Is Your Board Ready for a New Era of Shareholder Activism?
Activists are launching more campaigns, and they are finding more success.
In the first half of 2022, 37% of shareholder activist campaigns were conducted by first-time activists, a number that dwarfs the percentage led by more familiar activist names, such as Elliott Management or Icahn Associates (23%). According to The Activism Vulnerability Report, FTI Consulting’s most recent quarterly report on the environment surrounding shareholder activism, this may forecast a new era in shareholder activism, one that forgoes the focus on cutting costs and returning cash to shareholders in favor of an approach that fuses operational and strategic activism with corporate governance and ESG. I spoke with Kurt Moeller, managing director of FTI Consulting, about the likelihood of more activist campaigns, which industries are most likely to find themselves fending off activist attacks and what directors can do to help prepare their companies for a market environment increasingly ripe for shareholder challenges.
Bill Hayes: Would you say that the current market environment is one that could be primed for an increase in activist campaigns? If so, what factors are contributing to that environment?
Kurt Moeller: The recently more volatile stock market, along with continued high inflation and recession concerns, are likely to offer activists a broader selection of targets than in recent years. I would not be surprised if activists uncovered opportunities that might not have been as apparent before the correction. For those companies that activists have been eyeing, lower valuations may have created more attractive risk/reward scenarios. Furthermore, the September 1 implementation of universal proxy cards should reduce an activist’s cost to run a proxy campaign.
BH: What trends did the report indicate regarding the success of activist campaigns toward public companies? Are they becoming more successful?
KM: Activists launched 23% more campaigns in the first half of 2022 than in the first half of 2021. During the second quarter of 2022, activists gained 31 board seats, compared with 14 a year earlier. Activists were also more successful, gaining 44% of the seats they sought in this year’s second quarter vs. 33% a year ago.
BH: What industry sectors seem to be most susceptible to activist campaigns, and what makes them such attractive targets?
KM: During the first half of 2022, the technology, media and telecom sector was the most targeted out of 10 sectors, representing 25% of all U.S. campaigns, followed by healthcare & life sciences, at 16%. Lower valuations for biotechnology stocks helped lead to more targeting by activists.
Looking at individual industries more closely, a few others stand out. The aviation and airlines industry jumped 13 spots to now rank as the most vulnerable industry. While demand for air travel has returned, per-unit costs remain elevated relative to airlines’ previous guidance. Low-cost carrier Spirit Airlines was the subject of a successful hostile takeover bid earlier this year, which we view as a form of corporate activism.
The second-most vulnerable industry is savings banks. Depending on how their loan portfolios are structured and how strong the credit quality is, these banks may benefit from higher short-term interest rates, but they also may be hurt by lower mortgage originations and slower loan growth, plus increased loan delinquencies.
BH: An interesting statistic from the report: 37% of all campaigns initiated in the first half of 2022 were by first-time activists as opposed to established activist firms. What does that say about the current activist atmosphere and how does it affect companies and their boards?
KM: There are many long-established shareholder activists, and typically there are funds that recently have begun using activist tools. It tends to be easier for companies, boards and their advisors to anticipate how established activists will proceed in a campaign, as they have a track record that can be examined. By contrast, predicting the moves of a first-time activist can be more challenging.
BH: What effect do you think the SEC’s newly adopted universal proxy rules will have on the state of shareholder activism?
KM: The adoption of universal proxy cards in the U.S. lowers one barrier to activists running a proxy contest. Universal proxy cards will allow shareholders to more easily compare the skills and experience of both sides’ nominees. This should result in both activists and companies heightening their emphasis on having high-quality nominees and on convincing shareholders of the value that each nominee would bring to those shareholders.
BH: What can boards do to prepare for possible shareholder activist campaigns at the companies they serve? Are there signs they may notice that tell them their companies could be susceptible to activists?
KM: Directors should look at their companies through the lens of an activist. Has the company underperformed its peers from a total shareholder return perspective or on key operational metrics? How recently has the board been refreshed, and how well do directors’ skills and experience reflect the company’s current situation?
A substantial number of “against” votes on say on pay, or a substantial amount of “withhold” votes in uncontested director elections often foreshadow an activist’s arrival.