Can corporates be swayed to care about people and the planet?
13:55, 19 November 2021
In 2018, two funds with significant investment in Apple put pressure on the company to combat smartphone addiction among young people.
They were the California State Teachers' Retirement System (CalSTRS), one of the largest pension funds in the US, and Jana Partners, a leading activist shareholder fund, who collectively owned around $2bn of Apple shares when they penned their letter to the company asking it to make changes.
While it hasn’t eradicated smartphone addiction entirely, their efforts at least made Apple try to tackle the problem with the introduction of its Screen Time app, which gives parents more control by enabling them to manage their children’s texts, phone calls and the time they spend on Apple devices.
What are activist shareholders?
Shareholder activism is a way in which shareholders can actively influence a corporation’s behaviour – generally for the better. Activism has evolved over the years. In the 1980s activists were known as corporate raiders, but nowadays they are more strategic and impactful.
This is because activist shareholders now target bigger companies than previously, with increasing numbers of new campaigns every year. Most campaigns centre on companies embracing environmental, social and governance (ESG) principles.
Activists seek longer-term structural changes that benefit the environment, ensure the care and well-being of the staff being employed by the companies they invest in, and fight for rights like equal pay, shared parental leave and political ethics.
Successful or not?
There are plenty of headline-grabbing examples of activists making positive changes. “Shareholders achieved a significant change in the board at Exxon Mobil and rejected the excessive pay award proposed for the CEO of Norwegian Cruise Line,” says Peter Elwin, head of the Food & Land Use Programme and director of fixed income at financial think tank, Planet Tracker.
“At Chevron, shareholders voted for a resolution from ‘Follow This’, a campaign group that uses activist investment to substantially reduce indirect emissions arising from the products it produces. Overall, ESG-related campaigns by shareholders are on the rise and increasingly successful,” adds Max Muller, associate professor of accounting at ESMT Berlin.
But most efforts don’t result in change. Elwin adds: “The Diligent Institute report noted that only 20% were successful in 2020 – picking the right battles and gathering support are both important for success.”
These findings were also mirrored by the 2020 Activist Investor Report by Harvard Law School. It also found that, in 2020, there were more failures than successes with only 9% of the 797 campaigns analysed resulting in success or settlement. It highlighted that 38% were either unsuccessful or withdrawn, and that a whopping 53% were unable to gain any traction or are ongoing.
Making your voice heard
Institutional investors, like large fund management companies, hedge funds and pension funds, can often make the loudest noise if they feel companies are not doing enough to make the world a better place.
This is because they have the shareholder clout to easily gain the attention of the board through emails or a simple phone call. But are individual shareholders completely powerless?
Not exactly. Elwin points out that individuals can still attend company meetings and results events to ask uncomfortable questions. Details of when these events occur should be provided on company websites.
Elwin says: “Executive teams do not like to be embarrassed in public. Individuals can also ask their asset manager, which runs their fund, to engage with management, even if they’ve invested in an index fund.
“Retail shareholders should demand a right to vote, even if they have bought an ETF. The technology is now available for the asset manager to take into account the wishes of retail shareholders, not just the large institutions.”
Kristin Hull, founder of Nia Impact Capital, says her company files for a shareholder resolution with the U.S. Securities and Exchange Commission if it doesn’t like the progress it is seeing. She adds: “Any individual can come along and co-file with us and add their name. Not many retail investors know they can do this.”
If there are fewer success stories, why should individuals and institutional investors bother with activism at all? One reason is that there’s a growing body of evidence that shows that activists can make companies more profitable and productive.
Companies that have their ESG house in order also tend to be better equipped for volatile times. “ESG, and the sustainability strategy of a company, is so important today,” says Jessica Robinson, author of Financial Feminism: A Woman’s Guide to Investing for a Sustainable Future. “It is no longer a ‘nice to have’. First and foremost, it is about structured and effective risk management – one thing that the Covid pandemic showed us was the companies with strong sustainability track records, companies managing non-financial risks, were resilient during turbulent times.
“What does this tell us? As the world braces for the onset of dramatic climate consequences, we need companies that manage risks – beyond financial risks – well,” Robinson concludes.