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.
Exxon Mobil Corp investors will push to meet with oil company officials this summer to hash out elements of a climate-impact analysis following a shareholder vote calling for studies of technology and climate-related risks to its business.Exxon has said that it will reconsider its opposition to the request, not that it would begin discussions or initiate new studies. The shareholder proposal, filed by 54 groups including financial, religious and corporate governance activists, won the support on Wednesday of 62 percent of Exxon holders.
“I anticipate we’ll be having a meeting this summer,” said Tracey Rembert, assistant director of Catholic Responsible Investing at Christian Brothers Investment Services, one of the 54 co-filers.The White House’s decision on Thursday to withdraw from the Paris agreement on climate change has no bearing on the proposal. “We expect the scenario assessment will start to be done quickly at Exxon,” Rembert said.
The investors behind the proposal routinely met in past years with Exxon between December and February to discuss annual meeting proposals, she said. Earlier discussions because of the majority vote are in order.
A strong US dollar, undervalued asset prices and increased global scrutiny of corporate governance practices are contributing to an uptick in shareholder activism incidents around the world.According to the Global Shareholder Activism map from FTI Consulting, there were 342 activism campaigns outside the US in 2016, compared with only 70 in 2010. Over the same period in the US, the number of campaigns increased from 135 to 645.Speaking to IR Magazine, Steven Balet, managing director and head of corporate governance & activist engagement at FTI Consulting, says: ‘We have seen some of the larger US activists going overseas with US-style activism. But we’re increasingly seeing a great deal of home-grown shareholder activism in Australia, the UK and the Nordic countries.’
show how passive investing also leads to more aggressive shareholder activism than there would be otherwise, as passive fund firms add their clout to campaigns waged by activist investors. Their paper is titled, “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism.”“We’re asking whether two recent trends in U.S. stock ownership — the rise of activism and the growth of passive investors — are related,” [co-writer Todd A.] Gormley says. “Might the rise in passive ownership actually, somehow, be facilitating activism?”
In the paper, Gormley and his co-authors, Donald B. Keim, and Ian R. Appel, find that:
the rise in activism and its successes has coincided with the growing influence of passive institutional investors. Passively managed mutual funds now account for more than a third of all mutual fund assets, and the institutions that offer these funds, like Vanguard, State Street, and Blackrock, are now often the largest shareholders of U.S. companies. In this paper, we ask whether the growing importance of passive institutional investors has influenced activists.
We find, over the 2008-2014 period, that activists are more likely to pursue expensive activism campaigns when the target company’s stock has higher ownership by passively managed mutual funds.
As four of the five largest private oil companies prepare to meet shareholders next week, it is the green brigade in ties and suits that most worries them. At AGMs on May 25th CalPERS, the California state pension fund, with $294 billion of assets under management, plans to pressure ExxonMobil and Chevron, America’s two biggest oil companies. It wants the energy firms to outline risks to their business plans thanks to more-stringent-than-expected climate-change policies agreed in Paris in December. At ExxonMobil they will be joined by Norway’s Norges Bank Investment Management, the world’s largest sovereign-wealth fund, the New York City Pension Fund, global asset managers such as HSBC and BMO, which have about $650 billion of funds, and an ecumenical array of endowment-rich church groups.
Even Pope Francis will play a cameo role. The Sisters of St Dominic of Caldwell, New Jersey will invoke his encyclical about climate change in their proposal to commit ExxonMobil to support the Paris goal of limiting global warming to less than 2°C above pre-industrial levels.ExxonMobil, the world’s largest private oil company, gives these resolutions short shrift. It argues that more energy is necessary to alleviate global poverty, and that technology—coupled with a carbon tax—will mitigate the environmental risks. It may hope that a recent rebound in oil prices to around $50 a barrel will pacify shareholders. But their frustrations have been fanned by a decade of wasteful spending in the oil and gas industry (see chart). Some believe that more restrained capital allocation would boost returns, as well as helping the planet.
Ackman, founder and CEO of hedge fund Pershing Square Capital Management, made several comments Wednesday in front of the Senate Special Committee on Aging, which was holding a hearing about drug prices, that board members do not typically make.
In a hearing scheduled after the close of the market, he said that the very delayed 10K will prob come out Friday, the CEO will be on board Monday (the date was not previously disclosed), he would recommend price cuts on several drugs to the board, and that he essentially saved the company from bankruptcy.
VEA Vice Chair Nell Minow is quoted in the story in response to his statement that as a passive investor initially he did not examine their pricing strategy.
Nell Minow, the vice chair of ValueEdge Advisors, finds that mea culpa hard to swallow. “Even for a passive investment, due diligence should always include looking at pricing strategy. That’s especially true here since price increases were the primary way to recover the premium for acquisitions and a key component of the business model overall.”
But if Mr. Fink really wants to get the attention of company executives on stock buybacks and other corporate governance issues, why doesn’t BlackRock vote more often against C.E.O. pay packages of companies that play the short-term game?Executive compensation is inextricably linked to the shareholder-unfriendly actions Mr. Fink has identified; voting against pay packages infected by short-termism would help curb the problem.But BlackRock rarely takes such a stance. From July 1, 2014, to last June 30, according to Proxy Insight, a data analysis firm, BlackRock voted to support pay practices at companies 96.2 percent of the time.
Senior finance officials often speak in diplomatically coded language that can seem mystifying to the general public.
But not David Wright, who has just ended a three-year term as one of the world’s most senior regulators.
When it comes to serious corporate governance failures at large companies, the 64-year-old is clear and unequivocal about his belief that senior executives should be held personally accountable for any misdemeanours.
“Those individuals who abuse markets have to know there is one place they are going if they do not conform with the rules. It’s called jail,” says Mr Wright, who stepped down as secretary-general of Iosco, the global regulator for securities markets, earlier this month.
Mr Wright recognises much more work needs to be done to right the wrongs of the financial crisis, which continue to cause problems today.
“Regulators have to get tougher and sanctions must be more draconian,” he says.
Carl Icahn has nominated 42 people to fill 94 board seats at public companies ranging from EBay Inc. to Herbalife Ltd. in the past five years. Not a single one was a woman.
Other activist investors, including Dan Loeb and his Third Point Partners fund and Jeffrey Ubben of ValueAct Capital Management, haven’t done much better. Since the beginning of 2011, five of the biggest U.S. activist funds have sought at least 174 board positions and landed 108, yet nominated women just seven times, according to data compiled by Bloomberg. The women candidates got five seats, or 5 percent of the total.
Douglas Chia, executive director of the Conference Board’s Governance Center, a research arm of the business group, said companies targeted by activists would benefit from having more women directors.
“If you believe that diversity on boards is critical for long-term sustainable growth, then you have to wonder whether activists care about this — or simply want to get the company’s stock price up quickly,” Chia said. “It’s a serious issue at a time when most executives and directors believe you need boardroom diversity to avoid getting stuck in blind spots.”