Issue #32                                                                                       January 2022
Boards of Directors, Hedge Fund Activism and Strategic Decision Making
by Professor Margarethe Wiersema

An activist investor campaign is an unsolicited and unwelcome attempt by one of the company’s shareholders to influence the governance, financial, and/or strategic direction of the company in order to enhance shareholder value. Flush with cash, activist investors are rattling CEOs and boardrooms of companies globally. In 2020 activist investors deployed more than $40 billion in capital globally and initiated approximately 180 campaigns against publicly traded companies (Lazard, 2021). Activist investors target companies and take an ownership position with the intent to make a gain on their investment by making demands of management and the board to improve shareholder value. 

Before launching a campaign, activist investors conduct extensive research on the company, including consulting with industry experts and former executives. They express their concerns and demands in their letters to the board and management as indicated in Elliott’s letter to GSK: “Despite possessing strong businesses in attractive markets, GSK has failed to capture business opportunities due to years of under-management. GSK has a substantial value creation opportunity: We believe there is significantly more value to be realized at GSK with superior execution”. They can also be highly critical of the firm’s governance, as in Daniel Loeb’s scathing remarks about Intel’s board: “… we cannot fathom how the boards who presided over Intel’s decline could have permitted management to fritter away the Company’s leading market position while simultaneously rewarding them handsomely with extravagant compensation packages; stakeholders will no longer tolerate such apparent abdications of duty”. Clearly, activist campaigns raise not only concerns regarding the performance of the CEO but also render a critical assessment of the board as an internal monitor of management. 

Given their small ownership stakes and lacking control, activist investors must rely on communication and persuasion to convince the boards and management of the companies they target that their proposals are valid and at the same time they must obtain support from the company’s institutional investors. They can make a compelling case they are shareholder focused, as illustrated in Third Point’s letter to investors: “Nestlé, with an over $250 billion market capitalization, is the largest food business in the world and home to some of the world’s greatest brands. However, despite having arguably the best positioned portfolio in the consumer-packaged goods industry, Nestlé shares have significantly underperformed most of their peers on a three-year, five-year, and ten-year total shareholder return basis. Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency”. Activism has changed the relationship between companies and their shareholders in that management can no longer rely on the unconditional support of their institutional investors. Despite voting with management on most shareholder proposals, institutional investors are increasingly willing to side with activist investors. For example, with just a 0.02% share position, Engine No. 1 launched a proxy fight for board representation at ExxonMobil and succeeded at gaining board seats due to the support of the company’s investors including the Big 3 index funds (e.g., BlackRock, State Street, and Vanguard). Institutional investors may also instigate an activist campaign by issuing a request for activist, known as an RFA, a sure sign they also have concerns over shareholder value. In addition to the company’s shareholders, activist investors may engage in discussions with specific board directors to elicit support for their campaigns. Ultimately, an activist campaign is a negotiation between the activist investor and management and the board, but its outcome is highly dependent on the perception of the company’s shareholders towards the campaign. 

Activist investors have approached more than 45% of the S&P 500 and are increasingly targeting companies in Europe and Asia. This is a wake-up call for boards in that activists’ primary concerns are whether the governance and strategy of the company is optimizing shareholder value or destroying it. Boards must become more pro-active and realize that sooner or later they are likely to get an activist “knocking” on the door. The best defense is for boards to focus on the company’s strategy and to ask the same hard questions about shareholder value as activists do. What are the key resources/capabilities that drive performance in the industry and is management making the requisite investments to be competitive in the marketplace? This is clearly an issue in many of the campaigns initiated by activist investors, where companies were targeted because of their deteriorating competitive position. 

A thorough examination of the company’s business portfolio is also called for to avoid value destroying acquisitions and to be more proactive in divesting business units. Many activist campaigns have targeted companies where value can be unlocked by splitting up business or divesting business units. This is a classic case where the sum of the parts is worth more than the company as a whole. These re-assessments of competitive and corporate strategy call for boards with the requisite talent in strategic thinking to incorporate the demands and challenges posed by foreign competition, global supply chains, digital technologies, and environmental concerns. Boards must be more critical of their own skill set and whether, in total, they possess the necessary competencies to provide the guidance and oversight that activist investors look for. Thus, activist campaigns have placed intense pressure on boards to raise their game when it comes to engaging strategically with management on value creation. Anything less invites an unwelcome visitor.

​​​​​Margarethe Wiersema
Dean’s Professorship in Strategic Management
University of California, Irvine


*Prof. Margarethe Wiersema spoke at the last IESE - ECGI Corporate Governance Conference celebrated in October 2021.

