Actively engaged: Assessing Risks Posed by Activist Investors

Welcome to the November 2022 edition of our newsletter!  In this issue, we’ll examine the risks posed to companies by activist investors, and how best to understand both their motives and any weaknesses that may exist.

A Different Kind of Activism: Pushing Agendas for Profit

The activism of political and social justice movements born in the 1960s has, over the last decade, been interpolated into the activist investing movement, where agitating funds (or, sometimes, individual shareholders) seek to compel change at a portfolio company.  While the prior activism model used to be concerned with “unlocking value” – typically reducing employee headcount, increasing use of automation or spinning off divisions to drive growth, reduce costs or both – today’s activist investors seem to want more.  In addition to making companies “lean and mean,” they also want to make them … green.

Enter the ESG movement — environmental, social and governmental reforms, championed by what might be called the original wave of activists.  Large institutional investors and activist investors alike have begun to champion causes such as reducing a large manufacturer’s carbon footprint, improving employee working conditions or compensation, and changing supplier trade terms.  On their face, each is hard to argue against — who wouldn’t want to pay coffee growers more, or improve workplace safety?

Yet an activist investor’s other motives can be obscured by such noble sentiments, and if a company takes a small stake in a client firm, only to start making noise about needed change, it’s best to do your homework on them.  Many such investors can have shorter term investment horizons which may not comport with the longer-term vision of company executives.  An investor’s need for rapid change — realized over quarters, not years – can be driven by many factors, including shoring up portfolios which have suffered losses in other areas.  Ultimately, investors are responsible to their clients, not their portfolio holdings, and they will use ESG motivations as a means of justifying cost reductions which are driven by a far less noble agenda of meeting performance targets.  In addition to scrutinizing individual managers to learn about their background and any conflicts that may exist, placing their goals adverse to your company’s, a close review of a fund’s Schedule 13 holding reports can provide good insight into why they might be pushing so hard for change at your company.  As new rules make it easier for activist investors to nominate individual directors for public companies, vigilance about their motivations and ultimate goals is paramount to balancing a company’s long-term vision with both the short-term goals of investors and changing cultural and societal objectives.