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Elliott Takes a Stake In Salesforce
Shareholder activists, emboldened by beaten-down share prices, are increasingly crowding into the same big names. Software company Salesforce Inc. (CRM) faces at least four activists, while Walt Disney Co. (DIS) has drawn the attention of two well-known activists, one of which is mounting a fight for a board seat. Cloud-software company Splunk Inc. (SPLK) last year drew two activists, and toy maker Hasbro Inc. (HAS) fended off a pair in a challenge for board seats. In all, there were 17 instances in which a U.S. company drew more than one activist in 2022, situations that bankers refer to as swarming, according to data compiled by Lazard Capital Markets Advisory Group. That was up from nine in 2021 and seven in 2020. While there were 20 instances in both 2019 and 2017, industry experts anticipate the number will continue to climb this year as overall levels of activism increase. A down market for stocks has helped drive up the volume of activist campaigns, as investors pounce on opportunities to push for change at underperforming companies. There were 135 activist campaigns in the United States in 2022, a 41% jump from the prior year, Lazard found. Big companies like Disney and Salesforce that are grappling with issues including unpopular acquisitions and bloated cost structures and that have liquid stocks are particularly likely to draw multiple activists simply because there are only so many such opportunities at any given time. Having multiple activists can turn what is already a headache for corporate executives into a potential nightmare. Patrick Gadson, co-chair of the law firm Vinson & Elkins LLP's shareholder activism practice, said activists usually have their own respective time horizons and return expectations, so that when more than one shows up in the same stock, their objectives often clash.
Margherita Della Valle, the interim CEO of Vodafone Group (VOD), has reaffirmed guidance but noted that the company "can do better" in the wake of decreased European sales. The group's organic service revenue gained 1.8% to €9.52 billion ($10.4 billion) in the third quarter, Vodafone said, compared to the average 1.75% growth estimate from five analysts surveyed by Bloomberg. The slowdown marked the first time it fell below 2% since fiscal 2021. Sales were boosted from markets outside of Europe, in particular because of hyperinflation and price increases in Turkey, which represents 4% of service revenue. It grew 53% in the quarter, and stripping it out would leave total service revenue growth at 0.5%, Vodafone said. Meanwhile, questions have emerged about Vodafone's leadership after CEO Nick Read exited the company in December, with Chief Financial Officer Della Valle assuming the role of interim CEO. She said on Feb. 1 that "there is more to do and our focus is to provide a better service to our customers, become a simpler business, and deliver growth." In response to rising energy and labor inflation, Vodafone is curbing costs and will attempt to rebound in essential markets like Germany, its largest. Jefferies analyst Jerry Dellis described an 8.7% fall in Spanish sales as a "major disappointment." Vodafone leaders are also facing strategic investors such as United Arab Emirates-backed Emirates Telecommunications Group Company PJSC, known as e&, which has gradually enlarged its position to 12% and may potentially focus on Vodafone's African assets. Xavier Niel, a French billionaire entrepreneur who holds a 2.5% stake in Vodafone, last year unsuccessfully bid on the company's Italian division. Meanwhile, Vodafone anticipates its deal with KKR & Co. and Global Infrastructure Partners to share control of its mast operating spinout Vantage Towers will close in the first half of the year. The joint venture with private equity is expected to hold 89.3% of Vantage. However, the transaction could be affected by Elliott Investment Management, which disclosed a stake with 5.6% voting rights on Jan. 31.
Advent International-backed British defense company Cobham (CBHMY) is considering a takeover of U.S. peer Mercury Systems Inc. (MRCY), which announced it is looking at strategic alternatives. Cobham Chairman and Advent managing partner Shonnel Malani said on Wednesday that the firm is weighing an acquisition amid increasing defense spending worldwide, calling Mercury "the perfect fit" as both it and Cobham are the only mid-tier players that maintain radar components. Mercury's shares, which have been pressured by Elliott Investment Management and Jana Partners, have slipped 11% in New York over the last year for a market value of approximately $2.9 billion. Mercury is one of the last remaining independent, public providers of sophisticated aerospace and defense industry electronics that counts the U.S. government among its customers. This means any acquisition could attract the scrutiny of Washington regulators more closely eyeing transactions in critical industries. Advent purchased Cobham for £4 billion ($4.9 billion) in 2020, and has been striving to grow the business via buyouts of firms including Ultra Electronics Holdings Plc. Advent has also offered to buy U.S. satellite imagery supplier Maxar Technologies Inc. (MAXR). "Defense spending is increasing and private capital can play a crucial role here," Malani said. "We're not just buying companies, we genuinely want to develop them strategically."
