A Look Ahead Into 2020: Passive Pressure, Proxy Squeeze, ESG Enmity
Hi all,

We hope that you had a restful and enjoyable holiday period. Welcome back.

We wanted to kick off 2020 with a look ahead in the activist and corporate governance landscape. Here are some themes that we consider worth watching as the year unfolds.

Passive Pressure. The index fund narrative is shifting to the defensive. Look for BlackRock, State Street and Vanguard to continue to seek ways to communicate a unified message that pushes back against active managers, academics, regulators and other detractors who say the big three are growing too powerful and too concentrated.

Proxy Squeeze. The SEC’s proposed rule amendments on shareholder proposals and proxy advisers have major implications – specifically for small investors and two advisory firms: ISS and Glass Lewis. The proposals are still in comment period and any final ruling is a long-way off. Still, the rules favor companies (indeed, they’re the product of heavy lobbying) and the debate on shaping the changes will be a major corporate governance topic in 2020.

Elephant Activism. Activist campaign volumes dipped last year, according to Activist Insight, but the market cap size of corporate targets has shot higher. The “no company is immune” mantra rings as true today as ever. FedEx, Netflix and MolsonCoors are among the majors falling in the activism chatter crosshairs. Activists, coming off a bumper year where they outperformed all other hedge fund strategies, have grown in size and stature and that means putting larger equity checks to work on bigger, more mature companies.

Active Innovation. Active managers continue to adapt their powers of persuasion. Last year saw several non-traditional “honor agreements” between companies and activists. Activists took a more casual route, striking temporary truces rather than legal standstills with companies such as AT&T and Emerson Electric. Another innovation on the rise: “vote no” (aka “exempt solicitation”) campaigns. Such a move enables agitating shareholders to encourage other investors to withhold their vote or vote against a management proposal, without waging a costly and distracting proxy fight. Last year saw 124 exempt solicitations against Russell 3000 companies, up from only 18 a decade earlier, according to The Conference Board.

Climate Activism. It’s early days but the connection between climate change and activism is only strengthening. Activists swarmed PG&E after the wildfire tragedy in California, and energy companies seem logical next targets when it comes to pressing management on climate vulnerability. TCI has already launched an aggressive, multi-company campaign on this very front. Look for pressure to continue to mount on banks, such as Barclays, that finance fossil fuel projects.

ESG Enmity. ESG is a fund flow darling and the hottest corporate governance topic but the "do good" principles are facing a growing chorus of "bad idea" scrutiny from regulators and business leaders. The SEC is examining whether financial advisers are shirking their fiduciary duties and endangering clients via greenwashing. Standardizing ESG scores for companies will help and look for progress on this in 2020. The ESG movement took another hit early this year when Warren Buffett continued to press his shareholder primacy stance, telling the FT, “This is the shareholders’ money.”

Correction Course. The path that most of these themes take in 2020 is, of course, subject to change if the market faces a correction. Given current valuations, that prospect does not seem out of step this year. Trees don’t grow to the sky.

We’ve made some changes to our weekly newsletter – we’ve added more related readings and a short list of upcoming events in the activism and corporate governance space. Let us know what you think. We welcome tips on industry conferences, forums, books and papers.

Thanks for reading and have a great weekend,

Mike and Gabriella
The Wall Street Journal: New ETFs Fight to Escape Shadow of BlackRock, Vanguard

Less than half of ETFs experience asset growth; a ranking tool raises managers’ ire Read More
Financial Times – Opinion: Boards must be held accountable for sexual harassment scandals

Toxic corporate culture drags down morale and can be a bombshell waiting to explode Read More
Financial Times – Opinion: Ignoring climate risk is more costly than grappling with it

Regulators and activists are driving global warming concerns into the mainstream Read More
Financial Times – Lombard: Link executive pay to future profit, not historic CEO ratios

Research shows better performing companies do not pay their chiefs more Read More
Financial Times: ISS downgrades knock 1% off market value for US companies

Groups criticised over governance practices suffer investor flight Read More
Financial Times: Index funds break through $10tn-in-assets mark amid active exodus

Relentless rise of passive investing has transformed the business of managing assets Read More
Bloomberg: The Hidden Dangers of the Great Index Fund Takeover

