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ValueAct Takes Stake in Disney
Investor Activism Boom
Elliott Investment Management said on Friday that the departure of wireless tower owner Crown Castle (CCI) CEO Jay Brown, who will be leaving in January, is a step in the "right direction" but additional changes are needed at the company. Brown helmed the company for over two decades, and his exit is a significant win for Elliott, which had sought a management shakeup for what it said was years of underperformance. "We look forward to continuing our dialogue," the hedge fund said in a statement. Elliott has roughly a $2 billion stake in the company. Elliott said it wants a comprehensive review of Crown's Fiber business and a transparent search process for the next chief executive. Board member Anthony Melone will serve as interim head while the company searches for a permanent CEO, Crown Castle said on Thursday. This marks the second time in three years Elliott has publicly tried to press Crown Castle, which has a market capitalization of approximately $51 billion. Elliott had first urged changes in 2020, when it had a $1 billion stake in the company. Crown Castle refreshed its board and announced that five long-serving directors would not seek to be re-elected.
Problems are besetting Entain and CEO Jette Nygaard-Andersen, who has to deal with a lackluster share price, increasing regulatory pressure, activist shareholders, and increasing internal dissatisfaction with her leadership. The Financial Times interviewed over 20 current and former Entain executives, advisers, and investors. Nygaard-Andersen has struggled with the day-to-day operations of the gambling group, particularly as revenue growth slowed and regulatory pressures increased, they said. Some have also questioned Chair Barry Gibson's oversight. The company's share price has fallen 40% since August. Over the past two years, the company has ranked fourth-worst in the FTSE 100 for shareholder returns. Now activist shareholders Eminence Capital, Sachem Head Capital Management, and Dendur Capital — among Entain's top 20 shareholders — are sensing an opportunity; P Schoenfeld Asset Management has a smaller stake. One institutional investor said that Nygaard-Andersen's pursuit of "nonstop M&A" as the core business struggled "showed a lack of awareness and general understanding of the economics of the business and shareholder sentiment." A pandemic spike in online betting boosted Entain at the beginning of Nygaard-Andersen's tenure in 2021, but ended abruptly in 2022 and was followed by a sales warning in September 2023. The company does not anticipate revenue growth will return until the second half of next year. Nygaard-Andersen has been nicknamed "Private Jette" by some employees on the finance and audit teams because of her propensity to utilize private jets, something that was rarely done under previous management. Further, under her leadership the company has heavily utilized advice from various consultants. Its corporate costs nearly doubled between 2019 and 2022 to £91mn. Nygaard-Andersen has sought to diversify the company beyond gambling into other media assets, but investors say she has paid too much money for acquisitions she has failed to integrate. To fund deals the company in June raised £600mn of equity at a much lower price than two 2021 takeover bids that never went anywhere. In a public letter, Eminence criticized the "value destructive" move that took 10% off the company's share price. The company has cut staff and clamped down on costs, and the board is being refreshed. However, disagreements have cropped up between the activist shareholders and the company over the three remaining vacancies, according to multiple sources. Some mainstream investors would like to see Eminence founder Ricky Sandler join the board.
Refiner Phillips 66 (PSX) anticipated lower spending in 2024 on Friday, days after Elliott Investment Management called for a refresh of its board to increase lackluster performance. In November, Elliott in a letter disclosed a $1 billion stake in Phillips 66 and criticized its refining operations, saying management had taken its "eye off the ball" by allowing operating expenses to spike. Before Elliott's letter, Phillips 66 had disclosed a plan to raise approximately $3 billion from non-core asset sales and cut $1 in cost per barrel. The company forecast its 2024 capital expenditure at $2.2 billion, compared to its estimated 2023 spending of $2.5 billion. Global demand for fuel has stayed stable amid supply reductions by OPEC+ countries led by Saudi Arabia and Russia. The company said it intends to invest $1.1 billion in its refining segment. The refining outlay includes the conversion of its Rodeo refinery in California to a renewable diesel facility, which is expected to begin operations in the first quarter of 2024. A number of plants in the U.S. are being converted to facilities that can produce cleaner-burning renewable diesel amid President Biden's push to move the country toward net zero. "The 2024 capital budget includes investing in our NGL wellhead-to-market value chain, completing the Rodeo renewable fuels facility and enhancing Refining performance," said CEO Mark Lashier. It also plans to spend approximately $1 billion for its joint ventures with Chevron Phillips Chemical and WRB Refining. "The capital budget is consistent with our plan to return $13 billion to $15 billion to shareholders by year-end 2024," Lashier noted.
The board at Samhallsbyggnadsbolaget i Norden, also known as SBB, may be held criminally and civilly liable if directors don't act in accordance with their duties, according to Fir Tree Partners. The New York-based hedge fund holds about €46 million ($49.6 million) of the Swedish landlord's notes — representing 1% of the overall bond stock. In a private letter sent to the company on Nov. 20, Fir Tree raised serious concerns about the conduct of SBB's directors, including favoring one creditor to the disadvantage of another, approving the sale of assets below fair market value, and undertaking operations that use significant resources without a corresponding benefit. Fir Tree demanded its money back based on an alleged breach of debt terms. However, SBB said the claim was groundless, and it remains to be seen if the two parties will end up in court. Moreover, two directors have quit SBB's board in as many days, including its second largest shareholder. Shareholder Fredrik Svensson resigned from the board of directors on Thursday citing “time constraints,” a day after another board member resigned for health reasons.
