Investor activism is on the increase, a recent survey of institutional investors by FTI Consulting finds. The development of activism is seen as predominantly positive by those surveyed, providing the impetus for change within the culture of both poorly functioning and well performing businesses. The survey notes, however, that activism tends to support short-term stock holders over long-term holders.
In FTI Consulting’s ‘2015 Shareholder Activist Landscape’, a survey of 100 institutional investors that collectively have $1.7 trillion under investment, the consulting firm questioned the level of support for shareholder activism. The central finding is that investors tend to see activism as positive, that activists catalyse ‘changes’ and that their role in deciding boardrooms is increasing.
The most common form of involvement for institutional investors in a company’s direction is through proxy advisory services, including Institutional Shareholders Services (ISS) and Glass Lewis (GL). Institutional investors are however increasing their direct presence in relationships with their companies, undertaking their own proxy research, involving their own corporate governance personnel or through the establishment of proxy voting committees that wield decision making authority for proxy votes.
One of the findings of the survey is that there is increased growth in the role played by stakeholders looking to secure board seats. With the long term trend of 36% of campaigns for board seats won by activists, a recent surge can be seen with activists between 2013 - 2014 winning 56% of campaigns.
In terms of the growing role of activism in the running of companies, the surveyed companies take a generally positive stance, with 76% finding the development favourable, 13% neutral and 10% unfavourable. The favourability of the move stems principally from the perceived addition of value; with 84% of those surveyed saying that activism adds value to the target company. The value added comes in a number of forms, with 27% indicating activism provides a catalyst for change, 21% saying it helps align the board and management with the will of shareholders, 17% that it allows boards to sharpen their strategic focus and 13% that it creates the conditions for a sale, separation of assets or return of cash to shareholders.
Improving for the interim
The reasons why shareholders target a business for activism are most often related to the performance of the company. With 36% of those surveyed indicating that poor stock performance is a reason for stockholder intervention, with 27% citing inefficient use of capital deployment as reason and 18% report poor corporate governance as reason.
In the event of activism, institutional investors predominantly (77%) prefer to install independent directors as they believe companies benefit from independent expertise. With 91% ranking knowledge of the sector or industry of the company as key expertise, 84% ranking financial expertise as important, and 82% ranking knowledge of the company as an important qualification an install director. That the director is a shareholder is viewed as important by only 30% of respondents.
FTI’s survey concludes that the trend for activism is expected to continue over the coming years. With over half the institutional investor’s surveyed indication that at least 15% of their portfolio could benefit from activism. The research, however also finds that the motivation for activism, while potentially toward sustainability of the company’s stock in the long term, is seen by 61% of investors as inhibiting the long-term approach to decision making in favour of short term gains of value at the expense of long-term shareholders.