According to recent data from Lazard, activist investors spent $62 billion advocating for corporate change in 2017, more than twice what they had deployed just a year before. This dramatic uptick was less indicative of the volume of targeted companies than of their size, as activist investors target increasingly large, global companies.
Earlier this month, Reuters hosted a 2018 Predictions event where Breakingviews Global Editor Rob Cox led a discussion with Nelson Peltz, founder of the $12 billion activist firm Trian Partners, about his perspective around successful shareholder engagement strategies and his outlook on market performance.
As one of the most high-profile players in the activist arena, a strategy known for contentious, widely-publicized battles with corporate boards, Peltz pointed to Trian’s success working collaboratively with existing management as a differentiator from its peers and as a key element of their approach to boosting both short and long-term profitability.
“What we do is come with a plan to make a company better,” Peltz asserted. “We never come with a plan to throw out the CEO or to embarrass anyone.”
Addressing the perception that activist investors seek a temporary bump in stock price through forced cost-cutting instead of enabling long-term value creation, Peltz added, “The word ‘activist’ has come to mean a fight, it has come to mean short-term. However, our firm maintains each of our positions for an average of seven years. We are really not that concerned about the next quarter’s numbers, because we will be around for the next 28 of them.”
With the meteoric rise of passive investing showing no signs of stalling as we head into 2018, this longer-term approach to shareholder engagement may prove critical to the success of activist firms looking to secure board seats through proxy contests. Accelerated by the boom in Exchange-Traded Fund (ETF) inflows and other index-tracking funds, the three largest passive money managers – Vanguard, BlackRock and State Street – together now control three-quarters of all the money in passive funds. Alongside this concentration of corporate ownership comes increased influence over the policies and strategic direction of their portfolio companies. This means that activist investors must put forth proposals with a clear path for sustaining the long-term value creation sought by index managers, who don’t have the option to exit their position should short-term expense cuts lead to poor long-term performance.
While passive managers have historically sided with management in proxy contests, as their influence continues to grow, so too has their willingness to wield that power to compel change. Increased assertiveness in guiding corporate decision-making will undoubtedly continue to alter the dynamic between passive giants and activist firms. For corporations targeted by activist campaigns, this means bringing a clear, data-driven strategy to the table that lays out their plan to boost profits and build long-term value will be increasingly critical to garner necessary support from index fund providers.
As his discussion with Cox turned to the role of passive managers, Peltz noted that, for activists, this increasing concentration of shareholder influence can be a double-edged sword. There are now a far smaller number of shareholders they must convince to back their recommendations. However, if they are unable to persuade at least one of the major passive owners, winning the necessary votes for approval begins to look increasingly unlikely.
Peltz has demonstrated he is able to garner such support, with two of the three biggest passive managers voting to approve his most recent board appointment – votes that were ultimately pivotal in securing his narrow win, and which epitomize the shifting dynamic between passive and active shareholders. As more assertive approaches to corporate stewardship evolve, the extent to which activist and passive investors can agree on the best path forward for companies they have a stake in will determine the impact both investment strategies will have on the corporate landscape.
Meaghan Knox is a senior account executive, Edelman Financial Services Sector.