Elliott Investment Management, which manages funds that collectively have an investment of approximately $2 billion in Crown Castle Inc. (CCI), today sent a letter to Crown Castle's board of directors summarizing the feedback received since publicly sharing its views on the company last week. The feedback, which was overwhelmingly supportive of change at Crown Castle, came from investors, analysts, current and former employees, and industry experts, among others. As Elliott wrote in the letter, "the commentary has been consistent and highly critical of the Company and its strategy and leadership, including the apparent lack of oversight by the board." Elliott went on to note that in the week following the release of its materials, Crown Castle's stock price appreciated by 14.5% and the company outperformed its direct peers by 8.4% – the largest week of outperformance for Crown Castle in the last decade. "In effect," the letter noted, "Jay Brown's severe underperformance as a CEO has made the prospect of his departure his greatest moment of outperformance." In the letter, Elliott also took aim at the board's continued lack of oversight and wrote, "The board's refusal to act in the face of such overwhelming data and robust support for change would be a failure of its most basic duty of oversight and stewardship on behalf of shareholders." Elliott added that while it "remain[s] hopeful that we can align with the board on a constructive path forward, it is even clearer to us today based on the feedback we have received that Crown Castle requires CEO change and a robust review of the Fiber business." Elliott concluded the letter by stating that if the Crown Castle board is unwilling to make necessary leadership changes, Elliott will nominate a new board that will. Based on the shareholder feedback it has received, Elliott, the letter said, is "confident that shareholders will choose a board with a greater commitment to shareholder stewardship and best-in-class governance."
THG Plc (THG) shareholder Kelso has ramped up its campaign for the ecommerce company to affirm its break-up plans. The shareholder has written to the company’s board requesting a stock market statement containing its proposals relating to the de-merger of its three divisions. THG, which floated in 2020 with a valuation of £5 billion, operates a beauty business, a nutrition arm, and an ecommerce services platform, Ingenuity. However, its share price has since plummeted and the group is now worth approximately £1 billion. In the letter to the board, Kelso said that de-merging the divisions would help to address “the inherent disparity between THG’s share price and true value.” The letter said: “Kelso continues to believe strongly that the three distinct businesses within THG are worth considerably more as separate businesses than the current market capitalization. The stock market does not value diversified conglomerates, which THG is deemed to be. We do not propose to suggest the order of events, merely that it is made clear to shareholders that all options are being considered. Such an announcement would, in our view, help to close the valuation gap and so enhance the ability to achieve the true value in any of the de-merger options.” THG has yet to confirm whether it will split up the group’s division’s into separate entities. The company fueled speculation back in October when it was revealed it was considering a U.S. listing for its MyProtein business. THG boss Matthew Moulding snapped up a 3.2% stake in Kelso Group last week, becoming the business’ third-largest shareholder.
Wedbush analysts are critical of GameStop's (GME) decision to transform the video game retailer into a mutual fund. The move comes just three months after Ryan Cohen was elected chief executive officer of GameStop. In GameStop's latest interim earnings call, the board said Cohen would oversee the company's investment portfolio. The company's 10-Q filing says Cohen would have the authority to invest in equities and other investments. "Investors have a myriad of investment vehicles available to them and therefore do not need GameStop to act as a mutual fund," stated Michael Pachter at Wedbush. "If GameStop truly believes in the value of its shares, it should use its excess cash to buy back stock." Pachter called GameStop's move "alarming." The decision implies company management "believes it will achieve better returns by buying equities aside from its own." Other meme stock beneficiaries, such as AMC Theater (AMC), have gotten into equity investing. AMC's decision to buy a 22% stake in Hycroft Mining (HYMC) last year was called a "complete misuse of shareholder capital."
IHS Holding has offered better commercial terms to MTN Nigeria (MTNN) for the lease of 2,500 towers it lost to American Tower Corporation (AMT), saying the move would prevent network disruption in Africa's most populous nation. MTN Nigeria, owned by South Africa's MTN Group (MTNJ), said in September that the leasing on 2,500 sites that will expire in 2024 and 2025 was awarded to ATC Nigeria following a bidding process. The mobile network operator said the transaction would diversify its towers portfolio and unlock substantial network cost efficiencies. IHS Towers Chairman and CEO Sam Darwish said these towers comprise just a small portion of his company's total tenancies but it is willing to match ATC's terms. "IHS has offered improved commercial terms on the 2,500 towers to close the gap (between the offers) as our main aim is to prevent network disruption in Nigeria," he said. He did not offer details on the terms. MTN said the agreement with ATC is final and that MTN would continue to engage constructively with IHS on additional opportunities that arise, including renewal of its other sites. "Our preference is always for bilateral renewal, subject to competitive pricing and terms. In this instance the ATC proposal was superior," the operator said. IHS owns 16,000 towers in Nigeria; 14,600 are leased by MTN. Approximately 13% of MTN's portfolio sits with ATC, and 80% sits with IHS. There is growing apprehension that the cell-tower operator may lose more contracts as MTN Nigeria reviews other tower contracts coming up for renewal. The rest of the tower leases with IHS expire between 2025 and 2029, with the majority of those expiring in 2029. IHS is also engaged in a shareholder fight with MTN Group, its biggest shareholder with a 26% stake, along with French financial investor Wendel and investor Blackwells Capital over governance matters. Darwish said that IHS continues to engage with Wendel and MTN on the matters.
