Once the sole province of hedge funds and special interest groups, many mainstream institutional investors have now also embraced a more activist perspective with regard to their portfolio companies. In his most recent letter to CEOs, Blackrock chairman Larry Fink advocated in favor of a series of Environmental-Social-Governance (“ESG”) issues and rhetorically asked companies, “What role do we play in the community?” Other institutional money managers, like New York City’s Comptroller Scott Stringer, have also accelerated their ESG-focused shareholder activism in recent years, targeting well-known retailers such as Kroger, Walmart and Home Depot in the process.
At the same time, in speeches and congressional testimony, SEC Chairman Jay Clayton has begun advocating in favor of “Mr. and Mrs. 401(k)” and similarly situated “Main Street” investors, implying that they have been overlooked in recent years. And after working for many years at breakneck speed to complete congressional-required rulemakings, the SEC under Chairman Clayton appears to be moving at a more measured pace with regard to rulemaking, including completing the remaining Dodd-Frank rulemakings on executive pay. Hot-button issues like political spending disclosure or the use of a universal proxy card in contested director elections have fallen off the SEC’s regulatory agenda altogether. With the SEC appearing to be somewhat less hospitable to activist investors under its new leadership, expect ESG activism outside the agency to expand over the next three years.
Of course, many activists are not focused solely on ESG issues and instead seek to improve operational efficiencies at their portfolio companies. Data compiled by Lazard show that these activists deployed $62 billion in 2017—a record amount—and conducted 193 campaigns globally in 2017, more than double the total capital deployed in 2016. Activists won 100 board seats in 2017, raising their five-year total to 551. Activism around M&A transactions also advanced. Activist interest in prominent retailers such as Whole Foods, Tesco and Dillard’s show that the retail sector is not immune. We do not expect that this trend will abate in 2018.
Recent cyclical trends in the retail industry make it an attractive target for activists seeking to spur management to make operational changes such as improving foot traffic in stores, spinning off valuable real estate, refocusing online strategy or winding down unprofitable lines of business. Each activist situation will require a unique defensive strategy tailored to the demands of the particular activist campaign. But in contrast to years past when many companies reflexively spurned activists, more and more companies are now engaging with activists constructively in an effort to avoid an all-out confrontation. Support of institutional investors can be critical when an activist comes calling, and companies are well served when they build a rapport and develop lines of communications with institutional holders long before a crisis situation develops.