While some vocal investor activists goal healthy firms, practicing a type of corporate blackmail within the type of the Greenmailer movement, others return to the unique, noble mission of exposing real pathologies in corporate governance.
Recently we evaluated what number of self-proclaimed activist investors differ from the unique activists who helped spark needed government reforms 20 years ago. We argued that the credibility and value proposition of activist investors are increasingly in danger amid mounting proxy losses in high-profile fights and the weakening financial performance of activist firms.
At the identical time, we welcome cases where activist investors can assist drive mandatory governance reforms, following within the footsteps of revered real, original activist investorsincluding Ralph Whitworth of Relational Investors, John Biggs of TIAA, John Bogle of Vanguard, Ira Millstein of Weil Gotshal, and Institutional Shareholder Services co-founders Nell Minow and Bob Monks, who spearheaded a virtuous and mandatory movement in corporate governance that emphasized accountability, transparency and shareholder value while exposing and ending corporate misconduct, cronyism and excess.
When activists can do things right
While we’re fundamentally skeptical of most of today’s high-profile activist investors, we’re also probably the most vocal and enthusiastic supporters of those investors once they advocate for real and mandatory reforms in corporate governance.
Just this week successful proxy Kampf, led by Browning West and advised by Greg Marose of Longacre Square at Canadian clothing manufacturer Gildan, reinstated former CEO Glenn Chamandy to the highest after he abruptly fired in December without giving any reason despite increasing financial performance and inexplicably by a former sports director with a controversial pastThis series of bad government decisions sparked a revolt: Unusually lots of Gildan’s hottest Executives signed a letter supporting the activists’ fight against their very own company. Before the annual shareholder meeting, five directors leave the boardWhen it became clear that shareholders were overwhelmingly voting for activist control, Gildan’s entire board, together with its hand-picked CEO, abruptly resigned, ending their last attempt to save lots of their jobs. by selling the corporate below market value.
Clearly, the activist’s laudable role in difficult poor corporate governance struck a chord with disgruntled shareholders. The success of Browning West and Chamandy springs to mind when activist Starboard Value successfully replaced the complete board of Darden Restaurants after a hard-fought proxy battle in 2014; Darden stock has tripled within the meantime.
In fact, there are actually several impressive CEOs of Fortune 500 firms who rose to the highest through activist-backed proxy struggles, corresponding to Toby Rice of EQT and Lourenco Goncalves of Cleveland-Cliffs, who were in a position to translate their initial activist mandates into rapidly increasing financial results over an prolonged time period.
Sometimes activists uncover government misconduct that goes beyond bad decisions and results in misconduct, corresponding to Carl Icahn’s campaign against Aubrey McClendon of Chesapeake Energy.
However, these activist success stories are the exception moderately than the rule. As we’ve got already mentioned, over the past five years, activist investors have lost in content each proxy fight they initiated. And the most important proxy fights of this yr’s proxy season – at Disney and Norfolk Southern – went hand in hand with activists, although many imagine activists partly won the latter fight through Ancora’s storm of Tantrums.
This is how proxy fights look in 2024
While the most important fights of this yr’s proxy season led to Defeat for activiststhere are still some proxy fights coming up at smaller firms where activists may recover results, including a proxy fight led by Quentin Koffey’s Politan Capital and advised by Cadwalader’s Richard Brand (who also advised Ancora’s losing fight) against Masimo CEO Joe Kiani, who’s fighting back fiercely. Corporate governance at Johnson Controls might also be ripe for change, with Soroban Capital and Elliott Management taking big stakes.
Some of probably the most successful activist investors manage to push for needed corporate governance reforms by avoiding proxy fights altogether – and their returns show it. They are often called constructive, behind-the-scenes activists who work with, not against, CEOs. One distinguished example is ValueAct, led by Mason Morfit, which returned a formidable 46% last yr, greater than doubling the return of the S&P 500 since its inception.
It goes without saying that like several distinguished corporate governance expert with five a long time of experience in virtually the entire proxy battles mentioned above, and like several corporate motion from IPOs to M&A to proxy battles, we all know senior leaders on each the company and activist sides. The consultants, bankers, lawyers and repair providers on each the company and activist sides have relationships with us – but that on no account affects our independent and objective view of constructing the choices as we see them.
Like us written beforethe facts clearly show that the credibility of activist investors is increasingly under threat from mounting losses in proxy battles. But there are still opportunities where activist investors can push for mandatory governance reforms, and in those cases activists should be celebrated as forces for good, just as certain other activists ought to be rebuked for destroying shareholder value, Greenmailer of the previous couple of daysThe motto for activists ought to be: select your fight fastidiously to have a constructive impact, otherwise it’ll be seen as vanity-driven blackmail.
Jeffrey Sonnenfeld is the Lester Crown Professor of Management Practice and founder and president of the Yale Chief Executive Leadership Institute. He was named “Management Professor of the Year” by Poets & Quants magazine in 2023.
Steven Tian is director of research on the Yale Chief Executive Leadership Institute and a former quantitative investment analyst on the Rockefeller Family Office.
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