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13D Monitor Real-time Activist Newsfeed


Canada's Competition Bureau has approved the planned consolidation of DuPont (DD) and The Dow Chemical Co. (DOW), which was the last major approval needed for the $140 billion merger to move forward. The Competition Bureau gave the deal the green light because the companies had agreed to divest certain business units to satisfy European Union regulators. DuPont sold its crop protection business and associated research to FMC Corp. (FMC), and Dow is selling its acid copolymers and ionomers business to SK Global Chemical Co. Competition Minister John Pecman said, "This transaction between two multinational giants was of interest to Canadian farmers and those involved in this major economic sector. The agreement reached today ensures that consumers and businesses continue to benefit from a dynamic marketing place, which offers innovative solutions, increased choice, and competitive prices." Dow and DuPont issued a joint statement indicating that Canada's approval will not require them to make additional divestments. Daniel Loeb of Third Point has challenged the idea of three spinoffs, arguing that splitting DowDuPont into six new companies would create more value for shareholders. The hedge fund manager has demanded that DowDuPont split the specialty products business into four publicly traded companies. Meanwhile, Glenview Capital, a separate New York hedge fund, also demanded changes to the spin-off plan in a June 27 letter to its investors.

Corvex Management LP reported a 7.6% stake in oil and gas producer Energen Corp. (EGN) on June 28 and voiced "disappointment" with the company's decision to maintain its business plan. Corvex said Energen's decision was made without consulting shareholders on potential strategic alternatives for the company. For its part Energen said it had conducted a review of its business with the assistance of two financial advisers and input from shareholders and concluded that its best option was to continue with its present business plan. Corvex in May urged the company to explore a sale.

On June 28, Swiss investor Rudolf Bohli of RBR Capital said he had sold his remaining 3% stake in GAM Holding. This comes after an unsuccessful push to oust the company's CEO and implement more aggressive cost cutting. It was disclosed on June 27 that an institutional investor has offered 4.73 million shares in GAM at 13.15 Swiss francs, for an implied value of 62 million Swiss francs ($64.6 million). "We've earned well with our investment, especially considering the time horizon. We weren't going to be invested forever," Bohli said. "It was a good return."

Nestlé's (NSRGY) plan to boost its capital structure, announced just days after being thrust into the spotlight by Daniel Loeb's Third Point, is being viewed by investors as a precursor to bigger changes under the company's new CEO, Mark Schneider. Shares in the company increased up to 2% on June 28, close to the record high reached on June 26 after the hedge fund revealed a $3.5 billion stake and urged the foodmaker to buy back shares, establish a target for margin growth, and divest non-core assets including its stake in L'Oréal. Nestlé announced late June 27 that it would launch a 20 billion Swiss franc ($20.8 billion) share buyback program. "This is a new era for Nestlé and I'm extremely positive on the prospects for internal and external growth," said Carine Menache, who runs a Monaco investment firm that owns shares in the company. She says the buyback should lift earnings by 6%, while increased merger and acquisition activity could provide a further lift. "Nestlé may have a poor track record for M&A, but the new CEO, Schneider, is now in charge and he has a great track record," she notes. Topping a 19% operating margin, the midpoint of Third Point's recommendation, would boost earnings by another 8%, according to UBS, which described Nestlé's plan as "responsive but not reactionary" to Third Point. "We think this sends a strong message to the markets—expect more to come," UBS said. Nestlé did not address its stake in L'Oreal.

Deckers Outdoor Corp. (DECK) has been warned to sell itself at a favorable valuation or face a fight to roll the entire board and bring in new management.  In a June 27 letter, Marcato Capital Management's Mick McGuire wrote, "While we typically seek to work constructively with boards to implement change, we view this situation differently. If, for any reason, the process fails to produce a desirable outcome, we believe a new management team led by a new board of directors will be much more likely to succeed in achieving the revenue and expense opportunities at Deckers."  He noted that the footwear company has failed to achieve growth in earnings and stockholder value and complained that investor recommendations for corrective actions have been "consistently ignored."  McGuire also expressed concern about the lack of shareholder representation on the board and its directors' lack of experience in mergers and acquisitions.  According to Marcato, which owns 6% of Deckers, at least six other investors have demanded that the board pursue a sale.  Among them is Red Mountain Capital Partners, which holds a 3.3% stake.  Deckers responded, "We appreciate the views of our stockholders. Our board of directors will continue to take actions that are in the best interests of the company and all stockholders."

