The Rise and Resurgence of Shareholder Activism
Alyssa Ng
Introduction
While historically few investors have been willing to publicly voice their criticisms, the past few decades have seen a new kind of shareholder emerging — the activist investor. Their rise has been rapid, and their disruptive actions have rattled corporations and businesses in a way that is has left entire boardrooms reeling.
Typically, these activists only need to hold a small percentage of ownership positions in companies to publicly propose significant changes. In recent times, this has been made easier by large institutional investors becoming more and more willing to engage with activist campaigns. While institutional investors have traditionally preferred to keep a low profile on governance in favour of pure financial strategies, this may no longer be the case. Some of the biggest funds including BlackRock with more than $6 billion in AUM, and Vanguard with $5 billion AUM have publicly lent support to smaller activist investors, allowing them to leverage their massive influence when pressuring firms for change.
Activists work to voice their concerns firstly by engaging with management and the board directly. However, if consensus is not reached (as is often the case), their demands are commonly made public through open letters, white paper reports, shareholder proposals and proxy votes. Agendas typically revolve around issues relating to corporate governance, such as replacing management or new director appointments (Elliott with GSK), dividend payouts (Trian Partners with GE), and executive remuneration (Relational Investors with Home Depot).
However, an increasing number of activist campaigns have begun seeking influence within strategy domains, which previously has been the sole prerogative of executives. Most prominently of these has been the surge of ESG-focused campaigns, particularly in light of the COVID-19 pandemic.
The Post-Pandemic Resurgence and Shift towards ESG
With climate change becoming an increasingly pressing issue in recent years, companies have been forced to rethink their long-term strategies due to potentially huge consequences for their returns. From an investor’s perspective, the attention paid to environmental, social and governance (ESG) by a company has also become closely linked with their business resilience, competitive strength, and financial performance. This is reflected in the fast growth of ESG investing, and with it, ESG activism.
The devastating events of 2020 have only accelerated this trend. With COVID-19 bringing concerns around climate change and issues surrounding social inequality and diversity into sharp focus, it is no longer negotiable for companies to future-proof themselves against the increasing amount of ESG risks they are subject to. Companies that lag behind the pack in ESG face a real risk that their valuations are lowered and becoming prime targets for activist investors.
This trend is also reflected in the data — after a brief period of subdued activity when COVID-19 first hit, the total number of activist campaigns has seen a strong rebound. According to Bloomberg, the number of campaigns launched through June 2021 at companies with a market cap of over $1 billion USD reached 116, up from 87 campaigns over the same period in 2020 and 115 campaigns in 2019. Unsurprisingly, the vast majority of these campaigns have centred around ESG related issues.
Activism in Action: Engine No.1 and ExonMobil
Of these campaigns, none has made more of a splash than Engine No. 1’s stunning attack on ExxonMobil. Despite only being founded last year, it was announced this past June that the little-known activist had somehow managed to secure three seats on the board of Exxon. Made more impressive was the fact that Engine No.1 only held 0.02% of shares in the energy goliath. Their feat was awe-inspiring, shaking Big Oil to their core.
The upstart fund ran their challenge to ExxonMobil by equating climate risk with financial risk in terms shareholder value destruction. Engine No.1 contended that the energy major faced “diminished returns, high debt levels, and questions about its ability to maintain its dividend.” This was supported by the staggering $22 billion loss made by Exxon in 2020, playing further into investors’ fears about shrinking profits and concerns of a bleak future. Engine No.1 further noted that “repositioning ExxonMobil for long-term value creation will require an understanding of the trends shaping the future of energy and the opportunities they create, yet none of the independent board members have any other energy industry experience.”
The climate risk issues pushed by the fund were sufficient to get mega-funds Vanguard, BlackRock and State Street along with leading pension funds CalSTRS, CalPERS, and New York State Common in their corner. In explaining their stance, BlackRock stated that Exxon needs “to further assess the company’s strategy and board expertise against the possibility that demand for fossil fuels may decline rapidly in the coming decades.” Climate change is undoubtedly at the forefront of investors’ minds — in his 2021 annual letter to CEOs, Larry Fink, BlackRock’s CEO reiterated his company’s commitment to combatting climate change: “This is the beginning of a long but rapidly accelerating transition… climate risk is investment risk.” Aligning their campaign around this thematic allowed Engine No.1 to gain the support of not only the big three investment firms, but also the three largest pension funds in the U.S. This was undoubtedly the determining factor behind their victory.
Culminating in a historic defeat for the oil giant which resulted in a quarter of their board being replaced, Exxon has been left with no choice but to confront climate change head-on. “We’re focused on executing a strategy that positions the company for long-term success through the energy transition, and strengthening shareholder returns,” said an Exxon spokesman recently. Just this month, it was also reported that the supermajor was considering a pledge to reduce its net carbon emissions to zero by 2050. If carried through, this be the most significant strategic shift by the oil company in its entire history.
The framing of Engine No.1’s campaign around shareholder returns appears to have been both effective and accurate. “If we’re right on getting Exxon to mitigate these impacts, the stock should go up”. The words of Chris James, the founder of Engine No.1, already seems to have rung true — Exxon’s shares, which the fund bought at around $36, peaked at over $60 in June (in part boosted by a rally in oil prices). Despite a slight decline since then, the stock closed most recently $56.77, still far higher than the purchase price.
Implications Moving Forward
The ExxonMobil episode illustrates an important bridging of the gap between those interested in maximising investments and those interested in climate change and ESG. Far beyond the votes held by Engine No.1 and far beyond established climate change and environmental activists, the success of this campaign relied on its appeal to the mainstream investment community. The majority of votes ending up coming from large institutional investors and pension funds because they were able to recognise significant business risk in the strategy ExxonMobil had (or had not) taken.
It’s clear that mainstream investors now view climate risk as a key driver of long-term value. Activists like Engine No.1 can take advantage of this by integrating criticisms of ESG failures into their campaign narratives, allowing them to gain invaluable traction with institutional investors come voting time.
With ESG activism as potent and relevant as ever, we are likely to see a continued increase in these campaigns over the near future. Initiatives such as Climate Action 100+ should all but ensure this. Bringing together over 370 institutional investors including BlackRock, HSBS and UBS, the investor advocacy group represents an astounding $41 trillion in assets (twice the GDP of the U.S) and leverages their collective influence to engage companies on climate change. Already, they have successfully pressured oil giants BP and Shell to set targets to reduce emissions and disclose more data.
Closer to home, a new ESG war has also been brewing in Australia. In an act of shareholder activism, billionaire Andrew Forest has blocked the $550m takeover of Tasmanian salmon farming group Huon by the Brazilian food processing giant JBS. He is demanding improved environmental and animal welfare standards from both companies.
Engine No.1’s victory is undoubtedly just the start of a wider movement — the likes of Exxon and Huon would do well to brace for more such fights.
Alyssa Ng is a Research Analyst for UNIT – University of Melbourne
REFERENCES
https://www.climateaction100.org/
https://hbr.org/2019/05/the-investor-revolution
https://www.wsj.com/articles/the-hedge-fund-manager-who-did-battle-with-exxonand-won-11623470420
https://www.wsj.com/articles/exxon-considers-pledging-net-zero-carbon-by-2050-11628161201
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.
