Does shareholder activism make a positive difference?

By our staff reporter

We’ve seen a big increase in shareholder activism recent years. But does it actually have any proven benefits? According to a recent report by Willis Towers Watson, yes it does.

The WTW report, Investor stewardship: One hand on the wheel?, states that “Arguably, good stewardship is the most useful function the asset management industry performs.” It acknowledges that stewardship activities account for only a very small fraction of asset management industry activity: the “hand on the wheel” reference actually refers to the quip by Lord Myners in 2009, responding to the global financial crisis, that institutional investors were “asleep at the wheel” when it came to stewardship. But now, according to WTW, “investors have one hand on the wheel, at least amongst some of the biggest asset managers and asset owners.”

The Harvard Law School blog suggests that shareholder activism can include anything from contests to replace the entire board, to asking for policy changes or disclosure, or wanting to meet with a company’s executives or directors to discuss their concerns. The form activism takes often depends on the type of investor and what they want. “Institutional investors and hedge funds typically have the most impact,” write the authors. “Individual investors may submit lots of shareholder proposals, but they usually lack the backing to drive real change.”

According to the WEF, in 2017, as activist investors poured more than $60 billion into nearly 200 listed companies, twice as much as in 2016. They took on an unprecedented range of old and established companies, including General Motors, Nestlé, Tiffany and P&G. In the US, 2018 saw a record number of shareholder activist campaigns, with about 250 campaigns initiated during the year (up from the 2017 record of about 210 campaigns initiated).

One example is that of State Street Global Advisors (SSGA). In 2017, SSGA identified over 1,200 companies across the United States, Australia, Canada, EMEA and Japan without a single woman on their board. They voted against the Chair for over 500 companies each year — in 2017 and 2018 — that failed to address this issue. What happened? Over 400 of these companies subsequently added a female director.

There is even evidence that activists produce value for targeted companies. A paper in the Journal of Finance reviewed a range of funds between 2001 to 2006, and discovered a “return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism.”

There are currently shareholder activists appearing in both expected and unexpected places. An increasingly vocal group of shareholders are calling for Mark Zuckerberg to step down as either CEO or Chair or both, of Facebook (given that he holds 60% of Facebook’s voting rights this seems a lost cause). In April, the shareholders’ meeting of a Brazilian railway consortium was surprised when a group of indigenous people turned up, having recently bought shares in the company, demanding their needs and rights were recognised. In the US, Catholic shareholder activists are even trying to reform the private prison system. There is a burgeoning investor activism movement in India, too.

Arguably, it’s the original reason for owning stock and shares – to help influence the way a company is run. When it comes to ethical investment, this is a key concern. However, it requires the opposite mindset too many ESG and divestment strategies — it can involve investing in some ethically ‘uncomfortable’ firms, in order to petition for them to change their direction. For example, Shell, BP, ExxonMobil, Chevron, and Equinor are all facing resolutions from activist shareholders to hit climate targets. Shareholder activism often involves change from within, rather than a siege from the outside.