The Evolving Landscape of Shareholder Activism: Key Developments and Potential Actions

Sullivan & Cromwell LLP - March 10, 2015
Download

It is clear that shareholder activism continues to evolve, expand and increase in influence.  There is a growing emphasis, in particular by large mutual funds and other institutional investors, on shareholder engagement and shareholder-friendly governance structures that, together with the increased activity of activist hedge funds and other “strategic” activist investors, make shareholder engagement and preparedness an essential focus for public companies and their boards.

Most recently, BlackRock Inc. and the Vanguard Group, the largest and third largest U.S. asset managers with more than $7 trillion in combined assets under management, have made public statements emphasizing that they are focused on corporate governance and board engagement.  Vanguard recently sent a letter to many of its portfolio companies cautioning them not to confuse Vanguard’s “predominantly passive management style” with a “passive attitude toward corporate governance.”  The letter goes on to emphasize numerous corporate governance principles and to highlight in detail (as discussed in this memo) the importance of direct shareholder-director interactions.  BlackRock recently updated its voting policies to make clear that they are more than just guides to how BlackRock votes – they represent “our expectations of boards of directors.”  The new policies continue an emphasis on direct interaction between investors and directors.

These sorts of statements by large institutions are becoming more common – TIAA-CREF has sent letters to many issuers advocating the adoption of proxy access provisions, and a number of the largest institutions last year signed a letter sent to numerous companies in support of the shareholder engagement principles embodied in the Shareholder-Director Exchange (SDX) Protocol.  These statements and advocacy efforts come amid continuing high level of shareholder activism at a wide range of large and small companies.

What all this means is that shareholder activism, in terms of corporate governance and shareholder relations, has become mainstream.  What began as a targeted effort by a small number of governance activists, supported by some academics, clearly is now a broad movement that is redefining the relationship between public companies and their shareholders.  We expect this evolution to continue and believe that companies and their boards of directors should recognize that historic shareholder relations models, as well as “traditional” approaches to responding to shareholder initiatives, may no longer be optimal.

Activism has been successful as an asset class, attracting over $200 billion in investor funds, much from pension funds and other institutional investors.  There is an active debate about the long-term impact of activism, but there is no question that in recent years activists in many cases have achieved short term excess positive returns, and that activist campaigns have regularly garnered the support of many traditionally more passive shareholders.  As a result even the largest, most respected companies may be vulnerable.

Companies should take, and many are taking, these developments seriously.  Both directors and executive officers are proactively considering possible activist initiatives and discussing them at board meetings.  Companies are devoting greater effort to communications with shareholders and are beginning to arrange for direct communications between shareholders and outside directors; we expect this trend to continue.  It appears that corporations and shareholders are feeling their way towards a new relationship with significantly more scope for engagement.  This is a complex process that will take time and vary from company to company, and today we remain in transition.

Activists often benefit from underdeveloped lines of communication between corporations and their shareholders, particularly in times of crisis.  Activists may also have benefited from a perceived general decrease in investor trust in the thoughtfulness and diligence of boards and managements following the financial crisis.  Transitions are challenging, so what should a public company do to address the changing environment?  Included in this memo are some observations.