A surge in investor activist campaigns across the public equities market may be steering management teams toward private ownership, offering a rebuke to passive strategies of major index funds, panelists at an institutional investor panel in New York said.
Recent activist campaigns playing out across the boardrooms of Automatic Data Processing Inc., DowDuPont Inc., General Motors Co., Procter & Gamble Co. and PepsiCo Inc. were among examples highlighted by panelists at the Global Shareholder Activism Conference in New York on Dec. 1 as potentially eroding the long-term value of companies by way of short-term pressures. Such pressures center around activist hedge funds often voting to install their own board members to oversee near-term spinoffs, divestitures or share buybacks that can push up share prices.
For the activist set, having seen its recent efforts to push for certain operational adjustments deliver varied returns, it may begin to see itself as working for the good of large institutional counterparts, which more often tend toward passive ownership strategies.
"Activist shareholders first and foremost are shareholders, we're well informed and opinionated, doing things in a corporate context that no one is doing," Pershing Square Capital Management LP senior counsel David Klafter said. "We are the allies of institutional investors."
Private pretense
The onslaught of activism, both from marquee activist funds like Pershing, Elliott Management Corp., Trian Partners and Greenlight Capital Inc., and smaller funds, can foment costly proxy battles that lead management teams to ante up for defensive counsel, creating a dynamic where advisory costs alone may be at odds with shareholder value, particularly at companies that are positioned to maintain long-term growth.
"We have a new series of companies that are choosing not to become public companies in the same sense, by either getting access to private capital, or when and if they do access the public markets, they are doing so via dual-class capitalization," said David Katz, a partner at Wachtell Lipton Rosen & Katz. "A lot of it has to do with the activism that exists today."
"Companies do not want to deal with the wasted time and distraction that the activist distortion has brought on to them," said Jeff Sonnenfeld, assistant dean at the Yale School of Management.
Private companies such as Dell Inc. and Uber Technologies Inc. are among those that have opted for private ownership, perhaps weighing whether investor activism would result in more headaches, potentially giving management teams pause before considering IPOs.
"My concern is when you have activists focused on capital allocation and returning cash to shareholders, and not making investments, that's what leads to difficulties and allows others to take advantage," Katz said.
These concerns are borne out by IPO activity in 2017. A recent report by PitchBook characterized 2017 as "notably lacking" in newly priced U.S. IPOs, despite strong equity markets and low volatility. With 74 sponsor-backed companies going public through the first 10 months of the year, the 2017 IPO count is on pace to be 25% lower than the average during the years after the financial crisis, 2010 to 2016.
Sustainability secondary
Whether corporate social responsibility and environmental, social and governance factors should be a chief priority of corporate boards, let alone activist campaigns, may depend on how such initiatives are ultimately reflected in short-term share prices. Until then, convincing major alternative asset managers that such considerations are worthy of their attention could prove difficult in the absence of immediate value creation.
"[Corporate social responsibility] just does not move stock prices when it is introduced," said J.B. Heaton III, founder of legal advisory firm Conjecture LLC. "You gotta face the realities that it does not matter to the stock price."
A growing push to engage companies on such issues, driven primarily by the likes of BlackRock Inc. and State Street Global Advisors, is largely seen as a positive step toward delivering value to society, rather than strictly to shareholders. Large passive index investors such as Fidelity Investments and Vanguard Group Inc. may see their institutional partners push them to be similarly active in engaging management teams on environmental, social and governance and corporate social responsibility factors in the near future.
"The whole idea that passive index funds, like Fidelity and Vanguard, always supporting management in every fight, I think is a real threat to corporate America and American democracy because so much of our wealth is concentrated in those firms," said Bruce Raynor, principal at R&S Associates LLC and former executive vice president of Service Employees International Union.
"This religious attachment to shareholder value, that a corporation acts responsibly to the environment, workers, community, saying that does not create long-term shareholder, I think that's bullshit," Raynor added.
