Senior Client Partner, Sector Leader, Professional Services
The Return of the Activist Investor
After giving management and board directors a free pass over the last two years, activist investors are back in a big way—and threatening to unravel the status quo in a host of ways.
According to data from investment bank Lazard, activist investors launched 126 campaigns globally during the first half of 2022, a 34% increase over the 94 global campaigns launched last year and the most through the first six months of any year since 2018. On a sector basis, technology and industrials were targeted the most, together representing 42% of campaigns. Consumer, energy, and financial services rounded out the top five. An ominous sign for leaders: first-time activists accounted for 37% of the campaigns launched so far this year, the highest level in recent years.
Juan Pablo Gonzalez, sector leader for professional services at Korn Ferry, says the combination of depressed share prices and financial underperformance is opening up opportunities for activist investors to take big stock positions and agitate for change. Against the backdrop of the current economic downturn, he says, companies that are doing things that distract from the core business or that aren’t focused on shoring up the bottom line are particularly vulnerable. “Activist investors are looking for ways to make money,” says Gonzalez. They can do that in a variety of ways, such as asking a company to spin off or sell underperforming assets, exploring a merger or acquisition, or improving operations and capital-allocation strategies.
One of the most common ways activist investors seek to influence companies is by replacing management and board directors. So far this year, activists have won 75 board seats, according to Lazard’s data, with another 40 still in contention. More than one-third of activist campaigns featured board change, often including the incumbent CEO, as their primary objective. Moreover, thanks to a change in the way shareholders vote in proxy contests, companies will have to make a better case for each individual director, says Anthony Goodman, leader of the North American Board Effectiveness practice at Korn Ferry.
Beginning in September, shareholders will use a “universal ballot” to vote for directors whose seats are being challenged in a proxy contest. Whereas in the past shareholders had to vote for either the full incumbent or activist slate, now they can vote for individual directors on both sides. With this ability to mix and match, shareholders can target potentially underperforming or less independent incumbent directors that might have been protected as part of a full slate vote. “There is going to be a lot more critiquing and scrutiny of individual directors,” says Goodman.
The heightened pressure on companies to accelerate environmental, social, and governance (ESG) initiatives could work to the detriment of incumbent directors targeted by activist campaigns, experts say. Activist campaigns increasingly include certain issues—around climate change, pay equity, and diversity, among others—in order to win support from proxy advisory firms. One area of vulnerability activists love to target is CEO pay, says Tanya van Biesen, a managing partner for Korn Ferry’s Board and CEO Succession practice in Canada. “Directors get nailed on compensation all the time,” she says.
Companies and boards are well aware of the renewed activity among activist investors. The best managed organizations are proactively taking steps to figure out where they might be at risk, says Nels Olson, vice chairman and co-leader of the Board and CEO Services practice at Korn Ferry. They are looking for ways to correct weaknesses in their business, such as a lagging stock price, slowing profitability, or declining market share. They are undertaking peer reviews, and they are also studying the track records and contributions of individual directors for their vulnerability to common activist complaints like being too entrenched with management, not having the right skill sets, or rubber-stamping every decision.
Most importantly, management and boards—continuing a trend that began before, and strengthened during, COVID— are stepping up outreach and communications with investors of all stripes, from large institutions to individual shareholders. Olson says many activist campaigns end up in settlements in part because their core ideas prove to help the company. “There are a number of examples of companies that performed better after taking the advice of activists,” says Olson.