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Activists - The thin end of the wedge


This article was originally published on

Activists adoption of environmental, social, and governance (ESG) issues show their ability to adapt to succeed.

An article by Finsbury’s Philip Walters, Managing Director, London; Kal Goldberg, Partner, New York; and Hering Schuppener’s Jobst Honig, Director, Berlin.

For many, activist investors embracing socially responsible investing is a contradiction in terms. The consummate corporate raider, they argue, sees ESG as nothing more than a campaign wedge issue to garner support from institutions. It is another angle for activists to exploit to help them succeed.

Activists, however, argue that ESG can improve returns and companies with strong ESG credentials outperform their rivals. It signposts that a company has strong operational and governance controls and is integral to value creation and should be to investment decisions.

Thus far activists are doing a good PR job of choosing ESG campaigns which resonate with the public.

JANA’s and CalSTRS’ targeting of Apple caught the media’s eye. Asking Apple to tackle concerns about the harmful effect of smartphone addiction among children and teenagers is certainly an important issue, but Apple is not a company with a poor grasp of ESG; indeed, JANA itself acknowledges that Apple has a history of being very responsive to ESG issues.

Geographical nuances also matter. Take Germany, where the approach and the public exchange of blows between company and activist are usually less aggressive. Activists are increasingly savvy to German business norms and are careful to win over key stakeholders early on, including politicians and employee representatives, as well as shareholders.

Elliott is succeeding in Europe by refraining from shouty activism. Its first foray into France, targeting Pernod Ricard, has been marked by constructive dialogue (at least for now) and is using an advisor with local knowledge and connections in Alain Minc who is close to Emmanuel Macron.

Corporate governance changes in Asia, especially Japan, coupled with generational change, have also created an environment in which companies are more willing to engage if activists are seen to be a “force for good”. Activists’ approaches reflect this.

There have not yet been significant ESG campaigns in Europe. One reason may be that there are still plenty of traditional activist targets, particularly in Germany with its large conglomerates. But another reason might be that European Boards take ESG more seriously. A collision between the traditional shareholder model and the broader stakeholder model is playing out now – and rising employee expectations of how their company behaves may support an activist ESG campaign on the continent.

Companies should recognise that activist strategies are constantly changing. Elliott’s evolution into part activist part PE proves this. They will shift their focus from a purely value-driven approach to value and ESG as is necessary to succeed. A company with poor governance but a soaring valuation will probably be safe, that is until the share price falls to the earth.

So, are you ready to be your own activist?

Regardless of which side of this argument you fall, one truism of an attack is that activists can’t win on their own; they need to build a consensus to effect change and unlock value. Shareholders – be they traditional asset managers, index funds, retail investors or employees – can have varying and evolving motivations and an activist’s platform needs to appeal to all of them.

All companies must be their own activist. This means proactively addressing vulnerabilities by looking in the mirror; asking are we effectively communicating our strategy and value creation story? Is the right strategy in place for long-term growth? Is this transaction defendable on rationale and valuation? Are there gaps in the ESG story? It means developing defence narratives and materials, rehearsing responses in simulations and dialling-up stakeholder outreach. It also means being transparent about the Board’s decision making – explaining why the company is not taking certain actions can help rebut activist attack points.

Companies must maintain constant control of their narrative and have storytelling channels ready – from shareholder letters to paid social media campaigns – with supporters identified in advance. PR and IR must work hand-in-hand and help the company stay attuned to sentiment.

No company, no matter what continent, can afford to be complacent.

This article was first published in The Activist Investment Annual Review 2019