In a Feb. 1 email to staff, FedEx Corp. (FDX) CEO Raj Subramaniam announced layoffs of more than 10% of global management staffers. The company also said it will shrink its officer and director ranks and consolidate some teams and functions. The number of jobs being eliminated was not disclosed, but FedEx already has reduced its U.S. workforce by 12,000 since June 2022. According to Subramaniam, "Unfortunately, this was a necessary action to become a more efficient, agile organization. It is my responsibility to look critically at the business and determine where we can be stronger by better aligning the size of our network with customer demand." The company, which has faced pressure from investor D.E. Shaw Group, is the latest big corporation to announce workforce cuts amid expectations of slower economic growth this year and a drop in consumer and business spending.
Capricorn Energy (CRNCY) announced that shareholders supported six new directors proposed by Palliser days after the resignation of CEO Simon Thomson and CFO James Smith. The proposed replacements include former BP (BP) North Africa regional president Hesham Mekawi and former Spirit Energy CEO Christopher Cox. Cox will act as interim chief executive, replacing Thomson, who stepped down from the board on Jan. 24 after months of public battles with a big component of Capricorn's shareholders over the company's direction. Craig van der Laan will replace Nicoletta Giadrossi, who stepped down on Jan. 24, as group chairperson. Finance Chief James Smith resigned from the board on Feb. 1. Palliser and some of Capricorn's biggest investors had also publicly opposed a planned merger with Israeli gas producer NewMed (DKDRF), which major proxy advisers also recommended against. A shareholder vote on the NewMed deal initially scheduled for Feb. 1 was rescheduled to Feb. 22 to give the new board time to assess the proposal. The board will also have to review Capricorn's executive team following Thomson and Smith's resignations. "The Board will be conducting a comprehensive strategic review of Capricorn's business and the several potential directions for the future of the Company," Capricorn stated.
On Feb. 1, GSK (GSK) beat fourth-quarter profit and sales forecasts as a result of sales of Shingrix, the company's blockbuster shingles vaccine, and issued a positive forecast for 2023. The move reinforced CEO Emma Walmsey's spin-off last year of consumer business Haleonx. GSK reported adjusted fourth quarter profit of 25.8 pence per share on sales of about 7.4 billion pounds ($9.11 billion), surpassing the 21.2 pence per share on sales of about 7.1 billion pounds predicted by analysts in a company-compiled consensus. Shingrix generated 769 million pounds in the quarter ended Dec. 31, beating the 748 million in the GSK-compiled consensus estimates. GSK's turnover was further assisted by stronger than anticipated sales of its HIV and respiratory treatments. As of 0900 GMT, GSK shares increased 0.4%, outperforming the FTSE 100 which was up 0.3%. In 2022, GSK withstood a prolonged challenge by Elliott and Bluebell, and it also achieved clinical trial success for a potential blockbuster vaccine for respiratory syncytial virus, a leading cause of pneumonia in older adults and young children, and saw M&A activity. Barclays analyst Emily Field noted, "The big question is oncology, there's a lot of skepticism about the return GSK has been getting in investor dollars." Meanwhile, U.S. legal disputes over heartburn medication Zantac affected GSK's shares in the second half of 2022. Some of those concerns were allayed following a beneficial ruling in December, but other lawsuits remain. On Feb. 1, GSK forecast 2023 adjusted operating profit would rise by 10% to 12% with sales increasing by 6% to 8%, excluding any contributions from its COVID-19 solutions business at constant exchange rates.
Ancora Holdings Group is calling on biofuel producer Green Plains Inc. (GPRE) to run a full sales process. Ancora, which owns a nearly 7% stake and is Green Plains' second largest shareholder, sent a letter to the company's board on Tuesday arguing a buyer would likely pay at least $50 a share for the company. Green Plains' stock closed trading at $31.05 on Monday and has climbed 7.4% this year. "Our analysis and diligence indicate that strategic buyers with considerable cash on their balance sheets could be interested in acquiring the company at a significant premium to current trading prices," the letter stated. The investment firm noted its "positive dialogue" with the company and praised the board and management for moves that have helped Green Plains transition from an ethanol-dependent producer. But it also warned that emerging risks, including reduced fuel consumption and political change, are lurking and that "the macro environment" presents a much greater challenge to Green Plains. By running a comprehensive process, Ancora says Green Plains would be much more likely to catch the attention of potential buyers than by sitting back and waiting for someone to appear with an offer. "Telling us that 'the board is always open to fielding offers and exploring alternatives' is not a sufficient response," the letter stated.