City of London's demand for a performance conditional tender mechanism was rejected by the board of VinaCapital Vietnam Opportunity, prompting the investor to vote against the continuation of the investment trust at its annual general meeting on Wednesday. The bargain hunter investor is the second-largest shareholder with a 10.8% stake in VinaCapital Vietnam Opportunity. City of London met with investment trust Chair Huw Evans ahead of the continuation vote and said it would support continuation if the board introduced a performance conditional tender mechanism, which would allow shareholders to exit the fund at close to net asset value if performance didn't meet a threshold. Evans argued this would not be in the interests of the investment trust or shareholders, but City of London was not convinced. More than 29% of participating shareholders voted against the £903m portfolio's continuation. Allspring Global, a U.S. firm that uses engagement as an investment strategy, has a 5.6% stake in the investment trust, making it one of the top five shareholders. Roughly 10% of votes cast opposed the re-election of Evans.
Nelson Peltz is waging a proxy battle against Disney (DIS) again, and the question is what his case will be. Peltz's firm Trian Partners has a stake in Disney that is valued at roughly $3 billion. Disney’s share price continues to lag, but it is hardly alone among media companies this year. In a statement, Trian said that it was offered a chance to meet with the board, but that it was not proactively offered any seats, forcing the investment company to take its case to shareholders. Disney has long been willing to deal with investors that are looking to engage the company, and is currently dealing with ValueAct, although the investor is not expected to seek a board seat. The company dealt with Dan Loeb’s Third Point in 2020 and 2022. Sources said that both times Loeb delineated “detailed” strategic plans, something Trian has not yet done. In 2022, Disney added former Meta (META) executive Carolyn Everson to its board at Third Point’s request. Recently, another Disney shareholder that uses engagement as an investment strategy, Blackwells Capital, said defending against Peltz’s proxy fight will cost investors “upwards of $50 million and serve only as a value-destructive fog for Disney’s leadership and board.” “Mindless, drum-beating activism is not the right strategy for shareholders,” Blackwells chief investment officer Jason Aintabi commented. “Disney’s Board is acting in the best interests of all shareholders and should be allowed the time to focus on driving value at one of America’s most iconic companies without this fatuous sideshow.” Supporters of Peltz’s effort include Bill Ackman, founder of Pershing Square Capital Management. Looming over the whole situation is Isaac “Ike” Perlmutter, Peltz’s friend. Perlmutter was “terminated” as chairman of Marvel by Disney this year, the company said. Perlmutter has pledged his shares in Disney to Peltz, and they comprise almost 80% of Trian’s stake, giving Perlmutter a larger stake than Peltz. On Nov. 30, Disney referenced Perlmutter’s “personal agenda” against Disney CEO Bob Iger, saying that Perlmutter's interests “may be different than that of all other shareholders.” Although a source close to Perlmutter says that he was “not involved” in Peltz’s new effort beyond pledging his shares, a U.S. Securities and Exchange Commission filing from Trian confirms that Perlmutter is a “participant in the proxy solicitation.”
Crown Castle Inc. (CCI) CEO Jay Brown will step down effective Jan. 16, the company said on Thursday, days after Elliott Investment Management sought a board shake up and leadership change at the wireless tower owner. Shares of the company rose 1.5% in extended trade to $119.40. Board member Anthony Melone will take interim charge following Brown's departure, and the company said it will conduct a search for a permanent CEO. Last month, Elliott said it was ready to nominate directors at Crown Castle and blamed the company's board and management for years of underperformance. The hedge fund has also urged the company to review its fiber strategy, including considering a possible sale of the business, optimizing its incentive plan and improving corporate governance. Elliott last week also urged U.S. oil refiner Phillips 66 (PSX) to revamp its board to boost lagging performance.
Palliser Capital is pressing Samsung C&T on spending its cash better, improving governance and communications, and simplifying its corporate structure to boost its share price, according to three sources familiar with the matter. The London-based hedge fund owns a 0.62% stake in Samsung C&T, the effective holding company of Samsung Group, South Korea's largest business conglomerate. James Smith launched Palliser two years ago after spending two decades at Elliott Investment Management. This marks a second investment in Samsung C&T after he spearheaded Elliott's failed effort to stop the company's merger with Cheil Industries eight years ago. In a public letter last month, City of London Investment Management Company also said the share price was sluggish and changes were needed at Samsung C&T. Samsung Electronics (SSNLF) is the crown jewel of Samsung C&T. The founding family members, including the electronic giant's chairman Jay Y. Lee, are the biggest shareholders, collectively controlling more than 31% of Samsung C&T.
TCI Fund Management cut in half its dividend payment to the parent company owned by founder Christopher Hohn in a year that saw profits drop at the London-based investment firm. The payout for the year through February declined to $346 million from $690 million a year prior, according to a filing with the UK’s Companies House. TCI Fund Management (UK) Ltd. — where Hohn is the only director — also revealed a profit before tax of about $200 million, down from $1.06 billion in 2022. Hohn’s fund lost money in 2022, breaking a winning run of 13 consecutive profitable years as stocks dropped. Hohn has a net worth of $6.2 billion on the Bloomberg Billionaires Index. His firm is best known for taking stakes in companies and calling for change to help increase share prices.
Engine Capital wants cancer therapy developer 2seventy bio (TSVT) to refresh its board and appoint former chief operating officer Chip Baird as CEO, among other changes. The investment firm has about a 3% stake in 2seventy bio. In a letter sent to the board of 2seventy bio on Wednesday, Engine Capital said the company should exclusively focus on its blood cancer therapy Abecma, and explore ways to "immediately cease or monetize all development programs." The company should add a shareholder representative to its board and establish a special committee of independent directors for communicating with shareholders, it said. Shares of the company rose about 3% in premarket trading. In September, 2seventy bio disclosed restructuring plans and that CEO Nick Leschly intends to step down and transition to the role of chairman. The U.S. Food and Drug Administration is investigating CAR-T therapies over the risk of hospitalizations and death due to a serious safety issue, and in November delayed its decision on the expanded use of Abecma in earlier lines of treatment.