The Big Three—BlackRock, Vanguard, and State Street—are the most important players in corporate America, whether they like it or not Read More
Reuters: U.S. activist investors post strong gains as needling companies pays off

Activist investors who are shaking up Corporate America with calls for operational fixes, refreshed boards and even sales of a company are delivering their best returns in six years with double-digit gains for 2019 after big losses in 2018 Read More
The Economist: Bosses will pay a price for mixing politics and corporate values

The downsides of CEO activism will become rather clearer in 2020 Read More
The Wall Street Journal: State Street CEO Takes the Long View on Shareholder Activism

Ronald O’Hanley discusses the investing giant’s push to target all-male boards and whether index funds can own too much of the stock market Read More
Financial Times: Warren Buffett on why companies cannot be moral arbiters

Sage of Omaha says it is wrong for business to impose views on society Read More
Financial Times – Opinion: Potential pay-off for Boeing boss shows limits of business pledges

Indulgent shareholders have blinded chiefs to how the world sees their pay Read More
Financial Times – Video: Is 2019 the year companies turned cuddly?

From pay to paternity, investing to the environment, #MeToo to mindfulness, 2019 was a turning point for the corporate world. FT writers look at why companies changed tack and whether it's a long-term trend
Reuters: Activist hedge fund Marcato Capital to shut down after drop in assets

Activist hedge fund Marcato Capital Management, backed by Blackstone Group and billionaire William Ackman, is shutting down as assets have shriveled after two years of poor return Read More
Reuters – Breakingviews: Mark Zuckerberg can be his own activist investor

With a legal change to the company’s form, Zuckerberg could show he’s serious about addressing data abuses and toxic content at the social network Read More
Axios: 1 big thing: Culture outlasts the CEO

When a CEO is forced out of a company, a lot of people hope and expect big changes. Much like Inigo Montoya in "The Princess Bride," those people are going to have to get used to disappointment Read More
Bloomberg: HP Again Rejects Takeover Offer From Xerox

HP Inc. again rejected an unsolicited takeover offer from Xerox Holdings Corp., saying the potential deal “significantly undervalues” the personal-computer maker Read More
Bloomberg: Ex-Icahn Deputy Presses Tenneco to Sell or Face Proxy Fight

Auto supplier Tenneco Inc. is facing the threat of a proxy battle with Dan Ninivaggi, who has sent a sharply worded letter to directors urging them to sell part or all of the company Read More
Bloomberg – Opinion: When Elliott’s After You, Don’t Give It Ammunition

Capgemini has handed tactical advantage to opponents of its deal to buy Altran Technologies. Read More
Bloomberg Law: Instructure Deal Faces Revolt From Third of Investors

A sizable block of investors in Instructure Inc. plan to vote against its $2 billion takeover by Thoma Bravo over concerns about the sale process and price of the transaction despite no other buyers emerging since the deal was announced Read More
The Guardian: Pension funds urge Barclays to stop lending to fossil fuel firms

Institutional investors file resolution for AGM of bank to phase out loans to fossil fuel projects or companies Read More
University of Massachusetts: Worker Representation on U.S. Corporate Boards
January 14: Reuters Breakingviews Predictions 2020, New York, NY

ValueAct Capital CEO, Jeff Ubben, will sit down with Rob Cox, Global Editor of Reuters Breakingviews, to discuss the Spring Fund and his views on the future of shareholder engagement.

Speakers include the Wall Street Journal duo that covers WeWork; The Honorable Kathaleen McCormick, Vice Chancellor, Delaware Court of Chancery; Alex Stamos, former Chief Security Officer at Facebook.
March 5-6: Tulane Corporate Law Institute , New Orleans, LA

Agenda TBD

Speakers include Elad Roisman, SEC; James Williams, U.S. Dept. of Labor; Elisse Walter, Occidental Director
March 19: Harvard Corporate Governance Roundtable , Cambridge, MA

Agenda TBD

Agenda TBD
May 2-6: 2020 Milken Institute Global Conference, Beverly Hills, CA

Agenda TBD
May 13: The Sohn Investment Conference, New York, NY 

Agenda TBD
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