Shareholder Activism – A Monthly Snapshot – March 2017

4th April 2017

The Month in Review

Shareholder hits back at proposed Avianca-United Continental tie-up

A minority shareholder is fighting back against a proposed partnership between South American-based Avianca and United Continental over claims that a deal between the airlines would be disadvantageous to them. Financial Times, 1st March 2017

CSX names new CEO, board members in deal with activist investor

Railroad CSX named Hunter Harrison as its new CEO and appointed five new directors to its board under an agreement struck with activist investor Mantle Ridge. Harrison was the company board’s desired candidate to replace former CEO and chairman Michael Ward, but the move hit a rough patch amid questions about pay and governance. Financial Times, 6th March 2017

Shareholders reject takeover at Shawbrook

The bank rejected an £825m private equity offer from Pollen Street Capital but left the door open for a higher bid. It turned down the 330p per share offer from its largest shareholder and BC Partners, having consulted other shareholders and being told the price was too low. Pollen and BC Partners have until March 31 to make a firm offer or walk away. The Times, 8th March 2107

Jupiter to delay bonus review after shareholder pressure

Jupiter Asset Management has delayed an ongoing review of the way it pays its senior directors, after failing to reach agreement with its shareholders – amid an increasingly febrile climate in the City on executive pay. Jupiter began a review of its directors’ pay last year, following a shareholder rebellion at its 2016 annual general meeting in April. Financial News, 10th March 2017

Investors call for break-up of French Connection

French Connection has come under pressure from investors to break up the business after the retailer reported its fifth consecutive annual loss, following weak demand for its clothes, lower margins and store closures. Shareholders are also pushing for the roles of chief executive and chairman, both currently held by founder Stephen Marks, to be separated. The Telegraph, 14th March 2017

Elliott demands probe into Arconic pact with US buyout firm

Elliott Management, a key shareholder of Arconic, has demanded an impartial investigation into a “secret voting lock-up” at the US metals and components firm, which the activist hedge fund believes was thwarting attempts to replace chief executive Klaus Kleinfeld. Financial Times, 20th March 2017 

Elliott steps up pressure as Akzo spurns sweetened PPG offer

The activist investor Elliott Management could use an obscure Dutch corporate rule to force the chemicals giant Akzo Nobel to consider a €22.37 billion bid from its American rival PPG Industries. Amsterdam-based Akzo Nobel rejected PG’s latest offer, which came just weeks after an initial €83-a-share bid. Financial News, 22nd March 2017

Crest Nicholson pushes ahead with bosses’ bonuses despite shareholder rebellion

The housebuilder is to push ahead with generous share awards for its top executives despite more than half of its shareholders voting against the proposals. Around 107.3 million votes cast at Crest Nicholson’s annual general meeting were against the resolution, compared to the 77.3 million who approved the proposal – a 58% rejection. The Telegraph, 23rd March 2017 


In the Spotlight

Trends in ESG – fighting an uphill battle?

Striking a thoughtful balance between short-term returns and a credible corporate purpose rooted in political, environmental and social reality is a vexing challenge for today’s top executives.  As a growing number of investors are engaging companies on ESG topics, corporates must face issues which may not have a substantial impact on a company’s bottom line – but is tolerance, or even acceptance of such initiatives on the rise?

According to recent report by non-profit shareholder advocacy groups As You Sow, Sustainable Investments Institute and Proxy Impact, environment and corporate political activity remain key areas of focus for shareholder proposals this proxy season. Resolutions in 2017 concerned solely with ESG issues reached a total of 430 as of 15 February, just shy of the record 433 in 2015. Another study by Harvard University found that about 40% of shareholder proposals in the Russell 3000 are related to ESG issues, a 60% increase since 2003. While these numbers suggest another potential milestone, few would argue that the future of ESG activism is carved in stone.

In fact, the unprecedented uncertainty surrounding the Trump administration’s commitment to environmental and social issues could mean an even steeper climb for ESG proposals to gain majority in boardrooms. Existing US Securities and Exchange Commission rules state that any shareholder owning at least 1%, or $2,000 worth of stock for at least a year, is eligible to submit a proposal. The fate of this rule has recently been thrown into doubt following pro-business advocacy group Business Roundtable addressing a letter to the White House’s National Economic Council Director Gary Cohn which criticised the SEC’s current rules as encouraging activists “with insignificant stakes in public companies” to pursue “social or political agendas.” It comes as no surprise that a group of activist investors representing $65 trillion in assets were quick to react in defence of rules governing shareholder resolutions. The group of CEOs and executive directors argue that the current rules enhance transparency and encourage corporate action on a range of environmental, social, and governance issues that promote economic growth while increasing long-term shareholder value.

Undeterred by political uncertainty, some activists look on the bright side. As You Sow CEO Andrew Behar was quoted in a recent report saying that “Many companies, especially leaders on environmental and social issues and good corporate governance, are not leaping to end transparency, halt engagements and block shareholder input. Instead, they look to investor advocates to uncover win-win situations that benefit all stakeholders.”