Life sciences conglomerate Danaher Corp. (DHR) has closed its $5.7 billion acquisition of Abcam (ABCM). The deal indicates strategic acquirers remain leaders in the life sciences market, as Abcam said it engaged with more than 30 interested parties before landing on Danaher. Danaher paid $24 per share in cash. Referred to as the "Amazon of antibodies," Abcam will allow Danaher to provide its lab equipment customers with a broad range of consumables. A founder and former CEO, Jonathan Milner, signaled his opposition to the deal in September, claiming the price undervalued the business. At the time, Milner said he planned to vote against the merger and said he had established a "shadow board" of qualified nominees. In November, however, Milner suspended his campaign against the transaction. Danaher has been an active acquirer in life sciences, spending about $637 million to buy 10 businesses in 2022, per its annual report. The company reportedly considered acquiring contract manufacturer Catalent Inc. (CTLT) in early 2023 before backing away from the deal in April. Danaher may be out of the running for Catalent, but the business reportedly will formally consider a sale process as part of a settlement with Elliott Management.
The share of board members at S&P 500 and Russell 3000 companies reporting business strategy expertise continued to decline in 2023, while functional experience in ESG and technology experience continued to increase, according to The Conference Board. The decline in the percentage of directors with strategic experience is greater for new directors than for all directors. Based on Conference Board discussions with major institutional investors, this can expose directors to shareholder activism, especially if investors are not familiar with those directors from other board or executive roles. Larger companies continue to be much more likely than smaller firms to have a policy for mandatory retirement age that permits exceptions, while smaller companies are more likely to have no policy at all. Most “Big A” shareholder activism (which seeks to change the direction, board, or management of a company) is focused on smaller companies. The average director age is holding steady, and average board size has barely increased in recent years. New directors, in particular, may face shareholder activism, The Conference Board concludes. Activists usually highlight the relevant business background of their slate, which makes the stark decline in strategic experience among new directors an area of concern, it says.
Fewer than one in 10 (7%) of board evaluations lead to specific action plans to address opportunities, risks and weaknesses, according to the Nasdaq 2023 Global Governance Pulse report, which shares insights from a global survey of over 730 board members, executives and governance professionals across organizations and sectors across the globe. This is despite more than 90% of boards doing some type of evaluation. "The finding is surprising," says Kaley Childs Karaffa, head of board advisory for the Americas at Nasdaq and lead author of the report. "It seems incongruent with the purpose of conducting an evaluation if it is not going to drive any change." Companies that don't take action on their board evaluations may be missing "a really great opportunity to drive a greater level of board effectiveness," says Karaffa. An effective evaluation process should account for dynamic themes and should be about how the board is spending its time, how well it understands the business strategy, the sector, new regulatory mandates, new investor expectations and other stakeholder expectations. "Boards should use the evaluation process to think about all facets of how they are structured and functioning to enable corporate durability," Karaffa says. She highlights reasons that may be behind the low evaluation-action rates. Based on her conversations and work with boards, she has discovered that "directors do not always feel they can be candid in the evaluation process because it is typically run by the general counsel, corporate secretary, board chair or nominating/governance committee chair. There is a natural filtering that occurs in the way directors provide feedback when evaluations are run internally." Karaffa also says that an internally fueled evaluation process may come with risks, like blind spots in analyzing the feedback and coming forward with specific action items for the board to talk about and align on resultant changes and improvements. Lack of clarity around responsibility for implementing actions is viewed as another challenge. Findings from the Nasdaq report also show that some best practices in driving a meaningful evaluation process are less common. Just 11% of survey respondents report conducting individual interviews with board members and another 11% report engaging third-party facilitators. Despite the low figures on boards’ current practices, the report references a study from Willis Towers Watson and the Nasdaq Center for Board Excellence that forecasts a three-fold rise in third-party evaluations over the next three years. An effective board evaluation can have an impact. Whether reassessing committee delegations, allocating more time to strategy and risks, adjusting KPIs monitored by the board or enabling board members to engage in more education and site visits, evaluations should help move board practices forward. "It often results in richer dialogue in the boardroom and more confidence that the board is thoroughly and rigorously vetting issues and can reach alignment on critical decisions from major corporate events, such as M&A, or how to approach the CEO succession process," comments Karaffa. She also highlights how investors have greater expectations about how public company boards reveal their evaluation process, which can be seen as "a value statement for how the board approaches its responsibilities as a governing body." Further, evaluations "can be a strategic process through which the board is able to avoid complacency or take informed steps to evolve its structures, practices and approaches in a way that is supportive of long-term shareholder value. It can help the board foster a culture of continuous improvement."
