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Elliott’s Stake In Softbank
CNBC's David Faber takes a closer look at the Activism in 2017 and what to expect in 2018. With Ken Squire, 13D Monitor founder.
Toshiba (TOSYY) will be reinstated into the top tier of the Tokyo Stock Exchange next week, after years of being relegated to second-tier status and under almost constant investor pressure. The company remains engaged in a battle with shareholders led by Effissimo and Farallon Capital, which requested extraordinary general meetings (EGMs) of shareholders in December. The funds are demanding that Toshiba clarify its overseas acquisitions plans and review the circumstances around last year's annual shareholder meeting, where CEO Nobuaki Kurumatani was nearly ousted. Toshiba has pledged to hold the EGMs as a combined event before the end of April, but Effissimo last week filed a petition at the Tokyo District Court requesting approval to call the EGM itself. The fund has this right under Japanese law, which ups the pressure on Toshiba to hold the meeting sooner. A record fine was imposed on the company in the wake of a profit-padding scandal in 2015, and later it was embroiled in a further crisis when its U.S. nuclear business failed. Toshiba ended its financial year in March 2017 with more debts than holdings, and its stock exchange tier was automatically reduced. Many investors and analysts at the time considered the demotion serious enough to justify a full delisting, and the decision not to do so was viewed as tacit government support for the company. Toshiba subsequently sold a number of assets from its subsidiary portfolio, including its flagship memory chip business to a consortium led by Bain Capital (BCSF). The company also issued $5.4 billion in new shares, which added a lot of activist and offshore funds to its register. Toshiba declared in a written statement that it had reformed its governance and internal control systems and took initiatives to "transform the corporate culture."
Bill Ackman believes Target (TGT), Walmart (WMT), and Kroger (KR) can support the effort to vaccinate Americans. In a recent tweet, the founder of Pershing Square (PSHZF) questioned why the retail giants were not serving as vaccine distribution centers. "They have large parking lots, trained Rx staff, and weekly customer visits. Outdoor shots would minimize risk and inspire wary customers to get one. Every day we wait more die and variant risk increases," said the tweet. Target, Walmart, and Kroger did not formally respond to Ackman's tweet, which has received lots of attention. What Ackman said is accurate, and could prompt at least one of the big retailers to offer some assistance. Many companies are using their parking lots as testing sites. Many facilities operated by Rite Aid (RAD) are still in use for this purpose.
Intel's (INTC) earnings report on Thursday said that the company's troubled 7-nanometer chip manufacturing technique is on track to be used to make chips sold in 2023. Intel reported earnings per share (EPS) at $1.52 and $20 billion in revenue for the fourth quarter, its last period with Bob Swan as CEO before he hands the reins to Pat Gelsinger. The results beat Refinitiv consensus estimates of EPS of $1.10 and $17.49 billion. “I am pleased with the progress made on the health and recovery of the 7-nanometer program,” Gelsinger said in a release. “I am confident that the majority of our 2023 products will be manufactured internally.” Intel’s troubled 7-nanometer technology has weighed on the company as it has struggled to match Asian chipmakers’ advances in chip manufacturing. Intel’s latest chips use a 14-nanometer or 10-nanometer process while competitor chips manufactured by external foundries such as TSMC and Samsung are currently using a 5-nanometer process. In December, Third Point and its CEO Dan Loeb said in a letter to Intel’s board that the lag behind competitors was a critical vulnerability. Loeb said Intel has fallen behind Asian chip foundries and urged Intel’s board of directors to make several changes to the company, including considering whether to outsource chip production or divesting parts of the business, such as acquisitions. Intel customers such as Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) have developed their own processors, or have signaled they intend to do so. In the quarter ending in December, Intel said strength in PC sales helped it exceed its own expectations. It said that 33% more PCs with Intel chips were sold than during the same time last year, especially laptops. Intel increased its cash dividend by 5% to $1.39 per share, though its forecasts for revenue, EPS, and operating margin for Q1 were all down year-over-year. Sales for Intel’s data center group, which sells chips to enterprises that run servers, were down 16% in the quarter ending in December compared to a year ago. Intel said that Mobileye, its subsidiary working on self-driving car technology, saw sales rise 39% during the quarter compared to the same time last year, though it is still a small part of the company. Gelsinger, who was most recently the CEO of VMWare (VMW), is expected to push Intel to become more competitive in terms of chip manufacturing.