Glenview Capital Management LLC is calling for revisions to the proposed merger of Dow Chemical Co. (DOW) and DuPont Co. (DD).  The hedge fund has met with leaders of both companies and advocated changes in a plan to split the combined group into three components, according to a June 27 letter to investors.  It also questioned Dow's decision to defer the retirement of CEO Andrew Liveris.  Glenview believes the postponement and the current breakup plan will hamper Dow's ability to find a new CEO.  The chemical giants are expected to finalize their merger deal in August.  Within 18 months of completion, the combined entity would split into three separate companies covering three different sectors: agricultural, materials, and specialty-chemical products.  Glenview owns approximately $1 billion of Dow stock, or less than 1% of the company's total value, according to its letter.  The fund stated it largely supports Third Point LLC's plan for the companies.  Third Point has called for shifting almost a third of the earnings from the proposed materials business to the specialty-products operation.  Trian Fund Management LP has also privately pressed for changes.

Just days after Dan Loeb's Third Point announced a 1.25% stake in Switzerland's Nestlé (NSRGY), the company has announced a share buyback program worth up to 20 billion Swiss francs ($21 billion).  On June 27, the company said, "In the context of low interest rates and strong cash flow generation, share buybacks offer a viable option to create shareholder value." The share buyback program is expected to be completed by June 2020.  Nestlé said the decision stems from a review of its capital structure that began earlier this year, and as a result, it had decided to focus future investment spending on high-growth food and drinks categories, such as coffee, pet care, infant nutrition, and bottled waters, and on high-growth economies.  Third Point has said the company is failing to adapt to a slower growth environment and remaining "stuck in its old ways," but CEO Mark Schneider has hinted at broad strategic changes, which could include a formal profit margin target.

On June 27, shareholder Allan Gray said it had lost faith in Group Five's board to act in the best interest of the firm.  More than 10 executive and non-executive directors at the South African construction company have resigned since February, with no reasons provided.  Also in February, CEO Eric Vemer resigned after Group Five posted its first six-month loss in 11 years due to a 255 million rand ($19 million) settlement with the South African government. "They have been unable to regain our trust following numerous meetings and engagements," said Allan Gray Chief Investment Officer Andrew Lapping, adding that the board's response after the resignations had been "unsatisfactory."  The fund manager, which owns 25% of Group Five, informed the company in May of its request to call an extraordinary general meeting to reconstitute the board, and five non-executive directors resigned on June 23 ahead of the July 24 meeting.  Allan Gray has proposed that former Group Five CEO Michael Upton be appointed to the new board, along with four other nominated members.  Lapping said the fund manager is seeking a team with "continuity and institutional memory, sensitivity to historical industry behavior and execution of the company's strategy to deliver across the full infrastructure lifecycle and maximum shareholder support."  Group Five's current board opposes Upton's appointment and Allan Gray's "requests for an unbundling of Group Five if it does not create value for all stakeholders."

Daniel Loeb's Third Point is demanding, among other things, that Nestlé SA (NSRGY) review its €24.4 billion ($27.4 billion) holding in L'Oréal SA (LRLCY).  Shares in the Swiss food giant climbed 4% on June 26 in response to news that the hedge fund had acquired a $3.5 billion, or 1.25%, interest, which will exert pressure on CEO Mark Schneider to take action.  For decades, Nestlé and France's Bettencourt family, heirs of L'Oréal founder Eugène Schueller, held roughly equal stakes in the cosmetics giant. They have long resisted pressure to decouple, although critics argue the companies lack common strategic goals and would be better untethered.  Observers point out several ways in which Nestlé could further cut or rid itself completely of L'Oréal shares.  They believe an outright sale would prove difficult given the size of its stake, currently worth $27.4 billion.  However, some of the provisions in Nestlé's agreement with the Bettencourt family governing what it can do with its position expired in 2014; for example, Nestlé, no longer is obliged to offer the shares first to the Bettencourts if it decides to sell them.  Loeb has suggested that Nestlé could offer the L'Oréal shares in exchange for Nestlé ones; but observers say a more likely option would involve L'Oréal simply buying back Nestlé's stake.

