ACTIVIST INVESTORS have some menacing tools of the trade. First comes the phone call, letting a boss know they have a new arrival on the share register. Then there is the slide deck, enumerating all the failings for which the boss is supposedly responsible. Sometimes the body language when predator and prey meet for the first time can be the most unsettling. In 2015, when Trian Partners, one of the biggest activist funds, took a $2.5bn stake in GE, an American conglomerate, its founders, Nelson Peltz and Ed Garden, wore tailored suits—with sneakers—to their first meeting with Jeff Immelt, then GE’s boss. “That note of informality amplified their power,” two Wall Street Journal reporters wrote in a recent book, “Lights Out”. “Amid the fine art displayed [at GE’s headquarters], the sneakers were a reminder of their sovereignty.”
It is easy to be cynical about such calculated displays of power. Some deride shareholder activism as a game of smoke and mirrors, in which hedge-fund bombasts loudly call for executives to do what they were going to do anyway, and executives use activists as cover for unpopular measures such as asset sales and job cuts.
That is too harsh. True, not all campaigns work (Trian’s hasn’t yet at GE). But often a bit of nastiness helps shake up lazy boards and make sure cashflows are better spent. Though the covid-19 pandemic has reduced the number of activist campaigns, two big global trends mean they are sure to rebound. One is the growth of funds that track stockmarket indices. Such passive investments can let managers off the hook for poor performance; corporate activists help rectify that. The second is climate change, which is forcing companies to rethink their long-term strategies with potentially huge consequences for returns. Both trends are reflected in the fast growth of environmental, social and governance (ESG) investing—and with it ESG activism.
Of this new breed, none has made more of a splash than Engine No.1, an activist fund from San Francisco. It was founded only last year but has just successfully installed three directors on the board of ExxonMobil, arguing that the American oil giant is failing to prepare for a clean-energy future. It was an awe-inspiring feat (“supercool”, as one veteran gadfly put it). It also raised serious questions. Have shareholder crusaders morphed into climate campaigners? Will a hard-nosed focus on returns be replaced by mushy box-ticking? Will boardroom fuddy-duddies now sit amid woke eco-warriors? Hearteningly, even ESG activists themselves squabble over which of their tactics are friendlier to shareholders or the climate.
If anything, big activist hedge funds are getting nicer just as the newcomers are turning nasty. Former brutes like Elliott Investment Management, whose founder, Paul Singer, was once described by Bloomberg’s reporters as “the world’s most feared investor”, appear to have mellowed. Elliott has recently made peace with two high-profile CEOs, Jack Dorsey at Twitter, a social-media firm, and John Stankey at AT&T, a telecoms giant, despite formerly seeking their removal. It has taken a big stake in Dropbox, a software company, but has so far refrained from launching a public campaign against it. The bigger it gets, and the bigger its targets, the more it tries to take a “statesmanlike” approach, including by toning down its language. Though it has begun deploying ESG criteria in its campaigns, as have other veterans such as The Children’s Investment Fund, a $30bn hedge fund based in London, it is still mostly focused on boosting financial returns, and sometimes moves quickly in and out of positions.
The ESG-focused newbies argue that their horizons are longer, as is fitting for firms that have topics like climate change high on their agendas. But if you expect them to be cuddlier than their forebears, think again. Because they lack capital to buy large stakes, their attacks need to resonate broadly among investors big and small in order to have any impact. Engine No.1, which owned just 0.02% of ExxonMobil’s stock, achieved this by honing in on the dearth of energy experience on the supermajor’s board, which it blamed for the company’s underperformance against its peers. The fund’s appointed directors have all had important jobs in energy. That makes them better guides to capital deployment during the transition away from fossil fuels, it argued. It helped that Darren Woods, ExxonMobil’s boss, had so little credibility in this area that investors ignored his calls to reject the rebels.
The new activists’ feistiness extends to each other. Engine No.1 has criticised ExxonMobil’s board for lacking “successful and transformative energy experience”. Presumably that includes Jeff Ubben, a veteran activist who recently set up Inclusive Capital Partners, an ESG-focused fund, and won a place on ExxonMobil’s board earlier this year. Mr Ubben, former boss of ValueAct, a 21-year-old fund, who believes in negotiation more than confrontation, welcomes the changes to the board. But he laments that Engine No.1 launched its proxy campaign before consulting the board and management. He notes that it has left it up to the board to come up with a plan to turn the company around.
Bluebells and black eyes
Gripes aside, both insist that their focus is on shareholder returns. An insider describes Engine No.1 as “a shareholder crusader for long-term value, not a climate crusader”. Mr Ubben worries that the focus on returns is ebbing as index funds chase ESG investors, influencing proxy contests. A new firm of activists, Bluebell Capital Partners, has gone so far as to target Danone because its focus on sustainability was not matched by adequate financial returns. It helped oust the French dairy giant’s former boss, Emmanuel Faber, earlier this year. “ESG cannot be an excuse for a company to underperform,” says Giuseppe Bivona, one of Bluebell’s co-founders. Milton Friedman, the late Nobel-prizewinning economist and defender of shareholder value, to whom activists have always bent the knee, would be smiling. ■
This article appeared in the Business section of the print edition under the headline “Gadflies in the boardroom”