Less than two years after Corteva Inc.’s (CTVA) launch, the crop seed and pesticide maker is facing pressure from investors. Starboard Value LP confirmed Thursday that it has nominated a slate of directors to take over two-thirds of Corteva's board. The firm, which has a 1.3% stake in Corteva, called for the company to replace CEO Jim Collins, saying Corteva has been slow to improve its profitability, missed opportunities to improve its operations, and hasn't held Collins accountable. Starboard said it first invested in Corteva about 18 months ago and contacted the company's board privately in September to discuss Corteva's performance and leadership. Starboard's Jeff Smith said that while Corteva's board engaged with the firm, it hasn't acted and has refused to speak with the CEO candidate Starboard proposed. On-and-off discussions with Starboard since the fall haven't yielded a settlement agreement that could ward off a full-blown proxy fight at the company's annual meeting this spring. Activist investors played a large role in Corteva's formation from the agricultural businesses of DuPont and Dow Chemical, both of which contended with shareholder activism ahead of the 2017 merger that fused the two industrial conglomerates. In 2015, Trian Fund Management LP launched a battle to secure seats on DuPont's board, saying the industrial stalwart had grown unwieldy and needed to be broken up into smaller, more efficient companies. Trian narrowly lost its proxy battle at DuPont, and Third Point agreed to accept two seats on Dow's board rather than launch its own campaign. Dow and DuPont shareholders approved the deal in 2016, but firms including Third Point, Jana Partners LLC, and Glenview Capital Management criticized the companies' initial plans to divide up a wide-ranging portfolio of businesses. The company later shifted around businesses generating more than $8 billion in annual revenue.
The year 2021 is off to a strong start for Italian soccer club AC Milan as it has maintained its lead in the Serie A table. Two and a half years have passed since Elliott Management took charge after the catastrophic Chinese ownership that left the American fund having to rescue a disastrous financial situation. They decided the best way to do so was to focus on young players, reduce the wage bill, and make greater investments in the medium to long term. In the initial forecasts it was anticipated that it could take three to five years for Milan to start seeing the fruits of such a project, but it seems as though the club is on track and ahead of schedule. Since the summer of 2019 the management has managed to remedy the problems that arose such as choice of head coach and raising the quality of the squad thanks to excellent markets, especially in January 2020. In recent weeks coaches have had carte blanche because Elliott trusts them to blend young players with experienced players. The arrival of stars Zlatan Ibrahimovic and Simon Kjaer last year was decisive for the entire growth of the group. Despite the lack of participation in the Champions League, management still managed to acquire several promising players.
HYK Partners is protesting the appointment of Hanjin Group heiress Emily Lee Cho as vice president of subsidiary Hanjin Transportation. The private equity firm has a 9.79% stake in Hanjin Transportation, making it the second-largest shareholder of the subsidiary. Cho is the sister of Korean Air owner Hanjin Group Chairman Cho Won-tae, and market observers believe she will try to gain more control of Hanjin Transportation by joining its board of directors at its regular general meeting of shareholders in March. HYK, which has sent a shareholder proposal to the board and uploaded a statement to its website, has asked for three board seats at Hanjin Transportation. Hanjin KAL, the group's holding company, has a 24.16% stake in Hanjin Transportation and is its largest shareholder. HYK said it will pursue legal action if Hanjin Transportation does not respond to its proposal by Feb. 2.
Starboard Value LP has sent a letter to the board of Corteva Inc. (CTVS), reiterating its belief that Corteva's operating performance understates the intrinsic value of the company's assets. Starboard Value LP, one of the largest shareholders of Corteva, has nominated eight director candidates for election at the company's 2021 Annual Meeting. Its nominees are Jacques Croisetière, Lisa Crutchfield, David Everitt, James Gallogly, Janet Giesselman, Kerry Preete, Susan Schnabel, and Jeffrey Smith. Starboard expressed concern about the board's reluctance to seriously consider leadership change. "We have identified an industry expert with a superb track record of success and excellence who is willing and able to lead Corteva immediately. The Board's refusal to even speak with the individual we have identified is inexplicable," Starboard said.