Ericsson has scrapped its efforts to attract more clients outside the telecoms industry in order to refocus on selling networks to mobile phone companies. The Swedish firm is working to reduce costs and end a steep decline in its stock price.  Cevian Capital, which has a $1 billion stake in the company, is urging it to more quickly turn things around.  The company's stock price has declined 30% in two years amid competition from Nokia and China's Huawei. In 2014, Ericsson said it would diversify so that up to a quarter of its revenue by 2020 would come from industries beyond telecoms; but the plan has failed, and the company will drop the target as new CEO Borje Ekholm focuses on the core business of mobile networks.  Ekholm unveiled a cost-reduction plan in March and announced up to $1.7 billion in provisions, writedowns, and restructuring costs, including exploring options for its underperforming media unit and revamping its managed services operation.  Investors are receptive to the plan but are concerned that it will not stimulate growth.

Siemens CEO Joe Kaeser said in a recent interview that he is working to fend off activist investors and that he is increasingly wary of striking the right balance between financial results and building for the future.  "You need to keep the difference between the short-term aspect and the long-term aspect very close," he remarked. "The wider it gets, the more activists you get in saying 'Hey, this is a performance gap and I want this now.'"  The German engineering company has so far escaped being a target as investors like Third Point and Elliott Management eye Europe and beyond.  Kaeser has spent his four years at the helm simplifying the conglomerate's byzantine structure, which has helped to lift its stock price 49% since he took over.  Among other strategies, he has discussed adopting more of a holding-like structure that gives autonomy to units while still being centrally managed.  Kaeser said the changes at Siemens are important, as is creating an "ownership culture" under which employees buy stock and get a stake in the company's future.  "What I would do is say 'Look, if you want this, fine. Do your short-term thing. If you make a lot of money with that, you get taxed higher,'" he said.  "You cannot build long-termism, stakeholders, societal inclusiveness, into that purpose of ownership. So there's got to be some sort of counter, some sort of balance to that."

Nestle SA CEO Mark Schneider said on June 26 that he will hold steady on his own push to spur growth in the face of calls for radical change by Daniel Loeb's Third Point, which recently disclosed a $3.5 billion stake, or 1.25%, in the company. The hedge fund is calling for changes to boost margins and shares at Nestle, including divesting its long-held stake in L'Oréal SA. Third Point's letter to investors on June 25 identified "a familiar set of conditions that make it ripe for improvement and change" and indicated that "our recommendations to Nestle management, if taken together, would dramatically improve both the growth profile and earnings power of the company." Nestle responded that it maintains "open dialogue with all our shareholders" but "remained committed to executing our strategy and creating long-term shareholder value." Observers say Schneider has resisted some of the more radical approaches taken by some of his competitors and is an outspoken critic of the cost-cutting technique known as "zero-based budgeting."

Nestle SA has come under pressure from Dan Loeb's Third Point, which has built a stake of more than $3.5 billion in the world's largest food company.  The hedge fund is expected to urge management to "pursue change with a greater sense of urgency" by selling its stake in L'Oreal SA, increasing leverage for share buybacks, and launching a review of its portfolio.  More specifically, Third Point wants Nestle to scour its portfolio of more than 2,000 brands for possible sales and consider "accretive, bolt-on acquisitions in high growth and advantaged categories."  Best known for engaging U.S. and Japanese companies, Third Point has lately been drawn to European investment opportunities due to strong and improving economic data.  This is Third Point's single largest ever investment, and it is also the biggest company Loeb has ever engaged. The fund owns a 1.3% stake in Nestle.

Pandora (P) co-founder and CEO Tim Westergren plans to step down as the company's leader, according to sources. As of press time, the streaming-music service had yet to name a successor. Most, though, expect Westergren to remain at the helm of the company he founded 17 years ago until a new chief executive is in place. Westergren has been running Pandora since 2016. Before that, the CEO position had been occupied by a series of professional managers. Previously in June Sirius XM (SIRI) said it would invest $480 million in Pandora in exchange for a 19% stake and three board seats. That deal has yet to close, however.