IESE-ECGI Corporate Governance Conference 

"Boards of Directors and Corporate Strategy in a High-Uncertainty Context"
Hybrid, October 4-5, 2021 

Corporate strategy is considered a core driver of the firm’s long-term orientation. Corporate governance suggests that boards of directors have the duty to govern the firm and develop it sustainably for the long term. This implies that boards are supposed to discuss the firm’s strategy and make relevant decisions on corporate strategy.

In dealing with strategy, boards face a slew of challenges. Board directors need to understand the company's business and make complex strategic decisions in an increasingly uncertain context on a range of issues, from digital transformation and decarbonization, to corporate restructuring.

The IESE-ECGI Corporate Governance Conference 2021, held on October 4-5, 2021, shed light on these issues by bringing together leading scholars from the areas of corporate strategy, corporate finance and organizational economics, with CEOs and chairpersons from top-tier companies.

The conference report is now available for download. You can also watch all the conference sessions by clicking here

Corporate Governance News

Investor activism in Europe possibly entering new “golden age”
Investor activism is poised to enter a “golden age” across Europe next year, while low valuations and heightened environmental, social and corporate governance concerns mean that British companies are the most vulnerable targets, with 36% of the European companies based in the UK identified as “at risk”, according to a new report… read more (subscriber content)
Global standards body takes aim at company 'greenwashing' claims
"Greenwashing" by companies eager to massage their environmental credentials and increase their appeal to ethical investors came under scrutiny with the launch of a standards body, the International Sustainability Standards Board (ISSB), which seeks to build on and replace a patchwork of voluntary disclosure practices. The ISSB unveiled at the UN's COP26 global climate summit in Glasgow that it will publish its first batch of global norms for climate-related company disclosures in 2022… read more
Lithuania braces for China-led corporate boycott
China has told multinationals to sever ties with Lithuania or face being shut out of the Chinese market, dragging companies into a dispute between the Baltic state and Beijing. The European Commission responded in a statement that the EU was ready to stand up against all types of political pressure and coercive measures applied against any member state… read more ​​​​​
U.S. SEC issues guidance on corporate share-based executive compensation
The U.S. SEC issued guidance to listed companies around how to properly recognize and disclose share-based compensation arrangements made to executives ahead of company earnings and other releases… read more ​​​​​
Transparency of ESG investment ratings faces regulatory scrutiny
Market regulators set out a global framework to police environment, social and governance (ESG) investment ratings and help combat 'greenwashing' in the fast-growing, multi-trillion-dollar sector… read more ​​​​​
Company climate disclosures jump in 2021 as board pressure builds
The number of companies sharing climate data with CDP, the world's leading disclosure platform, jumped by nearly 40% over the last year as investors and policymakers pressured boards, Reuters reports… read more
EU to set up scheme to encourage CO2 removal from atmosphere
European Union policymakers say they’ll create a system to certify carbon removals next year, as a step towards establishing a regulated EU market to trade them and provide a financial incentive to store CO2. Would that measure offset the 3 billion tonnes of CO2 equivalent the EU emits?… read more
Japan's supreme court allows controversial 'poison pill' takeover defence
Japan's supreme court dismissed a request to block a plan by Tokyo Kikai Seisakusho Ltd for a "poison pill" takeover defence, in a closely watched ruling with implications for future hostile bids in the country… read more ​​​​​
Shell investors back moving HQ from Netherlands to UK
An overwhelming majority support changes to Anglo-Dutch group’s share structure and tax residence… read more (subscriber content) ​​​​​
Patrick Drahi’s Altice increases BT stake to 18%
The billionaire Patrick Drahi has increased his stake in BT to 18%, prompting the government to warn it could step in to block a full potential takeover of the British telecoms giant… read more ​​​​​
Generali CEO to fight shareholder pressure with new plan that seems to be effective
Philippe Donnet, CEO of Generali, announced a bold plan to increase profits and return capital to investors. It should be enough to keep him in place. Although Donnet has the backing of the main shareholder, Mediobanca, which owns 13% of the group's shares, the Italian billionaires Francesco Gaetano Caltagirone and Leonardo Del Vecchio, who control almost 16% of the company, along with a smaller ally, CRT, signaled that they want him out… read more ​​​​​
AmEx Global Business Travel to go public via $5.3 bln Apollo SPAC deal
American Express Global Business Travel (GBT) said it would merge with a blank-check firm backed by Apollo Global Management Inc. to go public in a deal valued at around $5.3 billion… read more ​​​​​

In Case You're Interested...