Kelso Group said on Tuesday that it has taken a stake in "undervalued" e-commerce company THG (THGHY). Kelso has bought 5 million shares in THG, a stake of 0.4%. "The board of Kelso believes that THG is a hugely exciting but significantly undervalued business," it said. "Matthew Moulding the THG founder and CEO has built a business with true global scale in two global growth sectors of nutrition and beauty." Kelso said the separation of the company into three main divisions provides THG with significant strategic optionality. "The potential to separate parts of the business could provide THG shareholders with significant upside from the valuation of the business today," it said. "Kelso believes that the current stock market value does not reflect the underlying value of the sum of each of the main THG divisions." Russ Mould, investment director at AJ Bell, said: "THG Chief Executive Matthew Moulding doesn't seem the type to welcome interference in his business, but other shareholders may welcome a new party putting pressure on the board to make changes."
Six Flags Entertainment Corporation (SIX) has added Marilyn Spiegel to its board, and she will stand for election along with the company's six other directors at this year's annual general meeting. In welcoming Spiegel, Six Flags Non-Executive Chairman Ben Baldanza cited her 30+ years in the hotel and entertainment sectors as providing the business "with valuable insight and guidance as we seek to elevate the guest experience and deliver long-term, profitable growth." The announcement follows positive discussion between the theme park operator and Land & Buildings Investment Management LLC, with which it has engaged several times in the last few months. "The addition of Marilyn to Six Flags' Board, with her extensive track record in the hospitality industry and her experience overseeing operations with significant real estate portfolios, is a positive development for Six Flags' shareholders," declared Land & Buildings CIO Jonathan Litt. "As we've previously stated, we believe the company has a tremendous value creation opportunity in front of it—including by exploring ways to potentially monetize its uniquely valuable real estate portfolio. We look forward to continuing to engage with the Board and leadership team." Spiegel expressed confidence that her hospitality expertise and ability to motivate frontline team members and improve margins "will help guide the Company on its exciting transformation."
In a Jan. 31 regulatory filing Elliott disclosed a 5.6% stake in Vantage Towers (VTAGY), the German-listed wireless masts business owned by Vodafone (VOD). According to the filing, the stake is held in voting rights through shares and instruments. Vodafone announced a deal in November to sell up to half of its 81.7% stake in the company to a consortium of Global Infrastructure Partners and KKR (KKR). Elliott has made other investments in Germany in recent years, including Kabel Deutschland and Uniper (UNPRF), both of which ended in significant payouts.
Amarin Corp. (AMRN) announced that it has filed definitive proxy materials with the U.S. Securities and Exchange Commission in connection with its Feb. 28 General Meeting of Shareholders. It also has mailed a letter to shareholders and launched a new campaign website. In the letter to shareholders, Amarin said Sarissa Capital Management "has called a General Meeting in an attempt to remove our newly appointed Board Chair and nearly double the size of the Amarin Board with seven of its own hand-picked candidates, three of whom are employees of Sarissa itself. We are asking you to support Amarin's strategy to maximize shareholder value and vote 'AGAINST' all of Sarissa's resolutions on the WHITE proxy card." The company argues that Sarissa's candidates "collectively lack critical understanding of operating a pharma company and have minimal experience with European drug launches, and International commercial expertise." Among other things, Amarin said Chairman Per Wold-Olsen "has offered on numerous occasions to meet with Sarissa on a regular basis, but Sarissa has chosen not to respond."
Canadian hedge fund manager Anson Funds is supporting First Capital Real Estate Investment Trust investor Samir Manji in his fight for control of the REIT by pursuing four board seats. Manji runs Vancouver-based Sandpiper Group and is CEO of Artis Real Estate Investment Trust. Both entities cumulatively own 9% of First Capital and launched a proxy challenge in December. “Samir has a history of maximizing shareholder value, and we fully support Sandpiper's plan here,” said Anson CIO Moez Kassam. The challenge is rooted in First Capital's intention to reduce debt by selling C$1 billion (US$751 million) in assets, while Sandpiper wants to lower that to $400 million, sell exclusively lower-growth holdings, and funnel the bulk of the proceeds into share repurchases. Sandpiper announced plans to revise management compensation and follow strategies to maximize unitholder value, which includes a possible strategic review that could facilitate a sale. First Capital has called a May 16 shareholder meeting, and has previously pledged to “engage constructively with unitholders in a manner that is in the best interests of all unitholders, and not just Samir Manji.” First Capital's Toronto-listed shares are up roughly 8% so far this year.