Norway's wealth fund—the largest sovereign wealth fund in the world—wants to exclude companies with non-voting shares from major indexes in a bid to improve corporate oversight.  It supports a plan to place a "zero investability weight" on companies with no listed shares with voting rights.  "Society benefits when companies are well run and asset owners take their ownership responsibility seriously," said the $960 billion fund's CEO, Yngve Slyngstad.  "Voting is an important tool to secure good corporate governance and ensures that asset owners are able to make the board accountable and ensure long-term value creation."  The fund's effort was sparked by the voteless initial public offering of Snap Inc. (SNAP), which in March became the first firm to go public without giving owners a say in its business.  Because Norway's wealth fund mainly follows indexes when it invests, the ability to influence companies by voting is critical to its strategy.  Norway's wealth fund said it will back the introduction of a minimum threshold based on the ratio of the company's voting rights, as suggested by FTSE Russell.  Failing to meet that floor would mean a lowered weighting, it said in a letter.  The Norwegian wealth fund has increasingly focused on corporate governance issues and voting, including blasting excessive CEO pay and refusing to invest in companies that do not meet its environmental and ethical standards.

Group Five Ltd.'s largest shareholder, Allan Gray Ltd., has nominated former CEO Mike Upton to the board as a non-executive director and has proposed that the South African construction and engineering company be broken up. In a letter to shareholders, Group Five said Upton's return would be "inappropriate" given that he led the company "at a time when historical industry behavior was severely criticized." The Johannesburg-based company said the board also disagrees with Allan Gray's breakup plan and has the support of other investors. The Cape Town-based investor has proposed a total of five new non-executive directors—to replace the five slated to resign—in an attempt to force the company to alter its strategy. Shareholders will vote on the appointments at a July 24 meeting. Group Five has proposed a further four non-executive directors for shareholders to vote on as an alternative to Allan Gray's proposals, two of whom were nominated by the Public Investment Corp., Africa's biggest money manager, and two by Johannesburg-based Mazi Capital.

Shareholders led by Effissimo Capital Management were unsuccessful in removing the chairman and the president of Kawasaki Kisen Kaisha (K Line), Japan's third-largest shipping line, at the annual meeting on Friday.  The investors had argued the company was making insufficient profits.  K Line responded to the pressure by sending a letter to shareholders earlier this month backing Jiro Asakura as chairman and Eizo Murakami as president and CEO.  K Line's share price declined 4.5% in trading in Tokyo on Friday.

Shareholders are expected to pressure the board of embattled software major Infosys (INFY) over corporate governance and performance issues at Saturday's annual meeting.  "You can expect fireworks at the meeting from retail and some institutional investors as the company's image or brand equity took a beating after co-founder NR Narayana Murthy voiced concerns over governance and other issues, which are affecting its operations and business prospects," a retail investor said Friday.  The meeting follows a months-long fight between promoters and the board and comes amid a lower revenue outlook for this fiscal year, tech disruptions, and slowdown in the IT industry.  Head Hunters India managing director K. Lakshmikanth said promoters may not confront the board at the meeting to avoid embarrassment, but activist shareholders would definitely seek explanations on issues like governance and higher pay for top executives.  Some investors are likely to seek an overhaul of the board, especially the removal of R. Seshasayee as its executive chairman for being unable to control CEO Vishal Sikka.  "With a combined 12% share-holding, the promoters are entitled to have one of them on the board as a director.  It appears neither the board offered nor the co-founders asked for it to safeguard their interests.  Other shareholders and institution investors may ask the board to appoint any of them for the sake of the company's welfare," Lakshmikanth added.

Anne Sheehan, the California State Teachers' Retirement System's (CalSTRS) director of corporate governance, has been elected chair of the Securities and Exchange Commission's Investor Advisory Committee (IAC). Sheehan was appointed a member of the IAC upon its 2012 creation. Three years later, she was elected vice chair and has been acting chairman since April. All IAC elected officers are required to serve three-year terms. The IAC's main task is to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, and initiatives to protect investor interests. Sheehan currently oversees an 11-member staff, who manage a $4.1 billion corporate governance portfolio. CalSTRS Corporate Governance votes more than 7,800 proxies a year.

In a non-binding vote, Mylan NV shareholders have voted against the company's executive pay policy. They also re-elected the board at its annual meeting, in spite of a shareholder campaign in the wake of a scandal over high prices for its EpiPen emergency allergy treatment. Company officials did not disclose the vote totals for the board members. Investors critical of Mylan's board had a steep threshold to cross as more than 66% of the shares voted, along with over 50% of Mylan's outstanding shares, were needed for the various directors to lose.  New York City Comptroller Scott Stringer, one of the most vocal opponents of Mylan's board, said the failure to disclose the vote totals likely means the directors face strong opposition.

