threat of hostile takeovers that was deemed the principal corrective for poor management decisions and shareholder value destruction due to performance failures. Today, in Germany it has shifted to active monitoring by engaged or activist value minority investors – characterised by such an alignment of interests with and persuasion of fellow shareholders and institutional investors to generate support in the form of the requisite general shareholders’ meeting (AGM) majorities, if necessary. With 60 to 70 per cent (sometimes an even higher percentage) of the voting stock of leading German corporates owned by foreign institutional investors, this train of thought must be taken seriously.There are two significant factors that help contextualise activist campaigns and market acceptance of shareholder and hedge fund activism in the German corporate governance debate.
Firstly, 60 per cent of all 650 German publicly listed companies are controlled or dominated via share block ownership by families, founders, management teams, investors or holding companies. Thus only 250 German public companies lend themselves to the presumption that activism is dependent on a widely-held, dispersed shareholder ownership/population so that when negotiations with target management break down, the activist may resort to launching a confrontational proxy fight in order to replace some or all members of the supervisory board. They, in turn, may recall the management and replace them with new managers who agree with the activists’ strategic plan.Second, there is a certain consensus-oriented German corporate culture, etiquette and decorum that, over time, has demonstrated how publicity and accusatory campaigns against sitting management or supervisory board, proxy fights or resorting to litigation are by and large unsuccessful strategies, with only 20 per cent of all campaigns ever becoming public knowledge. There has only been one precedent (out of a total of seven attempts) where activists were capable of replacing the chairman of a supervisory board in an adversarial proxy fight – at pharmaceutical company Stada AG in August 2016.
In the view of many, the separation of ownership and control (Berle-Means) and the principal-agent problem (Jensen-Meckling) has recently led to sharp market cap drops and share price value-losses at the expense of shareholders in large DAX 30 German corporations and corporate groups, such as the utilities RWE and E.on, but also TUI, Commerzbank, Volkswagen and Deutsche Bank. It is no secret that concerned institutional investors have initiated discussions with activist hedge funds on these matters (see illustration opposite).
Observers believe that leading activist hedge funds, who acquire usually a minority position in the one to 10 per cent range (seldom more than 15 per cent total, depending on target size), could exert such additional monitoring function on behalf of all shareholders without necessarily destabilising the balance of powers between the AGM (shareholders), supervisory board and management board. First, they are not imposing their views on anybody, least of all management or the supervisory board, but seek to engage and present well-thought out alternative courses of action. Second, they have to win the votes and confidence of fellow shareholders and institutional investors in the first place in order to have any strategic impact.
So, to recap, there have been approximately 400 equity activist campaigns in the past 15 years or so in Germany, attaching to 200 public targets (out of a total of 650 listed companies), mostly hidden from the public.Further, assuming a base line of 400 campaigns, Thamm/Schiereck claim that 75 per cent of these samples have been kept under the lid and were never in the public limelight, on social media or mentioned in the press or legal/economic writings, reflecting the mainly informal approach take in these campaigns….
Interests and strategies of both activist hedge funds and German blockholders defy easy categorisation. Activists aim at creating value expressed in an increased share price of their portfolio companies. They employ intervention and campaigns built around some of the building blocks that we have presented. KUKA demonstrates that hedge funds may align themselves with blockholders to ride a rising stock price. On the other hand, German family blockholders may use activists to attract the interest of international institutional investors following the latter’s recommendations with the ultimate objective of boosting share value and selling their position – displacement through defection. Some activists adapt their strategies to the German context and demonstrate commitment to their portfolio companies, while German blockholders utilise activists to increase the value of their holdings, thus changing their preferences from commitment to liquidity.
Not unlike studies in the US, there are empirical findings in Germany that show there is considerable disciplinary power inhering in activist hedge funds. Virtually all listed companies in Germany (which have shrunk from about 1,000 to 650 in recent years) have an IR department now, monitoring closely their investor base. Many of them anticipate potential investments, interventions and engagements by activists and, in order to thwart campaigns, implement some of the typical activist demands, such as extra dividends, share buybacks or selling non-core divisions.
Activist investor Daniel Loeb announced over the weekend that his hedge fund, Third Point, has taken a $3.5 billion stake in the Swiss food conglomerate Nestle, and he wants some changes at the company. That may sound like a lot of money, but the investment represents just over a 1 percent stake in the company. It’s enough though to get the company’s attention. That’s because activist investors are looking to drive change, unlike a lot of “passive” investors, who just sell their stock if they don’t like how a company is run. How do activist investors work? Experts say if activists have a reputation for adding value and getting good returns, and if they have appealing ideas, they can win over other shareholders who will help them push for change.
Four large pension funds have asked shareholders of the drug company Mylan NV to vote against six directors, including the company’s chairman, who have been nominated for re-election at the company’s annual meeting June 22.
“We believe the time has come to hold Mylan’s board accountable for its costly record of compensation, risk and compliance failures,” said the letter to shareholders, a copy of which was filed recently with the Securities and Exchange Commission.
The letter was signed by Scott Stringer, the New York City comptroller, on behalf of the $170.6 billion New York City Retirement Systems for which he is fiduciary to the five funds within the system; Thomas DiNapoli, the New York state comptroller and sole trustee of the $192 billion New York State Common Retirement Fund, Albany; Anne Sheehan, director of corporate governance for the $206.5 billion California State Teachers’ Retirement System, West Sacramento; and Margriet Stavast-Groothuis, adviser, responsible investment, for the €205.8 billion ($230 billion) Dutch pension provider PGGM, which manages the assets of the €185 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.
Collectively, the pension funds own approximately 4.3 million shares of Mylan stock, worth about $170 million, said the letter to shareholders.