The supervisory board of Bayer (BAYRY) is facing pressure from a top-10 shareholder to replace CEO Werner Baumann expeditiously, with company shares depressed by litigation stemming from its 2018 takeover of Monsanto while market trust in top management is also scarce. "When it comes to CEO succession we say: the sooner the better," said Union Investment portfolio manager Markus Manns. This comes on the heels of another key German portfolio manager urging Supervisory Board Chairperson Norbert Winkeljohann to accelerate finding a replacement for Baumann. The Frankfurter Allgemeine Sonntagszeitung newspaper quoted Deka's Ingo Speich as saying Baumann could no longer push strategic changes due to the erosion of his market credibility. "The Bayer stock is in a crisis of trust which the executive board is responsible for," he explained. "Bayer has to take investor demands more seriously going forward. The Bayer stock is currently reacting more strongly to news from investors than to operating results. That's a clear sign that something is wrong." Company stock has lost over 40% of its value since the Monsanto transaction. Manns said the non-executive supervisory board may need time to find a candidate who qualifies to succeed Baumann. Baumann was awarded a new contract in 2020 that expires next year, and he said then that he would depart Bayer at the end of that term. Bluebell Capital Partners is also demanding the company's breakup, including divesting its consumer health unit and later spinning off its pharmaceuticals and agricultural segments. Inclusive Capital Partners announced it had also acquired a stake in Bayer earlier this month.
The U.S. Securities and Exchange Commission's (SEC's) Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions provides a picture of what the agency's regulatory priorities will be for 2023. A total of 52 items are on the agenda, including 23 that are in the "proposed rule stage" and 29 that are in the "final rule stage." The SEC has outlined some new priorities for 2023, but it plans to continue work on initiatives and rules from the past year in areas such as ESG, cryptocurrency, Regulation Best Interest, and cybersecurity. In the area of cybersecurity, a rule that would require companies to report material cybersecurity incidents within a certain time frame has reached the "final rule stage." The SEC has proposed various rules in an attempt to increase disclosure of investment practices, environmental impact, and diversity. Other rules focused on digital engagement practices are still in the proposal stage. The agenda suggests there will be a flurry of rulemaking activity, similar to 2022.
Western Digital Corp. (WDC) is receiving a $900 million investment led by Apollo Global Management Inc. Funds managed by Apollo are buying convertible preferred stock in Western Digital, and Apollo Partner Reed Rayman will get a board seat, according to a statement issued Tuesday. Elliott Investment Management is also participating. Tuesday's investment is a precursor to a merger with Japan's Kioxia Holdings Corp., say insiders. Western Digital Chief Executive Officer David Goeckeler said Apollo and Elliott's perspectives will help facilitate the next stage of Western Digital's strategic review. “We look forward to working together in advancing our goal of creating value and finalizing the best possible strategic outcome for our shareholders,” Goeckeler stated. Rayman called Western Digital an “iconic American business that is critical to global digital infrastructure.” In June, Western Digital announced a review of strategic alternatives following discussions with Elliott. Elliott Managing Partner Jesse Cohn and Senior Portfolio Manager Jason Genrich said they're “encouraged by the progress Western Digital has made in its strategic review.”
Elliott Management last week quietly launched a campaign to pressure Dai Nippon Printing (DNPLY) to divest itself of its sizable "strategic holdings" in friendly domestic companies with which it does business. The Japanese corporate establishment itself admits that corporate cross-shareholdings not only depress stock value but also shield management from accountability to general shareholders. Yet despite pious public acknowledgments that its so-called strategic holdings need to be shed, Dai Nippon's domestic corporate and institutional shareholders are unlikely to support Elliott's demands in sufficient numbers to force management of the conglomerate to do anything meaningful, writes Stephen Givens, a corporate lawyer and an adjunct professor at Keio University Law School in Tokyo. If Elliott proceeds to submit a formal proposal for a shareholder vote, the odds are overwhelming that it will fail, based on past voting patterns, he says. The establishment does not in its heart believe corporate cross-shareholdings are bad, or at least bad for the establishment, writes Givens. "The cocooning effect of cross-shareholdings makes life happier for corporate executives by insulating them from unwanted takeovers and demanding shareholders like Elliott." But this explanation invites a further question, says Givens: How have Japan's corporate shareholders managed time and again to get away with the glaring contradiction between lip service about divesting strategic holdings and voting against activist proposals to actually divest? "A large part of the answer is of the activists' own making. They have chronically failed to inspire sympathy, to persuade, and to do the things necessary to be taken seriously and to be seen as legitimate by the larger domestic constituencies that shape public opinion in Japan. The failure to communicate sympathetically and persuasively to a domestic audience, in turn, owes to the fact that the activist funds are tin-eared and uncomprehending