Ancora Advisors LLC is pressuring Potbelly Corp. (PBPB) to change its strategy or explore the sale of the company. Ancora owns 4% of the sandwich chain's shares and outlined in a letter to the board the steps it wants Potbelly to take to raise its share price, including franchising more of its restaurants. "We would strongly urge it to immediately pursue a sale/going-private transaction, as we do not believe the current strategy would be attractive for current or potential public/minority shareholders over any investable time frame," Ancora said. The Cleveland-based investor said in searching for a new CEO following the departure of CEO and Chairman Aylwin Lewis in August, the board should seek a candidate with significant franchise experience. Further, Ancora wrote, "We firmly believe Potbelly should seek out shareholder representation for its board," noting that it may seek its own board presence at next year's annual meeting.

At Mylan's (MYL) annual meeting on June 22, shareholders voted against the drugmaker's executive pay packages for 2016. The shareholder unrest centered on Chairman Robert Coury's $98 million pay package, including a $20 million cash bonus and $51 million of stock, making him the highest paid U.S. pharmaceuticals executive in 2016. His remuneration was almost four times higher than that of Johnson & Johnson (JNJ) CEO Alex Gorsky despite J&J's market value being 18 times larger than Mylan's. Last year, Mylan was widely criticized for making its life-saving EpiPen injector unaffordable at $600 for a two-pack. However, the campaign by some investors to oust Coury and CEO Heather Bresch was unsuccessful.

On June 6, shareholders of General Motors (GM) voted overwhelmingly against hedge fund billionaire David Einhorn's push for a dual-class common stock structure, with 91% of the votes cast against the proposal. The shares cast by Einhorn's Greenlight Capital were just about the only votes in favor of the proposal, as 96% of non-Greenlight votes cast rejected it. Einhorn's efforts to get three directors on GM's board also were unsuccessful, with shareholders electing all 11 of GM's board nominees, who received between 84% and 99% of the votes cast. "We are disappointed that shareholders have elected to maintain the status quo," Einhorn said in a statement. "We congratulate GM's management on their win today."

On June 6, shareholders of General Motors (GM) voted overwhelmingly against hedge fund billionaire David Einhorn's push for a dual-class common stock structure, with 91% of the votes cast against the proposal. The shares cast by Einhorn's Greenlight Capital were just about the only votes in favor of the proposal, as 96% of non-Greenlight votes cast rejected it. Einhorn's efforts to get three directors on GM's board also were unsuccessful, with shareholders electing all 11 of GM's board nominees, who received between 84% and 99% of the votes cast. "We are disappointed that shareholders have elected to maintain the status quo," Einhorn said in a statement. "We congratulate GM's management on their win today."

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Hedge Fund Activists See More Opportunities in European Companies
" Wall Street Journal (06/27/17) Fletcher, Laurence"

Activist hedge funds increasingly are asserting their influence in Europe.  Several have recently purchased shares in a European entity controlled by a bigger owner, usually one seeking to claim the remaining shares of that company.  The funds often accuse the majority owner of unfair or abusive practices that they say could depress the value of their holding in the business.  Sometimes, the majority owner—either on merit, or simply to avoid conflict—buys out the investor at an attractive price.  The funds' calls for change also might get a boost because rules in some European countries offer minority shareholders more protection than they may be given in the United States.  "The bet by the activist is that the bidder has got so much face invested in the company, are they really not going to pay an extra few percent?" explains a senior executive at one of Europe's biggest hedge funds.  Elliott Advisors is a participant in some of these efforts, including a dispute with Japanese electronics maker Hitachi Ltd., the majority owner of Italian rail signaling firm STS Ansaldo.  Elliott says Hitachi's purchase was "collusive," which Hitachi disputes.  Meanwhile, France's CIAM in June filed a criminal lawsuit over the way Altice NV has used the assets of telecoms company SFR Group, which it majority owns.  CIAM wrote to SFR's board in May, challenging a fee it said would be paid to use Altice's brand.  "Majority shareholders often consider that minority shareholders don't exist," notes Catherine Berjal, CEO of CIAM, speaking more broadly.  "We have to remind them that they do."

