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.
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.
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.
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 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.
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 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.”
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