Shareholder activism: A tale of locusts and bees

Lars Kaiser, PhD Head Group Sustainability
Reading time: 6 Min
So-called activist shareholders attempt to influence how a company is run through exercising the voting rights attached to their shares, as well as active engagement. Initially, this strategy was used to extract the maximum value from the invested company. More recently, sustainability focused investors have picked up on these activist tactics to steer companies towards actions on climate mitigation and adaptation. Thus, one strategy can serve two very different goals: maximise profits or maximise sustainability. It may be useful to see it as a story of locusts versus bees.

German politician Franz Müntefering triggered the so-called "locust debate" and thus shaped the public image of the rapacious, ruthless and unscrupulous investor. Locust swarms devour whole swathes of land in a very short time, which can lead to massive economic damage and famine. Similarly, locust investors do not make decisions for the long-term good of a company. Quite the contrary: short-term profit maximization is often the central goal. And this is regularly achieved through savage cost-cutting measures, large-scale layoffs and steep cuts in R&D budgets, which ultimately damages the company’s long-term outlook.

This contrasts with the concept of "sustainability". This describes economic action while considering the careful use of natural resources and social responsibility. The focus is long-term and includes the needs and interests of all stakeholders. Thus, the concerns of employees, suppliers, capital providers, society and environmental aspects are considered. To stay with the image of insects, the destructive grasshopper would be contrasted here with the bee. It is one of the world's most important pollinators and thus contributes significantly to the preservation of the plant world and agricultural yields. In a highly social bee colony, the individual task of each bee serves the preservation and long-term survival of the entire colony. This is comparable to the actions of sustainable activist investors. Their strength lies primarily in collaborative action to create the necessary pressure on companies to achieve the desired change. In many cases, they pressure companies to disclose information and improve transparency, to stop environmentally and socially critical business activities and to introduce new strategies regarding a variety of environmentally and socially relevant issues.

Radically different investor interests

Obviously, these two types of activist investors have contrary objectives. Both use their activism as a means of asserting their interests but the success of the two approaches could not be more different in terms of results.  A recent academic studyexamines the consequences for companies that have been the target of an activist hedge fund. The study reaches three clear conclusions: (1) the company’s value immediately increases but in the long term markedly fades, (2) the company's standards of social and environmental responsibility decline, and (3) an immediate and steady rise in job cuts occurs.

In contrast, another study analyses the consequences of shareholder activism promoting sustainable environmental and social goals. This approach can yield positive excess returns, especially when sustainability activists engage in close cooperation with each other. As a result of coordinated activism, a company’s accounting and corporate management practices often improve, which in turn increases the interest of other investors in the company.

Many sovereign wealth funds, pension funds and endowment funds now regard managing the assets entrusted to them in a sustainable manner as a core task, while achieving returns in line with the market. Achieving this also involves using their voting rights to encourage companies to pursue more sustainable value creation. Thus, shareholder activism is now seen as the most effective way an equities investor can support environmental and social change.

Exercising voting rights

Exercising voting rights at a company’s annual general meeting is one way for investors to express their point of view, whether it is to register satisfaction, or not, with the company’s board or management or to highlight the need for change in the company’s activities or practices. In principle, each share grants the shareholder the right to vote at the annual general meeting – with the exception of some preferred shares.

Many large investors use the services of proxy voting providers to cast their votes. This is mainly due to the large number of investments they hold and the number of shareholder proposals to be voted on, as well as the associated complexity of assessing each issue thoroughly. In the case of private investors who invest in equity funds, voting rights usually lie with the fund. However, each individual can find out from the fund whether voting takes place aligned with ones preferences, or which proxy voting provider the fund has commissioned. Holders of individual shares in custody accounts are responsible for exercising their voting rights. Here, too, there are now providers of proxy voting services for smaller investors.

Filing shareholder proposals

In addition to exercising their voting rights, shareholders can also draft their own motions and put them to a vote at the annual general meeting. Certain criteria for submitting such proposals must be observed, and these may vary depending on the jurisdiction. Restrictions may include, for example, having the application approved by a regulatory authority, owning more than USD 2000 in the stock or owning at least 1 percent of the company. In order to meet these criteria, applying through a proxy voting provider has proven to be an effective approach, since the provider bundles the shares held by multiple individual investors and thus receives a weightier vote.

An example: This year the Ethos Foundation, in Geneva, established to represent several pension funds, together with the non-profit ShareAction Foundation and seven other Swiss pension funds, submitted a shareholder’s proposal to Credit Suisse’s annual general meeting for “Changes to the articles of incorporation regarding climate strategy and reporting”. The aim was to encourage Credit Suisse to increase transparency about its climate impact and reduce its financing exposure to companies in the fossil fuel sector. This particular motion was defeated at the general meeting, with 77 percent of the votes opposed, 19 percent in favour and 4 percent abstaining.

Management dialogue ("engagement")

Establishing a focussed and ongoing dialogue with management, also known as management engagement, is another valuable activist tactic to bring about environmentally and socially relevant progress. Investors often pool their efforts into joint engagement initiatives to increase their potential impact. The results of these engagements are shared with analysts, portfolio managers and clients so that they can use this information in their investment decisions. As a result of a failed engagement initiative, company shares may be sold, sending a negative signal to the stock market. In addition to the equity universe, the engagement approach is also becoming increasingly popular with ​​bonds. With the motto “engaging with issuers”, large bond investors such as PIMCO are increasingly using this approach to achieve climate and social impacts as bond investors – regardless of their equity investments.

Bottom line

ESG-focussed shareholder activism has proven to be an effective means of achieving social and climate-related change in listed companies. The strength of such initiatives often relies on collective action among a bloc of aligned investors, that is, on "partnerships to achieve the goals", as articulated in the last of the 17 UN Sustainable Development Goals.

But, as always, change is difficult to achieve. It requires the commitment of time and financial resources. And sustainable change can only be achieved if growing numbers of private investors and large funds are willing to take on this task.

In order to implement the Paris climate goals and improve social standards, more bee-type investors are needed. They need to collectively exercise their voting rights in a pooled manner and engage in dialogue with companies to bring about positive environmental and social change. At present, we still see many investors who are not yet ready to commit publicly, actively and emphatically to achieving such positive changes. But this can and will change. As shareholders, we should exercise our voting right to have a say in the companies we own, because, ultimately, we are also responsible for the consequences of their business activities.

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