Ovintiv (OVV) is facing pressure from Kimmeridge Energy Management Co., which sees the oil and gas producer lagging its peers due to reckless expenditures, expensive acquisitions, and poor management. Kimmeridge has said it may nominate a more general group of candidates for Ovintiv's board of directors if it does not attempt to uplift the company's achievements and restore investor confidence. Kimmeridge, which has a 2.4% equity interest in Ovintiv, says Ovintiv has failed to provide shareholder returns, with 85% of the company's stock giving negative returns since 2013. Kimmeridge says that Ovintiv must implement a pay-for-performance compensation strategy and restructure its board to restore investor confidence. Ovintiv acquired the Anadarko basin assets in spite of industry experts' opinion that the assets were not economically competitive. Notably, Kimmeridge hopes that Ovintiv shifts its entire spending into the Permian Basin of West Texas and New Mexico, which would likely yield better returns. Kimmeridge is also pushing the company to reduce its greenhouse gas emissions by setting emission-reduction targets in line with the Paris Agreement on climate change.
New Intel (INTC) CEO Pat Gelsinger faces a number of challenges, including pressure to implement strategic changes by Dan Loeb's hedge fund, which has a position of about $1 billion in the company's shares. In a letter in December, Third Point said Intel should consider separating its chip-design and manufacturing operations. On Twitter, Loeb welcomed Bob Swan's decision to step aside for Gelsinger, who will need to beat back competitive pressures and rebuild the technological leadership of Intel. Rival Nvidia (NVDA) surpassed Intel in market valuation, Apple (AAPL) dropped the semiconductor giant as a supplier for Mac chips, and the company suffered market-share losses this year. Still, Wall Street expects 2020 to be a lucrative year for the company. Intel received a boost from the surging demand for PCs in the work-from-home economy.
Land & Buildings Investment Management wants to overhaul the board of Apartment Income REIT (AIRC). In a letter to Apartment Income REIT's board, Jonathan Litt's investment vehicle referenced the performance of the company's stock. Land & Buildings also criticized the company's leaders for ignoring shareholder requests for a special meeting before Apartment Investment & Management (AIV) spun off Apartment Income REIT in mid-December. "Under your and CEO Considine's leadership, discounted valuations and underperformance are the rule, not exception," Land & Buildings wrote in the letter. Apartment Income REIT needs to refresh a majority of the board with true independent directors, and replace the directors who oversaw decades of underperformance at Apartment Investment & Management and now offer the same at the company, Litt's investment management company wrote. Land & Buildings said the company should create a special committee to evaluate strategic alternatives, starting with Westdale Real Estate Investment and Management's offer to buy Apartment Investment & Management.
Phone group Telecom Italia (TIM) is working on a plan that could keep CEO Luigi Gubitosi in his role when it names a new board in April. Sources say the group's outgoing board will start discussions at a meeting before drafting a slate of board nominees which it must file by the end of March for shareholders to vote upon on April 20. Other sources had told Reuters that Italy's government backed the idea of a new list of directors submitted by TIM's board with support from French media giant Vivendi, which holds 24% of TIM, and state lender CDP, which owns 10%. Vivendi's support is crucial for the plan to succeed. Relations between Vivendi and the Italian state have been strained by a recently passed law that could curb the former's interests in the country and strengthen the hand of broadcaster Mediaset in an ongoing legal battle against Vivendi. Gubitosi took the helm at TIM three years ago after Elliott Management won a governance battle against Vivendi, succeeding in appointing 10 directors out of 15 to the board. During his term, Gubitosi has focused on shedding assets to cut debt, while working on combining TIM's fixed network assets with those of state backed rival Open Fiber.
Effissimo Capital Management, Toshiba Corp.'s top shareholder, has requested court approval to call an extraordinary shareholders meeting (EGM) by itself as the Japanese firm has yet to officially clarify whether to hold it or not at the fund's request. Toshiba has gotten a notice from the Tokyo District Court that the shareholder has filed a petition for court approval to call an EGM, the Japanese company said in a filing on Jan. 20. Toshiba said last week it intends to hold an EGM by the end of April as requested by Effissimo and another big shareholder, U.S. hedge fund Farallon Capital Management, but has not made an official decision. Effissimo is requesting a third-party probe into Toshiba's 2020 annual general meeting, at which it said the voting rights of a number of shareholders were compromised. If Toshiba fails to open an EGM within eight weeks of getting the request or to quickly start the process, Effissimo could call a meeting by itself with court backing.