As boards expand their role to address a broadening array of topics, they are not only assigning responsibilities to existing committees but also starting to form new types of committees. As detailed in a new report by The Conference Board with data from ESGAUGE, 74% of S&P 500 firms have more than the three committees required by stock exchange listing standards: 36% have four, 21% have five, and 13% have six. When it comes to the allocation of ESG responsibilities, virtually all S&P 500 firms disclose assignment of such responsibilities to the full board and/or one or more committees. For example, 89% of the companies have assigned human capital management issues (including DEI, employee health and safety, talent recruitment and development, and corporate culture) at the board or committee level. The share of S&P 500 board committees on science and technology increased from 10% in 2018 to 14% in 2023, and committees on environmental, health, and safety increased from 7% to 10%. ESG and sustainability committees are just starting to emerge. As new types of committees begin to take root, there has been a slight decline in some of the traditional board committees, including the executive committee (from 33% in 2018 to 31% in 2023) and finance committee (from 30% to 25%). "The traditional approach of having three standing board committees—audit, compensation, and nominating—was established over 20 years ago when the focus was on the board's independent oversight of management. While boards still fill that role, they are increasingly serving as strategic thought partners for management across a broader array of topics, and boards should take a fresh look at whether their committee structure effectively supports the board's current remit," said Paul Washington, Executive Director of The Conference Board ESG Center. Even as boards are increasingly expected to take on a strategic thought partnership role, there has been a decline in business strategy experience among independent board chairs and lead independent directors. In the S&P 500, such experience among independent chairs dropped from 78% in 2022 to 72% in 2023, and from 70% to 66% among lead independent directors.
Jeff Ubben predicted earlier this year that the first model of the ESG investing movement would eventually disappear. However, he also predicted that firms like his Inclusive Capital Partners, which typically buys stakes in non-ESG friendly companies in an attempt to drive change from within, would succeed. Instead, Ubben last week told investors that Inclusive Capital Partners would wind down and return cash to investors, marking the demise of an environmental and social fund launched with high hopes and publicity in 2020. Inclusive blamed its closure on public markets, saying they had not rewarded its mission. But several people familiar with the fund's workings said Ubben had alienated the ESG community by investing in companies that would not traditionally fall into that bracket, including Exxon Mobil (XOM) and German conglomerate Bayer (BAYRY), which has been entwined in litigation involving its weedkiller Roundup. The strategy for Inclusive was to tackle environmental and social issues to create big returns. Inclusive did not fit neatly into a "clear bucket" for institutional investors, said Robert Eccles, an Oxford university professor. It was not easily classified as a sustainability "impact" fund, which tends to focus on private assets, and it was not an activist hedge fund, he said. This murky space likely made it difficult to raise cash, he added. Ubben also had a tense relationship with environmentally-conscious investors. He wanted to distinguish between what he referred to as "ESG 1.0," screening companies that meet certain criteria, and "ESG 2.0," where an investor works with companies to reduce harm. But many of Inclusive's bets have struggled. Ubben has been a big backer of Enviva (EVA), the world's largest producer of pellet fuel. Inclusive took a $220 million stake in the company, and Ubben joined the board and stood by the company when a short seller published a report accusing it of "flagrantly greenwashing its wood procurement." Enviva's share price has declined by 98% this year. Inclusive recently sold more than 2 million Enviva shares for just over $1 per share, while Ubben resigned from the board on Nov. 28. Inclusive's inability to define itself left it vulnerable amid a broader investor pullback from ESG funds, said people familiar with the firm.
As Bloomin' Brands (BLMN) enters its 36th year doing business, the Tampa-based restaurant giant — owner of four major national brands — is having a bit of a midlife crisis. The company's main challenge is how to increase foot traffic into the stores now that diners have more excuses to stay home and order meals from their mobile devices. It's that problem — the decrease in traffic — that recently got Bloomin's stock downgraded by Raymond James, from the top score of "Strong Buy" to "Outperform." Another angle in the company's future comes from Starboard Value. Earlier in 2023, Starboard owned about 5% of Bloomin' stock. That's up to about 10% now, making it a top five investor, giving Starboard enough clout to begin asking for big changes before Bloomin's annual meeting in April. Some changes have been made, not long after Starboard acquired 10% of Bloomin.' In August, Bloomin' put Rohit Lal on the board. Lal is logistics company Saia's (SAIA) EVP and chief information officer. The board also promoted director R. Michael Mohan, who has served on the board since 2017, to chair. Starboard, too, has noted the traffic problems. According to Raymond James' analysis of Bloomin' Brands' documents, Outback (the largest subsidiary of Bloomin') had a 6.1% decrease in traffic in the third quarter compared to the third quarter of 2023. That's as competitors LongHorn Steakhouse had a 1.5% increase, and Texas Roadhouse had a 4.1% jump. Part of the reason for lessened traffic, some Bloomin' officials and industry observers believe, is not the changes Outback has made in technology — servers now use a digital notepad to transmit orders faster — but the fade away from the fun, irreverence, and happy culture the Australian-themed chain promised so effusively in the 1990s. David Deno, Bloomin' CEO, addressed the issue Nov. 3, when he spoke to investors about third-quarter results. Revenues rose 2.3% from last year's third quarter, but analysts wanted to know when Outback traffic would improve. "We'll be spending more on marketing and advertising in Q4 as well as 2024," Deno told investors and analysts. "Although we do not intend to return to pre-pandemic levels, we do believe a higher level of advertising spend is warranted moving forward. Utilizing a blend of television and high-return digital tactics, we believe our increased marketing presence can help build traffic."