As the idea that corporate goals are legitimate only to the extent that they increase shareholder value is being challenged and the notion of “purpose beyond profit” is becoming increasingly popular, average support for shareholder proposals focused on ESG issues has significantly risen in the past few years. And though in the grand scheme of things the majority of shareholder resolutions fail, and – depending on the topic –often overwhelmingly, that is not to say they cannot improve a company’s performance on any given ESG issue. In fact, a Harvard study in 2016 proved that failed ESG resolutions still have a systematic effect on corporate management, with more resources allocated to issues of diversity, energy efficiency, water consumption, and product safety. Also worth noting is the tendency of non-specialist investors’ involvement in ESG issues, as well as  some so-called “suggestivists” – investors who engage management behind the scenes, helping companies to see through the short-term noise and focus on a context wider than pure financials.

Despite some measurable progress in tolerance and acceptance of ESG focused shareholder proposals, they still face an uphill struggle, especially if enacting change does not directly affect the company’s bottom line. ESG proposals may have a long way to go, but when they gain prominence, they can predict shifting shareholder priorities and company practices – with the biggest challenge being getting companies to enact concrete changes to their business model to mitigate political, environmental and social risks.


The Big Picture

Burberry self-help makes light work for activists

Billionaire Albert Frere, who was among investors that drove change at Adidas, has built up a 3 percent stake in the trenchcoat-maker. With a turnaround plan and new boss in place, there’s less to do at Burberry. Still, Frere can help ensure the company sticks to its knitting. Breakingviews, 1st March 2017

AIG: ahead of its skis

Peter Hancock, CEO AIG, announced his resignation. He had embarked on an intense cost-cutting spree, including dumping properties, to make AIG lean and mean. But failures in the core businesses of underwriting casualty and real estate risk toppled him. Activist investors Carl Icahn and John Paulson have little to celebrate. Even under new management there is no clear path to a company break-up. But a tightening of the company’s risk pricing should at least prevent another painful tumble. FT Lex, 9th March 2017

A giant leap for the jammy kind

WPP’s Sir Martin Sorrell pay dropped from £62.8m last year to £41.5m this year. Sorrell’s package is part of the shareholder-friendly pay scheme known as the Leadership Equity Acquisition Plan (Leap) which offered huge investment returns for hitting the 90th percentile performance and maximum losses for below the 40th. Sir Martin has done better than the shareholders. His £13.7m investment into the Leap scheme delivered £163m, 12 times the capital and treble a WPP’s total shareholder return since 2009. The Times, 10th March 2017

Arconic Plays Defense Again

Give Arconic credit for trying to be more shareholder friendly, but the company needs to break out of this pattern of playing catch-up to Elliott Management.The $12 billion maker of metal parts for cars and airplanes is attempting to fend off Elliott’s efforts to replace CEO Klaus Kleinfeld and several members of the board. The situation has become increasingly nasty, with the latest tussle focused on an August 2016 agreement that Arconic entered into with Oak Hill Capital Partners. Bloomberg Gadfly, 20th March 2017

Tronc/Oaktree: Follow the buyout money

Private equity is generally the winner when embroiled in a boardroom brawl. Tronc, the media company once known more sensibly as Tribune Publishing, spent most of last year fighting off bids from Gannett, a rival publisher. Now its two largest investors are at odds with each other. Shareholders should follow the example of the third biggest — Oaktree Capital — and sell. FT Lex, 27th March 2017

Unilever can take page from GE’s activist playbook

The 139 bln-euro Magnum ice-cream owner may attract uppity investors for the same reasons Kraft Heinz came calling: low margins and relatively little debt. CEO Paul Polman could keep them at bay by aping GE and seeking an activist’s advice. But he’d have to be willing to act. Breakingviews, 29th March 2017

Akzo activists are useful and best ignored

Holders of a quarter of the Dutch paint maker’s shares think it should engage with hostile bidder PPG, claims activist fund Elliott. Yet by rushing into talks, Akzo would play a trump card too early. Appearing lukewarm, but with shareholders still keen, may lure a better offer. Breakingviews, 29th March 2017

GM’s Own Tuneup Is Working

Plenty of companies have benefited from activist shareholder proposals. But hedge-fund manager David Einhorn is suggesting General Motors undertake one of the silliest moves we can think of. Investors should thank CEO Mary Barra for shooting it down and rethink the situation at GM. Bloomberg Gadfly, 29th March 2017


The Month in Numbers

115.4% The percentage to which Burberry’s operating margin declined from 17.8% in 2013, Breakingviews

£163m The amount Sir Martin Sorrell’s £13.7m investment into the Leap scheme delivered, The Times

416% of salary — the bonus Franklin’s Chief Executive Gregory Johnson received in 2016,  The Financial Times