Long-term investors are engaging more with activists to
shake up poorly run companies and improve their performance for
shareholders, according to a survey by corporate governance
consulting firm Morrow Sodali.
Fifty-seven percent are willing to listen to activist
investors who approach them, while 43 percent proactively reach
out to activists who are campaigning for changes at a company
in which theyre invested, Morrow Sodali said this month
in its annual
institutional investor survey of a global group that this
year represented $24 trillion of assets under management.
Poor governance practices is the biggest reason for their
support of activist proposals, followed by a companys
previous disregard for shareholder opposition, and its
unwillingness to engage investors, according to the survey.
While theres still some criticism that activists add to
destructive, short-term investing behavior, the performance of
activist strategies in recent years, along with a big shift
into passive products, has quieted many dissenters.
Weve seen increased interest in activism over
the past five years, said Ken Bertsch, executive director
of the Washington D.C.-based Council of Institutional
Investors, a nonprofit institutional investor-backed advocacy
group focused on corporate governance. If you go back to
say 2010, there was more skepticism around what activists do,
but a lot of that has gone away.
The shift to passive investments in recent years serves as a
counterweight to activist strategies, according to Bertsch.
We have several members that are heavily indexed
long-term investors, he said. I think when you look
broadly at the market, the presence of those long-term
investors largely balances out much of the short-term moves you
might see as a result of activists.
Having conversations is one thing, but when investors vote
with activists how well does it really work? In 2015,
Floridas State Board of
Administration, which manages the states pension
plan, took an audit of its proxy votes in order to understand
whether aligning with activists was worth
the effort. On a per vote basis, its research showed that
between 2006 and 2014 its equity value linked to activist
holdings increased by $572 million, or a gain of $5.3 million
per vote in the five years after a campaign was announced.
The study found that Floridas State Board of
Administration supported activists about 65 percent of the
time. When the pension plan manager backed their efforts, and
the activists won, companies they targeted saw an average
positive cumulative performance of 12 percent over one year; 21
percent over three years; and 26 percent over five. In cases
where it supported activists who lost their battle with company
management, there were losses over the same periods ranging
from 14 percent to 16 percent.
By and large the effect activists have on performance
is very positive, Michael McCauley, a senior officer in
investments programs and governance at Floridas State
Board of Administration, said in an interview. He said the
pension plan manager tries to be involved with as many proxy
votes as the investment team can handle, which is about 100 per
year right now.
In the future, were looking at ways to expand
our value-to-vote template for proxies to include additional
issues like say-on-pay or corporate directors, McCauley
Increased interest in activism by institutional investors is
corroborated by activists themselves. Jonathan
Litt, founder and chief investment officer at Stamford,
Connecticut-based activist firm Land and Buildings Investment
Management notes that investors, bankers, and analysts are all
becoming more vocal when it comes to engaging with firms like
Institutions are talking more with compliance folks
about what they can do, even if they are passively
invested, said Litt. Activism is becoming more
accepted as a strategy.