Engine Capital Management is asking a judge to block another investor from calling itself Engine No. 1, saying the name could cause confusion in the investment community. Engine Capital alleges in a lawsuit filed this month in Manhattan federal court that, because both firms are shareholder activists, Engine No. 1 is engaging in willful trademark infringement. Engine Capital is seeking to bar the defendant from using Engine No. 1 or similar names, plus triple damages, according to the complaint. Engine Capital has used its name for its management and investment services, including as a shareholder activist, dating back to 2013, according to the lawsuit. It said it has gained “notoriety and influence” since then for its Engine-branded family of funds and activist campaigns. As a result of the reputation it has built for itself, Engine Capital said it has “successfully negotiated board representation with many publicly traded companies.” It has pushed for changes at several companies, including last year at Matrix Service Co. (MTRX) and CIM Commercial Trust Corp. (CMCT). Tech investor Chris James founded Engine No. 1 in December 2020 with the goal of investing in companies that can have a positive impact on society and the environment. In December, Engine No. 1, with the support of the California State Teachers’ Retirement System, said it planned to nominate four directors at Exxon (XOM), arguing the oil giant was underperforming, needed to diversify its business, and align executive pay with shareholders’ interests, among other measures.
Sources report that Starboard Value LP aims to take over Corteva Inc.'s (CTVA) board and oust CEO Jim Collins, citing mediocre performance. The investor has privately nominated eight directors to Corteva's board, with Collins' prospective replacement unnamed. Starboard in October reported a stake of about 1.6% in Corteva. Starboard CEO Jeff Smith announced then that the company's adjusted earnings before interest, taxes, depreciation, and amortization showed little improvement from its founding in 2019, trailing peers. In response to an inquiry on Smith's comment, Collins acknowledged that the business has room to extend its margins. "Probably the only question in that whole discussion is our view of the timing of that improvement," he said. Starboard has been engaged in on-and-off discussions with Corteva since the fall and nominated board members before the deadline to do so in late December. Attempts to avoid a proxy fight at the annual shareholders meeting in the spring have so far come to nothing, and some sources said Corteva's current board fully backs Collins. Corteva and other farm suppliers have had a difficult few years, with a string of bumper crops in the United States and elsewhere helping increase global grain reserves and reduce crop prices, while less income for growers has made it harder for seed and pesticide suppliers to boost prices. With crop prices rallying in recent months, Collins and other Corteva executives have highlighted the company's new line of crop seeds.
CVR Energy Inc. (CVR) has adopted an activist investor stance with Delek US Holdings Inc. (DK). CVR CEO David Lamp sent a letter to Delek’s chairman, Uzi Yemin, outlining changes he would like to see at the company. Those changes include a priority on free cashflow over growth, retail monetization, and a focus on core refineries alongside an exit from certain non-core assets. Both CVR and Delek are refining companies in the downstream oil and gas business. CVR says its 15% stake in Delek makes it the Tennessee-based company's largest stockholder. CVR will propose three new directors to Delek’s board to replace some of Delek’s nominees in the company’s upcoming annual shareholder meeting, Lamp said. Some more specific changes CVR advocated for in the letter included the cessation of refining operations at Delek’s Krotz Springs and El Dorado refineries, the sale of the company’s retail business, and cuts to its general and administrative costs. Lamp also said Delek should exit its non-core supply and trading activities. In response to the letter, Delek said it will consider CVR’s nominations when it receives them but noted existing plans to cut its capital expenditure budget by 40% in 2021. CVR was similarly engaged in 2012 when Carl Icahn acquired a controlling stake; in 2018, CVR added two executives from Icahn Enterprises LP (NYSE: IEP) to its board. As of the start of 2020, Icahn owned about 71% of CVR's interest.