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Bill Ackman's Big Triumph Becomes His Big Problem
" Bloomberg (06/27/17) Nocera, Joe"

Bill Ackman, the billionaire investor who heads Pershing Square Capital Management, is a central character in a securities class-action suit, "In Re Allergan Inc Proxy Violation Securities Litigation." Most of the lawsuits Ackman has been involved in over the years are tactical moves in a larger fight with a company he wants to shake up, with the lawsuits being dropped after the fight ends. However, this lawsuit is different in that it aims to extract a large sum of money from Ackman and co-defendant Valeant Pharmaceuticals International Inc. (VRX), with the plaintiffs accusing the defendants of defrauding them. The case goes back to Valeant's 2014 attempt to take over Allergan Inc. (AGN). Shortly after Ackman's firm signed an agreement with Valeant to pressure Allergan to agree to a merger, Pershing Square began quietly buying Allergan shares, accumulating 9.7% of the stock, worth about $3.2 billion. When Allergan later agreed to be bought by Activis PLC, Pershing Square's profit on its Allergan stake totaled $2.2 billion. The legal question surrounding Ackman's purchase of Allergan's stock was whether it amounted to an improper use of inside information. The plaintiffs allege that the defendants knew from the start that they would have to go hostile, and that their early "friendly" offers were a ruse to make their inside track appear legal. They are seeking $2.2 billion in damages, or the amount of Ackman's profit on his Allergan stake. Whether or not the case goes to trial, observers say it will push to the forefront the special status of insider trading when it comes to tender offers, as well as Ackman's involvement given his status as the most polarizing investor of his generation.

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Altice IPO and the Best Activism Defense — Dealpolitik
" Wall Street Journal (06/27/17) Barusch, Ronald"

Supervoting shares are increasingly being used by newly public companies to eventually thwart activist investors. Companies are deploying multiple classes of shares in their initial public offerings and granting insiders stock that has extra voting power, while public investors are being granted either limited or no voting rights. Cable company Altice USA (ATUS), which went public in June, is one example. The class B "insider" stock has 25 votes per share compared with just one for the class A "public" stock. The supervoting rights of the class B stock mean the company or the controlling shareholder can sell additional shares without endangering insiders' control. The supervoting shares are largely immune to activist pressure; insiders can use them to prevent any effort to force change, which typically discourages activists from even trying.

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Men Join Corporate Boards With Less Experience Than Women
" Bloomberg (06/27/17) Colby, Laura"

According to a recent study of 105,000 directorships by ISS Analytics, more than three out of four new male company directors are rookies appointed without any prior corporate board experience. When a woman is appointed to a board seat, there is a 32% chance that she has already served as a director at another company, versus a 23% chance among men. ISS Analytics managing director John Roe says most board members get hired on the recommendation of existing directors, who are mostly male and whose networks tend to consist of people who look like themselves. The study shows that the gap is even wider than the average in Australia, the United Kingdom, and Sweden, where about 50% of new female directors come in with board experience, compared with about 33% of men. France is the only country where men are more likely than women to already sit on a board. One consequence of this trend is that some women end up on more than half a dozen boards at any one time, so although a company is getting an experienced director, it may not be getting the specific skills it needs for that position. Roe says, "You are putting blinders on in your search for talent. Are you going to get the director's full attention?" The study indicates that the best way to increase women's representation is to find new sources of qualified women who may not have the same C-suite background as existing directors. According to Roe, one route for women to join boards is via working for a company's outside auditor.

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Can Good Corporate Citizenship Be Measured?
" New York Times (06/26/17) Sorkin, Andrew Ross"

Certain large investors such as pension funds and others say they consider environmental, social, and governance (ESG) issues to be key considerations of their investment decisions, and companies seeking their favor must show a proven track record of responsible stewardship in all three categories. Asset manager BlackRock (BLK), for example, sent a letter to company CEOs earlier this year, suggesting that if they don't take these issues seriously, it might remove its money. Despite the public assertions of these large investors, however, many on Wall Street have privately cast a jaundiced eye based on the belief the talk amounts to nothing more than out-of-control politically correct marketing efforts. However, a new study developed by a team of quantitative strategists led by Savita Subramanian at Bank of America's Merrill Lynch Global Research unit, comes to some surprising conclusions. For one thing, investors who consider environmental, social, and governance metrics are less likely to buy shares in companies with volatile stocks and are also significantly less likely to buy into companies veering toward bankruptcy. Furthermore, "stocks that ranked within the top third by ESG scores relative to their peers would have outperformed stocks in the bottom third by about 18 percentage points from 2005 to today," the authors say. Still, there are some caveats. In certain industries, such as healthcare, technology, and consumer staples, companies that scored well on ESG metrics actually underperformed their peers.

