CFOs Faced Late Activism Surge, ESG Demands in 2020

Through the first three quarters of 2020, all was relatively quiet on the global shareholder activism front. Then, in the fourth quarter, activists broke loose. Fifty-seven new campaigns launched, including broadsides against Intel, Public Storage, ExxonMobil, and The Walt Disney Company. (See chart at bottom.)

The Q4 rebound was most evident in the United States, which saw 30 new campaigns.

Despite the pandemic, 2020’s final global campaign tally (182 new campaigns) was off only 13% from 2019. Non-U.S. activity saw an uptick for the year, with European and APAC campaign levels up 21% and 11%, respectively, over 2019.

While many other trends from 2019 remained consistent, 2020 also produced some new activism wrinkles, according to Lazard’s Annual Review of Shareholder Activism.

For example, investors, proxy advisers, exchanges, and governments alike called for greater diversity at public companies and a focus on environmental, social, and governance (ESG) issues last year, according to Lazard.

In particular, ESG activism gained momentum, Lazard says, with the launch of hedge fund Engine No. 1 in December. The small investment firm initiated a campaign against ExxonMobil, though holding only a $40 million stake in the multibillion-dollar oil giant. It’s calling for more disciplined capital allocation, a plan for sustainable value creation, board refreshment, and an overhaul of management compensation.

“The rise in the launch of ESG-related funds and campaigns focused on sustainability issues enables activists to improve perceived ESG weaknesses in businesses but also bolster fundraising by branding themselves as forward-thinking and socially conscious,” Lazard directors wrote in their report. “This trend is likely to continue as more limited partners intensify their focus on allocating capital in a way that betters society.”

Amid depressed equity prices during the pandemic, the adoption of poison pills increased in the U.S. as companies tried to discourage hostile takeovers.

Other ESG-focused activist initiatives represented only a slice of a campaign’s theme. For example, Canyon Capital’s targeting of Berry Global called for the plastic packaging products manufacturer to “get in front of [ESG] trends and correct market misperceptions about sustainability.” But that was only third on the list of Canyon’s demands, preceded by a demand to develop an accelerated deleveraging plan and measures to win investment-grade rating.

Other interesting trends featured in the Lazard report:

• Private equity firms continued to use “activist-like” tactics at public companies. Examples included Cerberus calling for Germany’s Commerzbank to cuts costs, adopt a new strategy, and appoint two of its nominees to the board and New Mountain’s demanding governance and operating improvements at small-cap IT firm Virtusa.
• Leading activist firms (such as Starboard, Pershing Square, and Corvex) embraced the market’s strong appetite for SPACs as a new source of funds. However, Lazard pointed out, there has not yet been “spac-tivism,” that is, using SPACs for activist campaigns.
• Amid depressed equity prices during the pandemic, the adoption of poison pills increased in the U.S. as companies tried to discourage hostile takeovers. There were 96 adoptions of the defensive tactic by U.S. companies in 2020 versus 30 in 2019.
• Activists won 131 board seats in 2020, but the ethnic and gender makeup of their appointees fell short of marketwide levels of diversity. While 22% of S&P 500’s new directors were ethnically diverse in 2020, only 11% of activist appointees were. Gender diversity also lagged, with women making up 24% of new directors from activist campaigns, versus making up 47% of new directors in the S&P 500.

The Lazard report also raised some key questions for 2021: How will activists react to lofty equity valuations? How will the regulatory focus of the Biden administration affect the shareholder landscape? And will ESG-focused campaigns generate alpha or just attention?