Premier Foods (PFODF) expects a sharp rise in trading profit after consumers stuck at home turned to its familiar brands. The pandemic has boosted a turnaround at Premier, which had been battling pressure from investors. It said the three months to the end of 2020 were “another exceptional quarter of trading,” with sales of its branded products up 16% in the first three quarters of its financial year. Its Mr. Kipling cake brand was on track for a record year with a new U.S. distribution deal through Weston Foods starting in 2021. International sales shot up 43% year-on-year during the quarter, although Premier said that figure was flattered by stockpiling ahead of the Jan. 1 Brexit transition. Premier's Bisto gravy and Batchelors dried foods products both benefited from double-digit sales growth last year. The sales bump helped the FTSE 250 group to launch TV advertising campaigns for some of its brands. Trading profit is set to be 12% higher in the year to March 2021, and the ratio of net debt to earnings is set to fall below two times. The company will redeem £40 million of bonds in February, after disposing of its stake in the Hovis bread brand for £37 million late last year. It had faced pressure from two investors, Paulson & Co. and Hong Kong-based hedge fund Oasis, but this month announced that a representative of Paulson had quit its board as the group cut its shareholding.
Chewy (CHWY) co-founder Ryan Cohen has scored a 300% gain on his investment in GameStop (GME). Cohen spent $76 million for 9 million shares in the video-game retailer, and these shares are now worth over $320 million. Cohen paid about $8.40 per share on average for his 13% stake, paying less than a quarter of GameStop's $35.50 closing price on Friday. GameStop's stock price jumped as much as 17% in premarket trading on Tuesday after a deal was reached between Cohen's RC Ventures and GameStop to add three seats to the retailer's board, including one for Cohen. Cohen had penned a letter to GameStop's bosses in November, criticizing them for not keeping pace with industry changes. The entrepreneur also called for GameStop to conduct a strategic review, evolve from a physical retailer into a technology company, prioritize its most profitable retail locations, and build an e-commerce ecosystem.
Elliott Management has decided to shut down its Hong Kong office after transferring responsibility for its Asian investment decisions to London and Tokyo over the past three years. Its Hong Kong workforce of approximately 20 people is being moved to those cities, according to a source. The firm has made several prominent investments in Asia over the years, including in SoftBank (SFTBY), Bank of East Asia (BKEAY), and Hyundai Motor Co. (HYMTF), and the closing of the Hong Kong office does not indicate a change in investment priorities, the source stated. The size of the office has contracted from about 100 people as portfolio managers moved to other locations. There currently are no portfolio managers based in Hong Kong, the source stated. Although the decision to close the office is being made primarily for efficiency reasons, it does coincide with increasing political tensions in the region.
AppHarvest, an AgTech company building some of the country’s largest high-tech indoor farms to grow affordable fruits and vegetables at scale, has announced that its first-ever harvest—Beefsteak tomatoes from its 60-acre Morehead, Ky., flagship indoor farm—will start to roll out in grocery stores this week. Shoppers will be able to find the Beefsteak tomatoes in the produce aisle, co-branded with Sunset Grown, and the products are expected to be comparable in price to standard tomatoes. AppHarvest’s Beefsteak tomatoes are chemical pesticide-free, non-GMO, and are grown with 100% recycled rainwater. This first harvest occurs as AppHarvest continues expansion plans for additional indoor farms to meet the increasing demand for sustainably grown U.S. produce. The company is preparing to list publicly after the closing of the previously announced business combination of AppHarvest with Novus Capital Corp. (NOVS) and then will trade on Nasdaq under the ticker APPH. In August 2020, AppHarvest announced that food entrepreneur Martha Stewart and author and investor J.D. Vance would join the board of directors, alongside Inclusive Capital Partners founder and managing partner Jeffrey Ubben and Rise of the Rest Seed Funds partner Anna Mason and others committed to transforming the future of agriculture and supporting entrepreneurial efforts in Middle-America. AppHarvest’s high-tech indoor farms are designed to use 90% less water with yields that are up to 30 times higher compared to traditional open-field agriculture on the same amount of land.