Toyota Motor Corp.'s (TM) decision to sell part of its $40 billion portfolio of stakes in other companies is spurring hopes of similar actions across Japan to unwind complex cross-shareholdings and improve corporate governance. Toyota is selling a stake worth close to $2 billion in car parts maker Denso (DNZOY), lowering its stake from 24.2% to 20%. The stake is one of a web of interconnected equity holdings that Toyota holds across more than 35 suppliers and affiliate automakers. While Japanese companies have defended cross-shareholdings as a way to cement business relationships and rebuff hostile takers, many outside investors believe they create conflicts of interest and perpetuate a chronic misallocation of capital. Toyota's decision could open the gates for others to follow and lead to major changes in Japan's corporate landscape, some investors hope. Japan has been encouraging companies to unwind cross-shareholdings. Since the corporate governance code was compiled in 2015, regulators have required listing companies to explain to investors their reasoning if they are not reducing their stakes. However, the habits remain ingrained. Companies on the benchmark Topix index have a median of 11 equity holdings, down from 15 a decade ago. U.S. proxy advisers Glass Lewis and Institutional Shareholder Services have also repeatedly pushed for Japanese companies to reduce their cross-shareholdings. ISS has called for a reduction to below 20% of net assets and Glass Lewis has said companies should aim for below 10%. "We are not saying that Toyota is perfect but it's a great step forward ... and other companies should follow suit. They will at least have to have a plan about how they deploy capital," said Naoko Ueno, a director at Glass Lewis.
Climate risk disclosures rose in 2022 from 2021, with S&P 500 companies still the most likely to disclose; 60% of companies in the Russell 3000 Index still did not report climate risk in 2022, compared with just 26% of companies in the S&P 500. Climate risk disclosure was most common in industries with existing regulatory and reputational risks related to climate change, including utilities (93%), real estate (77%), and energy (75%). The lowest rates of climate risk disclosure were in healthcare (15%), communication services (23%), and information technology (24%). Sectors with the highest rate of climate risk disclosure generally had climate goal years furthest in the future; for example, in utilities it was 2045, while in energy it was 2040. Those with the lowest disclosure had a climate goal year closest to the present date (healthcare and IT in 2034, with communication services having the goal year farthest in the future relative to the sector’s average climate risk disclosure rate). Companies with regulatory and reputation risks associated with climate change are likely to have developed governance protocols and knowledge related to climate risks. They also tend to have a greater understanding of what is needed to meet sustainability goals. Among the Russell 3000, it was more common to disclose climate risk policies and goals than to assign board responsibility for climate (39%, or 1,160 companies); disclose board climate expertise (12%, 364 companies); or tie ESG performance to remuneration (39%, or 1,169 companies). This will change, because the disclosure requirements in the U.S. Securities and Exchange Commission draft rule on climate-related disclosures, the California climate-related legislation, the CSRD, and CSDDD4, will all boost boards’ responsibilities relating to climate. The rate of disclosure of climate goal years was higher in organizations that implement ESG-linked remuneration protocols. Companies with both board climate expertise and responsibility were much more likely to incorporate ESG performance metrics into their compensation protocols.
In 2020, BlackRock (BLK) chief executive Larry Fink put the world's largest money manager squarely behind the cause of purpose-driven investing. "Climate change is different" from other financial changes, he wrote in his closely watched annual letter to corporate chief executives. Fink promised "a fundamental reshaping of finance" that would put "sustainability at the center of our investment approach." Corporate America and investors quickly followed suit, signing up for net zero carbon plans and launching funds that included ESG factors in their investment decisions. Three years later, BlackRock is still betting big on the transition to a lower-carbon economy, but its emphasis when it talks about sustainability and social issues has changed. Last month, when BlackRock put $550 million into one of the world's largest carbon capture projects in Texas, Fink focused on moneymaking potential rather than its contribution to the planet's welfare. Describing it as "an incredible investment opportunity," he also highlighted BlackRock's decision to continue to work with big energy companies. The shift comes after a two-year stretch during which U.S. Republican politicians have relentlessly pounded investment managers for being "too woke" or "hostile" to fossil fuel. The backlash raises the question of how much longer funds advertising themselves as ESG will be on the menu for investors. Fink himself said in June he no longer used the term as it had become "weaponized." The anti-ESG movement has had a major impact in the area of proxy voting. In the past two years, asset managers have become much more wary about supporting activist shareholder proposals to take specific action on environmental and social issues such as diversity audits or eschewing investment in fossil fuels. BlackRock backed just 7% of environmental and social proposals at companies' annual meetings in 2023, down from 47% two years earlier. Going forward, industry leaders say that funds will have to be much more explicit about what they mean when they say they offer ESG investing.
