In an unlikely marriage, activist investors are increasingly
seeking to partner with index providers when they campaign for
changes at public companies.
With index investors representing a growing portion of the
market, activists need to combine with other shareholders to
get managements attention. At the same time, passive
managers want to differentiate their offerings, which for the
most part vary only by their price tags. State Street Global
Advisors, one of the largest passive managers, is one.
We take those calls all the time, said Ronald
OHanley, CEO of SSGA. SSGA is getting increasingly
involved in governance issues ranging from public company
policies on voting rights of shareholders, to board diversity,
to climate change. The company has devoted more resources to
analyzing environmental, social, and governance factors as it
has grown in size, owning larger stakes in public companies.
SSGA, BlackRock, and Vanguard, the three dominant index fund
providers, together can often own 20 percent of a stock.
We are listening to good ideas, said
Passive managers like SSGA invest in all companies included
in a specific benchmark, regardless of their future prospects.
Activists, meanwhile, are the ultimate active manager. They buy
stakes in companies and then push for changes in strategy,
including spinning off profitable divisions or returning idle
cash to shareholders. In contrast, few index funds get involved
in any governance at all, said Alex Roepers, founder and CIO of
activist investor Atlantic Investment Management.
But Roepers expressed interest in talking to SSGA. The firm,
for its part, is responding to investors growing interest
in using ESG criteria to assess whether to own certain stocks.
OHanley said SSGA can be more influential than even
active managers, which own stocks on average for nine to 18
months. Index funds, on the other hand, are a source of
permanent capital, he explained. You cant turn the
S&P500 into the S&P499, he said. Although many
activists seek changes that are long term in nature, many want
companies to make moves that will result in a quick uptick in
the stock price. SSGA would vote against activist proposals
that work against long-term company goals. We will vote
against short-term people, OHanley said.
Jeffrey Ubben, CEO and CIO of activist ValueAct Capital,
agreed that SSGA and other passive managers governance
efforts could help focus activists on the long term. Right now,
he said, too many hedge funds execute activist strategies with
money tied up for only a year when five years is a better time
Ana Marshall, CIO of the William and Flora Hewlett
Foundation, said she believes good policies could help index
funds stand out. There is an information opportunity for
passive shops to say we do corporate governance, she
said. Her fund currently invests with a number of activists in
part because index funds are increasingly dominant and plow
money into stocks regardless of their fundamental advantages or
disadvantages. The more the market goes passive,
Marshall said, the more important activism