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John Lovallo

September 15, 2015

Global Uncertainty Will Drive More Activist Activity: Ten Reasons Boards Need to Prepare

If the years since the 2007 financial crisis have taught us anything, it’s that we are in the midst of a new era in activist investment. The activists are bolder than ever. Moves on blue chip companies are no longer extreme outliers. Institutional investors and everyday shareholders are as open as ever to new ideas, new directions, and new directors.

Boardrooms across the country are being impacted by shareholder activism.  Activist investors, publically or in private, are pushing companies to break themselves up, spinoff, sell or exit businesses, and in some cases insisting entire companies to be sold. This trend will only continue as the uncertainty throughout the world and pending increases in interest rates in the U.S. will impact companies’ performance. At the midpoint between the 2015 and 2016 proxy seasons, there are myriad indications that boards of directors are in for more of the same in the foreseeable future.

Below is a rundown of the top ten reasons that corporate boards need to be prepare for the challenge now – before there is a knock on their boardroom door, or worse, a public presentation or letter from the likes of Bill Ackman of Pershing Capital or Dan Loeb of Third Point.

1. Trend lines all point up. In 2014, upticks in activist investor activity continued at a stunning pace. Last year saw 344 companies targeted, up 20 percent from 2013.

2. Increased market volatility. China, Greece, and Puerto Rico all demonstrated just how prone global markets are to downswings from which some companies don’t fully recover. With energy prices and other factors likely to create more crises around the globe, activist won’t hesitate to leverage a target’s short-term troubles into lasting change.

3.The corporate raider is dead. Forget what Hillary Clinton says about “hit-and-run” activism. Activist investors are increasingly seen as more than just opportunists seeking a quick profit. Don’t take my word for it. Listen to SEC Chairwoman Mary Jo White, who not long ago said “There is widespread acceptance of many of the policy changes that so-called ‘activists’ are seeking to affect.”

4. Institutional investors are allying with their activist counterparts. Last month, the Wall Street Journal examined how activist investors won the support of major mutual funds their push for a seat on the Microsoft board. That’s a troubling sign for boards, especially given that ISS and Glass Lewis have similarly demonstrated a newfound affinity for activist positions.

5. Speaking of Microsoft… It’s just one blue chip companies to come under attack that show size is no longer a deterrent to activists. Apple, Dell, Sony, Proctor & Gamble, and PepsiCo are just some of the others.

6.Activism is moving overseas. Companies across Europe, Canada, and Japan are already seeing the prospects of activism as far more likely than in the past. Don’t expect the epidemic to stop at those borders.

7. More capital for activist funds. Activist hedge funds have been consistently outperforming their traditional counterparts for at least two years now. Investors are taking notice, and injecting more capital than ever into activist funds that they see as more attractive than other options.

Proxy access is on the rise. A report from the Harvard Law School Forum on Corporate Governance and Financial Regulation finds that nearly 100 companies confronted proxy access shareholder proposals in 2015 – more than four times the number submitted in 2014.

9.Activism is no longer just about performance. The same report cited above finds that there was a corresponding uptick in proposals related to environmental and societal topics in 2015.

Investor engagement is up, but remains at only 56 percent. A final note from the Harvard report shows that only six percent of companies reported sustained investor-engagement programs in 2010. While we’ve seen a 50 percent increase since, that still means nearly half of all publically-traded companies aren’t doing enough to listen to shareholder concerns and proactively articulate their value propositions.

John Lovallo is a Senior Vice President at LEVICK and Chair of the firm’s Corporate Reputation Practice and Financial Communications Practice.

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