foreigners. The funds' capital is foreign money. The fund managers making demands are foreign, or in a few cases, foreign-educated, nonestablishment Japanese who manage foreign money from offshore. The establishment looks down on the foreign funds with barely disguised contempt as opportunistic carpetbaggers looking to make a quick buck in a proud and insular corporate monoculture. Activists firing off demands from perches in Singapore and London evoke anti-colonial emotions and cover for the establishment to dismiss proposals that actually make sense." Elliott's own history in Japan leaves it vulnerable to charges of carpetbagging, says Givens. "The fund management company maintains a shadowy profile here and shut its small Tokyo office earlier this year. In recent years, it has made money behind the scenes by clever arbitrage plays in domestic transactions involving taking listed companies private. Nothing is wrong with clever arbitrage, of course. But it is not a pedigree that gives Elliott standing to speak with statesmanlike authority about what is best for Japan or Dai Nippon's shareholders. Third Point demonstrated nearly a decade ago that with the right domestic endorsements, objectively reasonable activist proposals can win," says Givens. With behind-the-scenes support from the administration of former Prime Minister Shinzo Abe, Third Point achieved victories against some of Japan's most deeply entrenched names. "Third Point's moral victories in Japan, however, did not result in financial rewards commensurate with those offered by lower-hanging fruit in the U.S. and Europe. As a result, the fund company withdrew from Japan for greener pastures elsewhere." Elliott, if it is serious about making serious money in Japan, needs to make a serious commitment to the country that it has avoided making so far, says Givens. "Japan's tragedy du jour may well be that it is too Japanese to attract the quality of activists it really needs."
An article forthcoming in the Southern California Law Review discusses the last major period in which shareholder voting rights experienced transformative change and connects it with the current moment. The article begins by recounting the legal change that produced the modern proxy system. In the early nineteenth century, it was common for corporations to limit the voting power of large bloc-holders, and this contributed to the problem of proxy abuse. One-share-one-vote became increasingly common, particularly after 1850, but it disempowered small stockholders in relation to wealthy, large holders. By the end of the nineteenth century, the pieces of modern corporate capitalism were mostly in place. Today, developments such as the universal proxy, changes to broker voting rules, pass-through voting, and dual-class structures are rebalancing power among corporate managers, large asset managers, and small and beneficial holders. The fact that such power rebalancing has occurred twice, during periods of notable wealth inequality, suggests a relationship between the politics of shareholder voting and the distribution of wealth. If history repeats, voting rights reforms now underway are likely to be followed by a surge of political activity by the beneficiaries of the change.
As boards continue to evaluate how environmental, social, and governance considerations factor into corporate operations, some lawmakers and regulators have raised potential antitrust concerns about coordinated efforts, Damian G. Didden, a partner at Wachtell, Lipton, Rosen & Katz, writes in an opinion piece. For example, several U.S. senators sent letters to law firms admonishing them to advise clients of increased congressional scrutiny of “institutionalized antitrust violations being committed in the name of ESG.” Some regulators in the U.S. have recognized that ESG considerations and antitrust principles are not in conflict. Moreover, antitrust regulators in the U.K. and the European Union have offered specific guidance on applying antitrust laws to sustainability agreements and similar multi-firm conduct. As these regulators correctly recognize, in most circumstances, antitrust principles should not be a serious impediment to incorporating ESG into decision-making that is otherwise in the corporate interest. Other than in rare circumstances, antitrust law is generally concerned with collaborative behavior between competing firms and negative effects on consumers. Collaborative conduct motivated by ESG considerations should not generally run afoul of core antitrust prohibitions.
Paul Singer, founder, president, and co-CEO of Elliott Management, has built a multimillion-dollar stake in Salesforce (CRM). Since the news broke of his position in the company on January 23, the Salesforce share price has climbed 8.9%. Elliott Management becomes the fourth known activist investor at Salesforce, joining Inclusive Capital, Starboard Value, and ValueAct Capital. Following news of Singer's stake, the details of which have been kept private, the company has appointed three new independent directors, including ValueAct Capital CEO Mason Morfit. In a statement, Morfit said he hopes to help the company "deliver profitable growth and shareholder returns." It's not yet clear what Morfit's appointment might mean for Elliott Management and the other activist investors; Singer's firm will be putting forward its own nominations to join the Salesforce board after February 12. Ken Squire, founder and chief investment strategist of 13D Monitor, believes that activist investors want the same thing. "They want costs down, margins up, and [to] work on a succession plan," he told CNBC Overtime last Monday. Squire also pointed out that "it's hard to really run a proxy fight against a company that just put an activist on the board."