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With Crowding in U.S. Market, Activist Investors Look to Europe
" New York Times (06/26/17) Stevenson, Alexandra; de la Merced, Michael J."

Activist investors increasingly are seeking out European companies to engage. Some activists are finding more opportunities abroad than in the United States, given U.S. competition. "The U.S. market has lots of activists in it looking for ideas and has been picked over," says Greg Taxin, managing director of Spotlight Advisors and a founder of Glass, Lewis & Co. "If you're Paul Singer and managing $33 billion, you have to look into other markets, and you have to be sophisticated." Europe is a more favorable environment than it used to be, because it is more politically stable. Many European countries offer fewer obstacles than does the United States. For example, poison pills and staggered boards are less common or not permissible in many European countries.

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Underperforming Japanese Companies Face Investor Pressure
" Financial Times (06/25/17) Lewis, Leo"

Investors are facing unprecedented pressure to hold management of poorly performing Japanese companies accountable at this year's round of annual general meetings (AGMs), in an important test for Prime Minister Shinzo Abe's governance reform campaign.  Companies most clearly at risk of shareholder revolt include Toshiba and Fujifilm, both hit by high-profile scandals.  However, analysts say the CEOs of hundreds more companies that have repeatedly failed to meet return on equity targets could also be voted down for re-election by institutional investors.  Japan's round of AGMs—which peaks on June 29, when nearly 30% of listed companies meet their investors—is the first since a key revision to the country's 2014 Stewardship Code was made last month.  That revision requires institutional investors to report how they voted on each of the agenda items raised at the AGMs or provide an explanation for failing to do so.

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In Praise of Activist Investors
" Financial Times (06/25/17) van Steenis, Huw"

Activist investors can play an essential role in stimulating long-term thinking, according to Huw van Steenis, Global Head of Strategy at Schroder, a British multinational asset management company.  Efforts to restrict engaged investors reflect broader debate about the apparent short-termism in markets, the weaknesses in corporate governance, and the role of activists, he writes.  Executives perceive that short-termism is more acute than ever: a recent study found the majority of executives felt pressure to deliver results within two years or less.  Another concern is that a large proportion of investors are focused on short-term returns; yet it is difficult to find systematic evidence of short-termism in markets.  "The vast weight of money is looking for long-term value," von Steenis writes.  Another complaint is that companies are underinvesting to boost short-term profits.  However, R&D has stayed fairly constant as a percentage of GDP and percentage of sales.  Instead, companies are returning cash as the windfall gains of cheap borrowing costs due to quantitative easing are being returned to shareholders.  "Rather than passing new laws, we should welcome activist and engaged investors which can be an important catalyst for change," the author suggests.  According to a Harvard study of 2000 interventions by activists, companies' operating performance was materially improved five years after activist intervention.  "That is not to say there aren't short-term activists, or that all engaged investors proposals are good … A keen focus on appropriate incentives and corporate governance is a critical ingredient," von Steenis concludes.

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Opinion: Index Funds Are Great for Investors, Risky for Corporate Governance
" Wall Street Journal (06/22/17) Henderson, M. Todd; Lund, Dorothy Shapiro"

A broad-based indexing strategy is great news for investors, who will pay less and get better returns, but it has troubling implications for corporate governance. No passive investor cares much about governance of a particular company, so it is a problem when these investors control voting outcomes for the companies that they invest in, considering 88% of public companies count one of three large institutional investors—State Street Global Advisors, Vanguard and BlackRock—as their largest investor, write professor M. Todd Henderson and teaching fellow Dorothy Shapiro Lund at the University of Chicago Law School. And because there is no such thing as universally good governance, the blind application of one-size-fits-all governance solutions across vastly different companies often has negative effects. So how can the law ensure that these institutions make informed decisions about corporate governance? One possible approach is to encourage them to rely on third-party corporate governance experts. Academic critics have identified cases of biased and self-serving behavior on the part of these advisers, so a second approach is to create in-house governance teams that make recommendations to a fund's managers. However, these teams may not be up to the task—as of October 2016, Vanguard employed 15 people to cover some 13,000 companies, for example. A third option is to leave decisions to those with an incentive to be informed. Having passive institutional investors abstain from voting would concentrate the voting power of active investors that have the motive and information to vote intelligently, according to Henderson and Lund.

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