Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP 40 | Shareholder Activism Trends in 2019 OLD PLAYERS ASSUMING NEW ROLES The first quarter of 2019 saw traditional active managers increase their engagement in activist situations. Perhaps seeking a way to drive better returns as a response to pressure from clients and increasing competition from passive investment managers, active managers have been becoming more vocal when siding with companies or activists and directly engaging management and other shareholders to promote the managers' independent propositions. 10 It remains to be seen whether this new strategy on the part of active managers signals a shift to a more assertive approach to value- creation in the long term. BOARD REPRESENTATION REMAINS KEY FOCUS As in 2018, the most common demand made by activists in the first quarter of 2019 across all geographies was board representation. In the United States, all board seats won by activists were secured through settlements, rather than contested votes, reflecting companies' continued reluctance to engage in proxy contests. 7 Notably, "long-slate" nominations, in which activists seek to replace at least 50% of the incumbent board, accounted for more than one-third of all board nomination campaigns in the first quarter of 2019 (compared to 17% of board nomination campaigns in 2018), signaling activists' growing confidence and ambitions when demanding board changes. 8 Continuing a trend from last year, M&A-driven campaigns, including advocating for companies' sales or industry consolidation, intervening in announced transactions or initiating divestitures, remained on the rise, accounting for 14% of the campaigns launched in the United States in the first quarter of 2019 (compared to 12% during the same period in 2018). 9 FOCUS ON ESG Continuing a multi-year trend, ESG matters in 2019 have become a focal point for traditional and non-traditional activists alike. ESG-driven demands by traditional activists have continued to grow in 2019. In the first half of 2019, new activist campaigns in the United States have included 57 ESG-driven demands, well on pace to surpass the record 78 demands made in 2017. 11 Institutional investors, who have historically maintained a low profile in the activist landscape, have also been increasingly outspoken about the impact of corporate culture and ESG performance on promoting long- term shareholder value. For example, in his public January 2019 "Letter to CEOs: Purpose & Profit," Larry Fink, CEO of BlackRock, called upon companies to become more involved in issues of public importance and demonstrate their commitment to the communities where they operate, thereby fulfilling their corporate purpose and responsibilities towards their stakeholders. Cyrus Taraporevala, President and CEO of State Street, similarly addressed boards in a January 2019 public letter, urging them to concentrate on corporate culture and stressing its importance at critical corporate junctures, such as leadership transitions or strategic mergers and acquisitions. In addition, activism on ESG matters by passive investors has not only gone mainstream but appears to be yielding results. For example, Climate Action 100+, an investor coalition backed by investors with over $33 trillion in assets under management, has been engaging with companies on climate change issues. In February 2019, Glencore, one of the world's largest coal producers, announced that, following engagement with Climate Action 100+ investors, it was capping its coal production capacity and boosting board review and public disclosure on its climate change performance. In other campaigns, As You Sow, a sustainability-focused investor advocacy group, has been very active in engaging investors to challenge companies on climate change (Chevron, Shell), public health risks (ExxonMobil, DowDuPont, PepsiCo), consumer packaging (Starbucks, Kroger, Yum! Brands) and gender diversity (Skechers, Caesars Entertainment). The activist landscape is constantly evolving, and as a result, it can present challenges for boards. That being said, ongoing engagement with shareholders and anticipating and understanding potential areas that are of interest to activists remain key strategies that every public company board should be considering. As always, when engaging directly with shareholder activists, directors and senior management should stay focused to ensure that their response is in the best interest of all shareholders. 7 Lazard Review. 8 Id. 9 Activist Insight. 10 Lazard Review. 11 FactSet.