In an interview on investor activism in 2023, Kiran Moorthy, head of European shareholder advisory at Citigroup (C), said, "Activism activity in the U.K. has long been more vigorous than continental Europe. However, the key question for most activists today remains 'is the U.K. a value play or a value trap,' as it's not necessarily clear what the catalysts are to unlock that value. The depreciation of the pound, in and of itself, does not necessarily provide impetus for an agitant to pursue a U.K. company." He added, "Where we are seeing activity are funds screening for U.K. domiciled mid-caps with significant overseas revenue. It is potentially an efficient way to trade the currency and valuation discount, without necessarily being exposed to the currency risk." When asked about activism across Europe, Moorthy said, "You're starting to see the maturation of activism. It's no longer a small list of very public funds who have become activist. It's become pervasive. The larger activist funds have become more private, institutional investors are increasing their engagement with companies, and you're starting to see the next wave of activist funds spun off and pursuing larger targets. It's becoming more mainstream and less of a U.S. only construct." According to Moorthy, "With the current uncertain M&A option, activists behind the scenes are laser focused on driving operational changes, granular cost, and other margin improvements. Nearly one third of companies in Europe have seen returns on invested capital near or below their average cost of capital, which has been elevated due to largely macroeconomic factors. This is added impetus for activists to focus on improving operational performance via cost cuts."
BlackRock (BLK) CEO Laurence D. Fink is embroiled in a fight with Republican lawmakers over the asset manager's stance on environmental, social, and governance (ESG) investing. Differences of opinion over what constitutes an asset manager's fiduciary duty poses a challenge and had resulted in a split among red states. Last year, Louisiana Treasurer John M. Schroder announced plans to sell $794 million of investments managed by BlackRock, stating in a letter to Fink that "according to my legal counsel, [ESG] investing is contrary to Louisiana law on fiduciary duties, which requires a sole focus on financial returns for the beneficiaries of state funds." Schroder added, "This divestment is necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector. Simply put, we cannot be party to the crippling of our own economy." Meanwhile, North Carolina Treasurer Dale R. Folwell, who has called on Fink to resign, said, "My fiduciary duty to those that teach, protect, and serve, as well as to our retirees, directs that the current North Carolina Retirement Systems investments in BlackRock remain at this time. Our job is to find the best value with the lowest cost and highest margin of safety. Pulling money away from BlackRock and giving it to someone who will charge us four times as much is not the right thing for our members." According to Columbia University's Cynthia Hanawalt, "There is a cognitive dissonance between political narratives and people's practical obligations. If there is reason to believe that companies are vulnerable to climate risk or the impact of some other ESG factor, fiduciaries are obligated to consider those factors."
Elliott Management said recently it made a multibillion-dollar investment in Salesforce (CRM). Soon after, Salesforce said it would bring in three new board members, and according to The Wall Street Journal, Elliott intends to nominate its own list of directors. Salesforce is also dealing with other firms—Starboard Value purchased a "significant stake" in the company in October, and ValueAct Capital and Inclusive Capital Partners also made investments. In fact, ValueAct Capital CEO and chief investment officer Mason Morfit is one of the three new board members. He joins Arnold Donald, former president and CEO at Carnival Corp. (CCL), and Mastercard (MA) CFO Sachin Mehra, replacing Bret Taylor, co-chair and co-CEO. Taylor said in November he would step down at the end of the month along with longtime board members Sanford Robertson and Alan Hassenfeld. Patrick Gadson, a partner at law firm Vinson & Elkins who oversees shareholder activism and mergers and acquisitions, says Elliott typically requests board seats as a starting point in discussions with a company where it is operating to help reinforce its demands. The discussions related to changes in board makeup have been continuing since last summer, indicating that the investors have been working privately for some time. William Blair, a division of Equity Research, wrote in a recent note regarding Salesforce's operating margins compared to its peers: "In comparison, this group of five companies has a similar revenue scale to Salesforce, yet has an operating margin profile of 41%, well above Salesforce, largely due to more efficient sales and marketing spend." William Blair believes Salesforce likely could not achieve that, but may reach 30%. Notably, Salesforce has committed to margins of 25% by 2026, but that may not be sufficient for Elliott and the other investors as they strive to make Salesforce more efficient and profitable.
According to a study conducted by the National Association of Corporate Directors (NACD), gender diversity on corporate boards of directors is inching upwards as more women join boards than exit them. Females accounted for 41% of the new board member appointments to Russell 3000 Index companies last year and just 17% of those leaving, the 2022 Inside the Public Company Boardroom report showed. Board independence is also gradually increasing. In 2020, 15% of boards were 90% comprised of independent directors. This increased to 17% the following year and 18% in 2022, NACD's research shows.
