“What Does “Activism” Mean Now?”

More frequent activist campaigns, a more diverse cast of activists

An excellent recent article in the Investors Chronicle, written to help retail investors understand the power of activists, points out that Benjamin Graham, “the father of value investing”, effectively launched the first activist campaign nearly 100 years ago, in 1926.

This time last year, a group of blue-chip minority institutional shareholders collaborated, represented by an “Ad-Hoc Committee”, to launch a shareholder action which successfully forced change at an investment trust managed by celebrated activist Nelson Peltz. This “turning of the tables”, highlighted how far activism has come since 1926 and begs the question, is the word “Activism” still the right one to describe the range and depth of current active shareholder engagements?

Origins of Activism

The difficulties Benjamin Graham faced in pushing for Northern Pipeline (the target) to return capital to shareholders was partially attributed to the point that “share registers were significantly more of a closed shop than they are today”, and it was not until the mid-20th century that they became more widely accessible through regulation, effectively facilitating the opportunity for shareholders to drive change and influence corporate activity.

The Investors Chronicle article discusses the transition into the “corporate raider” era of the 1980s, and the activities of figures such as Carl Icahn, noting the relatively short-lived period in which this type of engagement with corporates survived. From there, it covers how hedge funds became dominant figures in their search for alpha and the focus shifted towards management change, M&A, strategy, and capital allocation. An interesting factor in the growth of modern activist investing is ascribed to the development of passive investing, and the perception of quiescent shareholders, which has created space for activists to argue they are fulfilling an important role in markets.

It is also clear that, as in the case of the Trian Investors 1, there has been significant growth in the variety of investors who are now engaging more actively with investee company Boards, particularly on issues around ESG. A paper from Herbert Smith Freehills highlighted how “the term shareholder activist covers a broad spectrum of investors, with activism no longer being the solo pursuit of pure activist funds. Instead, we are seeing campaigns by private equity investors such as KKR, institutional investors (such as Bluebell Capital) and traditional investors who have joined forces with activists”.

Opportunistic, Value Driven Activism

The market opportunity for activism is evidenced by the weight of capital that has been raised for conducting these campaigns, particularly in the US, where the top four largest activist firms by AUM exceeded $10bn in Q1 2023, led by Third Point Partners at $18.1bn. The opportunity for realising profit is reflected in various definitions and understandings of this activity:

• An activist investor is someone who believes a company has potential and sees an opportunity to increase that company’s share price - Corporate Governance Institute

• Activist investors, sometimes called shareholder activists, usually try to make money by investing in underperforming companies, trying to improve their performance and then selling their shares for profit - Forbes

• Investors, meanwhile, are committing more money to activism, in search of good returns and greater accountability from companies - Deloitte

Mega-cap companies (>$50bn market cap), which represent an attractive opportunity for profitable activism due to their scale and liquidity, are a more popular type of target for activist campaigns than ever. Lazard recently reported that 16% of unique companies targeted in Q1 2023 were mega-caps, the highest level on record. In Europe, the figure for Q1 was 22%, double the average for 2022 overall . For recent examples, we have seen major figures in activism targeting Disney, TotalEnergies, Salesforce and Shell.

Historically, the perceived sole-focus of activist campaigns on short term profit has often been met with considerable hostility. In 2005, Chris Hohn’s activist fund, The Children’s Investment Fund, was wrapped up in a famous debate in Germany around Deutsch Bourse, where the behaviour of private equity/hedge funds was compared to “locusts” by a German politician. Incidentally, Hohn’s fund tops the Investors’ Chronicle list of Top 20 Activist Sharks today (7 June 2023) .

Activism as a Positive Force

However, the developed, more recent definitions of activism reflect how activism is better recognised and accepted. Campaigns are now often more broadly based with, for instance, changes being sought in the sphere of ESG and the pursuit of value beyond and alongside profit. Lazard’s Annual Review of Shareholder Activism for 2021 highlighted how there had been a “rapid proliferation of ESG as a key plank in activists’ platforms”. While unlocking value often remains the dominant objective, the difference is in the broader definition of value that activists are seeking to achieve and what that says about activism as a force for positive change.

Returning to Trian Investors, we saw this trend born out in practice. The core of the Ad-Hoc-Committee’s action was bringing together institutional shareholders to ad-dress corporate governance concerns, protecting the interests of the minorities. It also can be seen as a positive that activists themselves should not be immune to so-called activism, as was the case for the Ad-Hoc-Committee, and that this is in fact a growing trend. This development is likely to improve the overall quality of activist vehicles and help ensure that those agitating for change are themselves in as strong a position as they can be.

“Activism” the Label

All of this suggests that the ‘activist’ label may be applied to a wide range of activity from shareholders, aimed at stimulating the relationship between companies and their shareholders, and holding directors to account in the fulfilment of their fiduciary duties to shareholders and the broader community. Seen in this context, the label is more helpful than indicating mere opportunism, as it demarcates this area of market opportunity which, when executed well, is recognised as being a positive force in capital markets. However, investors who position themselves as ‘activists’ must ensure that, in a society which expects more from the investing community than pure financial gain, their campaigns are understood in a wider context than just short-term profit.

First published: 27 June 2023

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We began the Vico Views series as an expression of the team’s thoughts on the issues that we monitor in the course of our work. Internally, we have a short Vico Views type discussion every morning in our daily briefings, so we wanted to take the most interesting of those subjects and create a format to share them externally as well.