The biotech industry is on a stable and long-term growth trend, thanks to an aging population and accelerating scientific innovation. However, the investment cycle in biotech stocks does not always reflect this, with new technologies and shifting sentiment often fueling exaggerated highs and lows in share prices — which investors can exploit. There are five stages in this investment cycle: despair, recovery, equilibrium, euphoria and correction. The most recent loop around this cycle was exaggerated by the Covid-19 pandemic, which raised focus on the biotech sector. This resulted in an increase in retail trading during lockdown, but the subsequent comedown in the Spring of 2021 was equally sharp and the biotechnology industry has now lagged the market as a whole for two years. However, there is some hope on the horizon. The market currently is alternating between recovery — in which the pace of mergers and acquisitions (M&A) kickstarts and valuations start to recover; and equilibrium — in which there is an influx of capital, a steady stream of M&A and an active IPO environment. There are several signs experienced fund managers will be seeking to give them confidence about a genuine recovery. During 2022, M&A in the sector increased, with appetite fueled by the combination of impending patent expiries and big cash balances at the large pharmaceutical companies. This has continued into 2023, with significant transactions occurring such as Amgen’s (AMGN) recently completed $28bn takeover of movement from the recovery phase to the equilibrium phase of the investment cycle. In early May, Johnson & Johnson (JNJ) successfully spun off its consumer healthcare arm Kenvue (KVUE), raising $3.8bn, the biggest ever IPO in the sector and one of seventeen biotech IPOs so far in 2023. As the biotechnology industry moves out of recovery and into equilibrium, there also tends to be a boost in shareholder activism. Shareholders tend to become more assertive during this period because they are frustrated with the lack of activity and poor returns during a protracted downturn, so they begin to rattle the cage in order to extract returns on their investments. Investors may feel the market recovery is taking too long, and they need to take proactive steps to accelerate the next phase. They may also think management at individual companies is failing to live up to expectations. There has been an increase in such shareholder activism in 2023. In April, Farallon Capital sent a letter to the board of Exelixis (EXEL) announcing its nomination of three directors to the board. The hedge fund said the biotech firm should focus its research and development efforts, communicate a differentiated and coherent strategy and commit to ongoing distributions of excess capital to shareholders. All three Farallon candidates were elected at the May AGM and a share repurchase program was launched. In June, Illumina (ILMN) CEO Francis deSouza quit amid pressure from Carl Icahn. The proxy fight was spurred by the market punishing the valuation of Illumina after deSouza pushed ahead with the acquisition of cancer blood test developer Grail in the face of opposition from the U.S. Federal Trade Commission which continues to challenge the transaction. Icahn backed the new CEO Jacob Thaysen at the September AGM. Subsequently in October 2023, EU regulators ordered Illumina to dispose of Grail, dismissing Illumina’s claim that Grail’s lack of EU revenues put them outside the EU’s jurisdiction. After its success deposing the chairman and imposing seven new directors at Amarin (AMRN) in March 2023, Sarissa Capital launched a third proxy fight at Alkermes (ALKS), hoping to secure its choice of three new board directors. Sarissa accused Alkermes’ board, which already includes one earlier Sarissa nominee, of overseeing “tremendous shareholder value distruction” but didn't win adequate wider shareholder backing to depose any directors in the June 23 AGM. In November, Biomarin was engaged by Elliott Management, which reported a $1bn investment in the company. The company's shares rose 12% on the news.
Elliott Investment Management’s call for change at Phillips 66 (PSX) borrows from its successful playbook at Marathon Petroleum (MPC). In other words, it would likely be a mistake for Phillips 66 to ignore it. Elliott said on Wednesday that it had taken approximately a $1 billion stake in U.S. refining giant Phillips 66 and urged the company to sell noncore assets, concentrate more on its primary refining business and fix its track record of relatively high operating costs. Phillips 66 has the most diverse portfolio among its peers, with big exposure to midstream, marketing and, most notably, a stake in chemicals business CP Chem with Chevron (CVX). In theory that means the company could capture more from the full value chain, but the sprawling structure hasn’t done much for its performance in recent years. Its refining segment has been less efficiently run than rivals’ and its share-price performance has lagged behind them. Phillips 66’s refining operating expenses were more than $7 per barrel in 2022, compared with roughly $6.46 per barrel for Marathon and $5.11 per barrel for Valero Energy, according to Visible Alpha. The company has an appealing refining footprint. It has the second-lowest gasoline yield among refiners — a benefit recently because margins are much higher on diesel these days than gasoline, according to Matthew Blair, equity analyst at TPH & Co. In addition, it has high exposure to the heavy Canadian crude oil that is selling at an appealing discount. Blair points out that Phillips 66’s diversified portfolio is likely the primary reason the company’s implied refining-only enterprise value, as measured as a multiple of 2024 earnings before interest, taxes, depreciation and amortization, is lower than its two large peers, even after the recent spike. Many of Phillips 66’s blunders — the lack of concentration on refining and the failure to deliver on cost reductions — happened under the company’s former chief executive, who left in 2022. The new CEO had already announced some goals along similar lines: The company in late October said it would try to monetize some noncore assets and said it would slash $1.4 billion of costs by year-end 2024. Investors liked what they heard, and the refiner’s shares climbed 6.4% in the month after that announcement. They appreciated Elliott’s involvement even more, though: Shares have risen 9.9% in the few days since the letter was published. Although Phillips 66 was already headed in a similar direction, Elliott’s participation might foster more significant changes and more accountability. The investor, for example, is suggesting the company could sell $15 billion to $20 billion of assets, much more than the company’s own $3 billion-plus goal. And while Elliott isn’t trying to replace anyone, it is trying to add two new board members with refining-operations experience, a step that might hold management more accountable on cost discipline in that segment. This is familiar territory for Elliott, whose involvement in Marathon Petroleum four years ago resulted in a sale of the company’s Speedway gas-station chain and a new CEO. Marathon Petroleum has delivered approximately 346% in total shareholder returns since announcing the Speedway sale, greatly outperforming Valero (at 164%) and Phillips 66 (144%). In a research note published in 2022, BMO Capital said Marathon’s operational execution had gotten better since the Speedway sale.
Euronext Corporate Services has released the results of its European survey on shareholder identification for European issuers. Conducted in partnership with Proxymity, the survey follows the 2020 implementation of the Shareholders Rights Directive II (SRD II). Main trends in shareholder disclosure request practices are analyzed by company profile and by country. More than 5000 European listed companies participated in the research, with companies analyzed across Belgium, France, Germany, the Netherlands, and Portugal. The survey found a 38% increase in the number of listed companies using share registers between 2021 and 2022. A 73% year-on-year increase was seen in the number of small and mid-sized companies classed as "active" in the identification of their shareholders, rising to 474 in 2022. Among issuers, 863 were reported to be proactively identifying their shareholders. Euronext states that the findings mark a “positive change and a new norm” in how European listed companies are structuring their corporate governance. “This survey on shareholder identification practices highlights primarily that the SRD II directive has liberalized the use of shareholder consultation, which is critical for companies of all sizes with ambitious growth and ESG strategies," said Mathieu Caron, head of primary markets at Euronext. “We welcome the successful adoption of the SRD II framework by listed companies, which improves transparency in their dialogue with final shareholders. We are now, as a consequence of the directive, able to provide more efficient data collection and management, and are seeing an increasing number of issuers choosing to use this service and are moving further with bond-holders engagement service.”