Friso Van der Oord, senior vice president of content for the National Association of Corporate Directors (NACD), writes in Directors & Boards that NACD conducts a survey each December in preparation for the key trends that will impact boards in the new year and how directors can adapt. The threat of a recession topped the list, with 64% of respondents rating it as their No. 1 business concern followed by inflation (57%). Meanwhile, 59% of directors see increased competition for talent as a pressing issue for 2023. To this end, 63% indicated that improving their board's oversight of human capital is a critical priority between now and the end of December. Interestingly, 56% of respondents listed improving the relationship between the board and the CEO as either an "important" or "very important" improvement goal for 2023, intimating that this dynamic may be under some stress.
Institutional investors have increased sustainable and impact investing activity by 81% over the past four years overall, with significant variation by investor type and region, according to a Cambridge Associates survey released Monday. The biennial client survey found 65% of 144 respondents actively engage in sustainable and impact investing, compared with 61% in 2020 and 36% in 2018. The 2022 survey for the first time included family offices and high-net-worth individuals. Institutional investors outside of the U.S. invest more of their portfolio, with one-third reporting that more than half of their long-term portfolios are allocated to sustainable and impact investments. By contrast, more than half of U.S. respondents reported less than 10% allocated to such investments. Climate change and resource efficiency were the most common focus areas for respondents engaging in sustainable investing, with 77% investing in those themes, compared with 38% in the 2018 survey. Other themes mentioned were investing in diverse managers and social and environmental equity. The continued expansion of sustainable and impact investing "reflects a growing recognition that these factors are material to investment decision-making and long-term portfolio outcomes," said Liqian Ma, global head of sustainable and impact investing research at Cambridge.
Corporate boards are cutting the pay of some top CEOs—from Apple's (AAPL) Tim Cook to Morgan Stanley's (MS) James Gorman to David Solomon of Goldman Sachs (GS)—in a new trend that could just be starting. "This is a show of solidarity. CEOs need to share the pain," remarks Nell Minow, vice chair of ValueEdge Advisors, which advises institutional investors on corporate governance issues. In recent years, compensation committees have been taking top executives to task more. Minow states, "CEOs would often get all the credit and money for good times and then blame El Nino or some extraneous force for the downside. Now they are being forced to accept more responsibility." Also, ever since the passage of the 2010 Dodd-Frank law, regulators have required public companies to give shareholders a voice on compensation issues. While these "say on pay" votes have been advisory, having shareholders reject compensation packages is an embarrassment companies try to avoid.
Most management teams feel unprepared for the forthcoming U.S. Securities and Exchange Commission (SEC) rule on climate-related disclosures, according to a survey by ICR. Roughly eight in 10 management teams (78%) are concerned about reporting ESG-related risks and strategies because of the pending SEC rule. If approved, it would mandate that companies disclose information about their governance of climate-related risks and how these have had, or are anticpated to have, a material impact on their business. Despite uncertainty about the rule’s final scope and the timing of when it could be approved, governance professionals at a recent Corporate Secretary event encouraged companies to prepare to comply. The survey, conducted at a recent ICR Conference, collates responses from management teams, institutional investors, sell-side research analysts, investment bankers, and private equity professionals. It found that 73% of management teams incorporate ESG-related information into corporate announcements. It also found that a majority (65%) of non-management teams think companies’ ESG disclosures are "sometimes helpful" in making investment decisions. This compares with 7% that always factor ESG disclosures into their investment decisions and 28% that consider such disclosures never helpful. "Despite the recent raft of anti-ESG regulations and pressures, ESG factors are here to stay," says Lyndon Park, managing partner for global ESG advisory and shareholder activism at ICR. "There are tangible reasons why 78% of the survey respondents feel unprepared for the SEC’s forthcoming climate rule, one of which is that the SEC published its proposed rules very early, pushing aggressively for TCFD-based disclosure, including Scope 3 emissions information, which is difficult to account for or control, as it lies outside the Scope 1 and Scope 2 emissions within operational control of the companies," Park notes. He says another reason is tied to the SEC’s delay in finalizing its ruling from the end of 2022, as originally intended. "In addition to this uncertainty, many issuers and investors have focused their ESG efforts based on 'materiality' as companies, especially smaller and recently public [ones], have focused their initial [ESG] efforts on ESG factors that are business-relevant and material, often based on the SASB framework that investors have coalesced around," he points out. He says there is still a way for companies to get ready ahead of the SEC’s final ruling on the issue. The first step is to start collecting Scope 1 and Scope 2 emissions data, crafting a strategy, and developing achievable goals in line with the TCFD framework. "Intellectual honesty is a must," he says, "so rather than speculatively setting Scope 3 targets based on incomplete information or data that’s out of their control, companies can begin the assessment work related to Scope 1 and Scope 2 emissions. Companies would be best served to start from there."