Golden Age for Activism in New “Target-rich” Environment

Global professional services firm Alvarez & Marsal (“A&M”) announces the findings of its latest analysis and predictor of shareholder activism in Europe in 2022. The outlook forecasts a “golden age” for activism in Europe, with 148 companies at risk of activist attacks in the near-term. The number of corporates at risk of being targeted by an activist in the next 12 months has increased by almost 10% since A&M’s April 2021 update… read more ​​​

Review of Corporate Governance Reporting 

This is the second year that the FRC has reviewed how UK premium listed companies have reported on their application of the 2018 UK Corporate Governance Code. Their analysis last year gave a benchmark on the quality of reporting against the Code. This year they once more assessed a random sample of 100 FTSE 350 and Small Cap companies… read more ​​​​​

How Corporate Governance is Changing

Wharton's Beyond Business series tackles on "Redefining Corporate Governance," a discussion on the unprecedented challenges facing corporate boards in today's business and societal landscape. Hosted by Dean Erika James as part of the Tarnopol Dean's Lecture Series, this event – which originally streamed live on the Wharton LinkedIn page –was the second of three Fall 2021 sessions on the topic of Environmental, Social, and Governance (ESG)… read more ​​​​​

The Wisdom of Whistleblowers

Although whistleblowing isn’t a panacea for corruption and corporate malfeasance, it has proven highly effective as a last line of defense against behavior that is both economically harmful and politically destabilizing. As such, there is a strong case for establishing a new global agency to manage the process… read more ​​​​​

Reimagining Corporate Purpose Post Pandemic

CEO of Hewlett Packard Enterprise Antonio Neri spoke to Bloomberg on the permanent changes to the way of working post pandemic and the importance of company culture when it comes to talent acquisition and retention, as well as what’s needed to progress the climate agenda… watch here ​​​​​

The Revolution will not be Privatized: Corporate Responsibility and its Limits

The movement for ESG reporting reflects a vacuum in political leadership. To reach a zero-carbon economy, the state cannot count on businesses to voluntarily pare back profits. Governments will need to force companies to invest in new technologies and ways of operating and to pay higher energy costs during the transition. In order to restore healthy markets for customers and workers, states will need to cut into the revenues of dominant businesses. Happy talk about corporate purpose and responsibility cannot serve as a distraction from hard choices. Business leaders need to play their part, but so do political leaders and voters. Like it or not, everyone is in this together… read more ​​​​

Business Schools Lag Behind Europe’s Executives on ESG

According to Oxford’s Colin Mayer, business is undergoing profound change. Urged on by regulatory reforms proposed by the European Commission, the continent’s executives are at the forefront of promoting purposeful, responsible and sustainable business. European business schools should be at the vanguard but risk being left behind… read more ​​​​​

IESE's Recent Research on Corporate Governance 

“The Big Three and corporate carbon emissions around the world”

Journal article (November 2021)

Authors: José Azar, Miguel Duro, Igor Kadach, and Gaizka Ormazabal
Journal: Journal of Financial Economics
Read more

“Mandatory carbon disclosures and the path to net zero”

Journal article (October 2021)

Authors: Patrick Bolton, Stefan Reichelstein, Marcin T. Kacperczyk, Christian Leuz, Gaizka Ormazabal, and Dirk Schoenmaker
Journal: Management and Business Review
Read more

“How top managers use the entrepreneurial gap to drive strategic change”

Journal article (September 2021)

Authors: Robert Simons and Antonio Dávila
Journal: Accounting and Control
Read more

“The Impact of Logic (In)Compatibility: Green Investing, State Policy, and Corporate Environmental Performance”

Journal article (May 2021)

Authors: Yan Shipeng, John Almandoz, Fabrizio Ferraro
Journal: Administrative Science Quarterly
Read more

“Deciding the firm's future: The role of the board of directors in corporate strategy”

Working paper (September 2021)

“The role of corporate purpose in corporate governance: A framework for boards of directors and senior managers”

Working paper (July 2021)

“Boosting international investment: The role of expert assessments of corporate governance”

Working paper (June 2021)

“Resilience of the financial system to natural disasters”

Study and Monograph (May 2021)

Authors: Patrick Bolton, Harrison Hong, Marci Kacperczyk, and Xavier Vives
Read more

“The international airline group rights issue ”

Case-study (June 2021)

“Ingka in 2020. Corporate Governance, Purpose and Transformation”

Case-study (January 2021)

Authors: Roger Masclans and Jordi Canals
Read more

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