Market Update - Activist investing is changing
Activist investing is changing
As you may imagine, activist investing, just like any activism, is about campaigning for change. This can be carried out by an individual, a group of investors, or an organisation by building a significant stake in a public company. Their shareholding gives them a voice to influence how the company is run, usually by getting seats on the board of directors. Then the activist investor can use their boardroom presence to agitate for change or apply pressure on the target company to follow through on specific commitments.
There are many famous activist investors, particularly from the US. These include Bill Ackman of Pershing Square, Daniel Loeb, David Einhorn, Carl Icahn, Paul Singer and, early in his career, Warren Buffett. The reason that these individuals are well known is due to the success that they have had in their activism, and the money they’ve made from it. Carl Icahn has been a major presence on Wall Street for over forty years, having started his own venture in the 1960s. Famously, he was involved in an attempt to wrest control of RJR Nabisco from its board in the late 1990s when he built up a 7.3% shareholding in the tobacco and food conglomerate. His aim was to extract more value for shareholders by forcing a breakup of the company. Although he failed in this aim, he made an overall profit of around $100 million on his investment.
Altruist, greedy or both?
Activist investors claim to be acting in shareholders’ interests, often with the aim of throwing out senior executives that they view as overpaid, lazy or both. Often, they put pressure on cash-rich companies to use these funds constructively or return their riches to shareholders. Sometimes they look to profit from perceived management failures by shorting the stock. This was the case with Bill Ackman when he carried out a very public attack on Herbalife, the maker and supplier of nutritional supplements. In 2012 Mr Ackman claimed that Herbalife’s business model was nothing more than a high value pyramid scheme and that its stock price would eventually crash to zero. He took out a large short position on Herbalife, using his investors’ funds, and initially the bet played off. The company’s stock slumped by 20% in just three days after he made his intentions clear, but it quickly recovered. Then things got personal as Carl Icahn took the other side of the trade, adding to his holding in Herbalife until he held 26% of the company. The two were then involved in a public spat on CNBC with personal insults thrown by both individuals. Ultimately it was Carl Icahn, the grizzled Wall Street veteran, who triumphed, making an estimated $1 billion on his Herbalife holding. Bill Ackman is estimated to have dropped a similar amount on his position which he finally exited after five years. Herbalife is still in business and its shares are still quoted on the New York Stock Exchange.
As we’ve seen, the general definition of activist investing is where a fund buys up a significant amount of a company's stock to pressure management into making specific changes to the enterprise. This usually means changes that should increase the company's share price or benefit the activist directly. But recently we’ve seen a different type of activist investor. Back in June this year, a small hedge fund called Engine No.1 won three out of the twelve seats on the main board of the oil giant, Exxon Mobil. This may not sound particularly unusual. But it was an astonishing triumph for the fund, and a stunning blow for the oil major. Rather than pushing the chief executive to pay out dividends, or sack ineffective directors, the new board members are there with the prime purpose of forcing the company to adjust its business strategy to match global efforts to combat climate change. The move follows criticism of Exxon which has been accused of lagging other oil majors in its response to environmental concerns. While rivals have scaled back their investments in fossil fuels, Exxon planned to increase spending to boost its output and take advantage of its expectation of increased demand growth in oil and gas for years to come.
This is a big deal, and it’s hard to think of another occasion when such an event has occurred. But for the oil industry there was a double whammy. On the same day that Engine No.1 won its first two seats, a Dutch court ruled that another oil giant, Royal Dutch Shell, must drastically deepen pledged cuts to greenhouse gas emissions. It’s one thing to have a minority of activist investors on your main board, but it’s even more concerning when a court of law bears down upon you. This is especially so when governments in developed countries are under pressure from campaigners, and increasingly the public, to take affirmative action on climate change and address the environmental damage it causes. Who would have thought that oil giants like Exxon Mobil and Royal Dutch Shell could run such an existential risk from hard-nosed investors?
Attitudes are changing
Now it has often been said that you can do the right thing and divest yourself of shares in companies that aren’t socially responsible, but such actions change nothing. The argument is that there will always be investors out there who are more than happy to buy up the stock of companies, no matter how cavalier their attitude to the environment. But this could be changing. Larry Fink, the CEO of BlackRock, the world’s largest investment manager, wrote that, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” He went on to say that BlackRock is “literally talking about selling assets so we don’t get caught up in the damage when it hits.” Just in case anyone thought Mr Fink was all mouth and trousers, BlackRock, which is Exxon Mobil’s second-largest shareholder, voted for three of Engine No. 1's new activist board members. Large conglomerates must really watch their step going forward, and that means investor must stay on their toes as well.