Starboard Value's Jeff Smith is set to rescue Ritchie Bros. Auctioneers (RBA) similar to the way that Warren Buffett has swept into situations to support companies in need of cash, Jonathan Guilford writes in an opinion piece. Starboard has offered a financing deal to help Ritchie pursue its bid for salvage-car portal IAA (IAA), but success would be no small victory for Smith. Ritchie investors Luxor Capital and Janus Henderson oppose an acquisition, as does IAA investor Ancora. However, other shareholders want Ritchie to buy IAA, such as Independent Franchise Partners, which owns 4.8% of the company. Starboard would gain a board seat if shareholders clear the deal, but opposition is expected in market turmoil. Still, there may be other opportunities for Smith to pursue this strategy, as long as markets remain under pressure and reasonable deals are on offer.
The recent political and public attention given to environmental, social, and governance (ESG) issues should not deter directors and officers from addressing ESG risks. The state of Florida said it would start divesting $2 billion worth of assets currently managed by BlackRock (BLK); similar announcements have been made by Louisiana, Missouri, South Carolina, Arkansas, Utah, and West Virginia. More money flowed out of ESG funds in 2022 than into them for the first time in over 10 years. Meanwhile, 21 GOP attorneys general wrote a letter to Institutional Shareholder Services and Glass Lewis to question whether their net-zero emissions policies were based on the financial interests of investment beneficiaries rather than on other social goals, and warned that their boardroom diversity policies may violate contractual and fiduciary duties in addition to state anti-discrimination laws. At the same time, revised European ESG regulatory guidance has resulted in extensive downgrades in the designations of ESG portfolio funds of many of Europe's top asset managers. Anti-ESG shareholder activism is on the rise as well, as highlighted by Strive Asset Management, a fund that was launched in May 2022 to take on the major U.S. asset managers and "restore the voices of everyday citizens." The fund has already approached Exxon Mobil (XOM), Disney (DIS), Chevron (CVX), and Home Depot (HD) to request they reverse some ESG-related initiatives. Strive also unveiled its "ESG Transparency Campaign" that calls for investors to question their financial advisors about whether they are invested in funds that voted in favor of racial equity audits, emissions reduction plans, or executive compensation linked to environmental and social goals. It is important that companies' supervisors and boards continue to consider ESG risks in addition to all other material risks and issues to ensure the company's value over the long term. Moreover, addressing ESG and sustainability-related risks is consistent with directors' fiduciary duty of care, as well as with the board's legal obligation under the Caremark doctrine.
This year's proxy season is poised to be remarkable because of the unprecedented number of anticipated shareholder proposals. Companies that are not sufficiently prepared may experience a variety of pressures. Active owners as well as activists are seeking to maximize corporate margins to withstand economic uncertainties apart from disruptions stemming from the pandemic. These include abandoning longer-term R&D projects or delaying further investments in employees through wages and benefits, despite research indicating that such activities generate value over the long-term. Companies also tend to see higher long-term return on invested capital when a greater proportion of long-term shareholders are associated with them, and such companies are likely to face fewer material shareholder proposals. By engaging long-term shareholders, companies can tune out the short-term noise and stick to their long-term strategy. However, the reality is less straightforward. A 2022 FCLTGlobal survey examining engagement experiences between companies and investors found that of those surveyed, more than 60% faced hurdles in accessing long-term-oriented investors. More than 50% of those surveyed said they sought to talk to portfolio managers, but their success rate was below 50%. Instead, companies were directed to lead sector analysts or engagement/stewardship teams, which are not responsible directly for managing money or making buy/sell decisions. Meanwhile, 90% of investors said they took into account ownership characteristics when dealing with portfolio companies, but only 50% of the companies customized their communications and engagement strategies by investor type. Communication and engagement efforts generally consist of generic statements that do not address the priorities of long-term shareholders. Companies may enhance their long-term strategy by closely evaluating their shareholder base; not waiting until proxy season to engage with their large, long-term shareholders; having regular check-ins; reducing corporate access to shorter-term shareholders; prioritizing contact with key investment decision-makers and the engagement team during meetings; and actively promoting long-term strategy through customized communication.