Activist investing has gained traction in Australia for several reasons, the biggest of which is the amount of capital that is now behind it, numbering in the billions of dollars, far larger than it was historically. Melbourne-based fund manager L1 Capital, via its L1 Capital Catalyst Fund run by James Hawkins, has raised approximately $1.6 billion in assets and outperformed the ASX200AI by 7% since inception in July 2021, increasing the profile of activist investing in Australia and helping the strategy break through to the mainstream. Other smaller activist funds have been operating in Australia for some time, including the Sandon Capital Activist Fund, run by Gabriel Radzyminski, which has been involved in more than 40 campaigns over the past 14 years. Another major reason for the increased traction is that the media has begun to cover this space more frequently, enhancing transparency in this formerly under-reported investment style, as well as increasing the profile of activist investing campaigns and the value they can unlock. Fund managers and major investors are also increasingly using the media as a lever to help accomplish their specific activist aims. “Activist investing is a fairly broad term but generally refers to shareholders who are willing and able to actively engage with publicly listed companies to unlock value for the benefit of all shareholders,” says Hawkins. Radzyminski notes that “an activist campaign is all about trying to change the status quo. Take the example of a stock trading at a big discount to its intrinsic value. Why is that? It could be because the company has a poor track record of executing on its strategy. It could be that the strategy doesn't work and management is not prepared to give it up. It could be that the business is confusing to the market because it's not a coherent or transparent portfolio of assets.” In assessing all those things, the opportunity sometimes presents itself to change the status quo, do things differently, and perhaps better reflect the company’s intrinsic value. Both Hawkins and Radzyminski point out that potential activism is the natural outcome of the investment research process — the investment manager analyzes every aspect of a company, determines the intrinsic value of the shares, and what needs to be done to get there.
As the world grows more complex and the volatility of global politics escalates, corporate compliance and risk management teams have never been more important — nor had more responsibility. Part of the expanded responsibilities within risk and compliance functions is that environmental, social & governance (ESG) standards have become an increasingly important reflection of a company’s values, goals, leadership, and reputation. As heightened ESG standards become the norm, especially in Europe, jurisdictions have responded with increased regulation. The impacts of non-compliance are likely to grow significantly, especially for companies with a brand reputation that investors and customers associate with responsible, sustainable governance. Significantly more companies based in the United Kingdom than in North America are taking a more proactive approach to meeting ESG expectations, in part because of divergent regulatory regimes between the two geographies. UK companies are also more likely than North American companies to give broad responsibility to their board for establishing and ensuring ESG benchmarks (40% in the UK, compared to 28% in North America, according to a Thomson Reuters survey) — and also more likely to designate ESG oversight to an individual board member. UK companies are also twice as likely — 40% to 20% — as North American companies to actively engage with such external stakeholders as investors, non-governmental organizations, and customers, according to respondents. In fact, almost one-third (30%) of respondents from North American companies said their companies simply don’t engage with external stakeholders at all. Given that Europe has taken the global lead in establishing and enforcing ESG standards, it is also not surprising that more UK companies follow general regulatory reporting requirements for ESG and have a formal reporting framework in place for doing so. Additionally, on almost every measure of ESG effectiveness — such as internal metrics, team assessments, communication with external stakeholders, internal surveys and feedback, the use of external consultants, and a host of other factors — UK companies are at least 10 to 15 percentage points ahead of businesses in North America.
Starting from about the end of the 2010s, researchers from Texas A&M University and the University of Chicago find that women with board experience see a jump in their subsequent board positions relative to their similarly situated male colleagues. Women directors are also more likely to have no previous board experience, according to the paper, When Bill Rolls Off: Continuity and Change on Corporate Boards. As a result of these trends, women directors tend to hold more simultaneous board seats than their male colleagues. Companies are adding women to their boards by expanding the board or by replacing existing male directors with women, but the increase in board size is transitory. The researchers find no evidence that companies are removing men who would otherwise have stayed on as directors, which suggests that the norm is that directors are replaced through natural attrition. The findings on the replacement of male directors suggest that companies value their relationships with current directors and are unlikely to seek to remove them prematurely to make room for new candidates.
Many of Asia's hedge fund managers who reduced exposure to China's markets to focus more on Japan's soaring stocks in 2023 have struggled to make money. Fund managers lack local insight and have no playbook to unlock the world's third-largest economy, market participants say. Japan requires traders to have a deep understanding of its cash-rich multinationals and lesser-known small businesses, corporate reforms, and shareholder activism, fund managers say. Hedge fund managers have to be selective, spot mispricing opportunities, and identify companies that could be the focus of activism. The average returns for Japan-focused equity long-short funds were only 5% for the first 10 months, while those for broader pan-Asia equity long-short funds fell 3%, according to data from Eurekahedge. In comparison, Japan-focused event-driven hedge funds — taking in special situations like mergers and acquisitions and activist investor campaigns — rose 10% in the first 10 months. Market participants expect growing investor interest in Japan as the country emerges from deflation and serves as an alternative to China. Activist and event-driven managers rather than equity long-short funds are likely to be winners as corporate reforms gain momentum, market participants add.