Corporate Japan is facing a historic reshuffle of the Tokyo Stock Exchange and aggressive new guidelines from proxy advisers designed to compel a selldown of the country’s widely criticized “cross-shareholding” networks. Cross-shareholdings are interconnected portfolios of ownership by listed Japanese companies in each other, which protect underperforming managements with a cushion of automatic investor support. Although cross-holdings have been in decline for years, companies justify them as necessary to maintain business relationships, frutstrating fund managers who view such webs as a recipe for complacency, low returns on equity, and poor governance. Almost 11% of Japan's listed companies have a listed shareholder owning a slice of more than 30%, compared to 0.9% in the U.S. and 0.2% in the UK. In a significant overhaul in April, the TSE will streamline its six boards and 3,753 listed stocks to three tiers: prime, standard, and growth. Membership of the desirable prime index will depend on the March 31 level of free-floating market capitalization, excluding cross-held shares. The change should in theory push a number of companies into asking cross-holders to sell down stakes before end-March to qualify for the prime index and the huge investment that will track the new index. In October, proxy adviser ISS implemented new guidelines calling for investors to vote at shareholder meetings against directors at any company that allocates 20% or more of its net assets to cross-shareholdings. According to Goldman Sachs (GS), about 9% of companies listed on the TSE's first section will not meet the ISS requirement. While many analysts foresee a decisive impact on Japan's companies, others warn investors to expect a reform-crushing campaign from the powerful Keidanren business lobby. ISS and Glass Lewis are not as influential in Japan as in the U.S., analysts note, and separate efforts to convince investors to vote against underperforming managements have failed. Recent activist campaigns have targeted cross-held shares, resulting in accelerated sales of strategic holdings by companies, but many remain.
Bluebell Capital Partners is calling for food and beverage company Danone (DANOY) to replace its chairman and CEO Emmanuel Faber following what it calls a "disappointing" share-price performance under his leadership. In a Nov. 19 letter to Danone, Bluebell urged the company's board to start looking for a new CEO and also split the chairman and CEO roles. Since Faber took over in 2014, Danone has delivered total shareholder returns of 21% compared with 56% for its index, Bluebell noted. “In our view, this fails to reflect the quality of the group assets,” Bluebell said in the letter. In November, Faber announced a reorganization that included cutting up to 2,000 jobs, or 2% of Danone's global workforce, and carrying out a strategic review of its portfolio of brands. Analysts at Barclays said investors would want clarity on Danone’s water division, which was down 28% in the second quarter of 2020 and 13% in the third quarter, as the Covid-19 pandemic shut down bars and restaurants. Bluebell also highlighted its concerns over Faber’s dual focus on financial performance and environmental and social goals. Bluebell isn’t the first investor to push for change at Danone. In 2012, Nelson Peltz's Trian Partners built a 1% holding in the company and agitated for change, selling the stake a year later after then chief executive Franck Riboud departed the company. Five years later, Keith Meister's Corvex Management took a $400 million stake in the French group, “but again it didn't really change anything,” said Barclays analysts. However, they noted that Bluebell, which is run by the former chief executive of Italian jeweler Bulgari, Francesco Trapani, has had some success agitating for change in other companies such as Lufthansa (LHA) and Hugo Boss (BOSS).
Investors and other stakeholders are demanding new environmental, social, and governance (ESG) regulations from the Biden administration. Business and trade groups have already sought meetings with President-elect Joe Biden's agency review teams and incoming staff to discuss potential ESG rules. Transition officials say the Biden team has focused on listening and asking questions. During his presidential campaign, Biden said he wanted to require greater disclosure of environmental risks, address racial inequality, and hold corporate executives personally accountable for violations such as corporate pollution. Biden has named Gary Gensler, a former financial regulator and Goldman Sachs (GS) executive, to lead the Securities and Exchange Commission. His pick for top economic advisor is Brian Deese, who led sustainable investing at BlackRock (BLK). Some industries say they have made progress on ESG on their own in recent years.
Bluebell Capital Partners, a London-based hedge fund founded by former Bulgari CEO Francesco Trapani, has acquired a stake in yogurt maker Danone (DANOY) and is urging the replacement of Chairman and CEO Emmanuel Faber due to "disappointing" share performance. Bluebell has not publicly revealed the size of its Danone share, whose disclosure is only mandatory if it passes the 5% threshold that triggers a filing to France's market regulator. Bluebell in mid-November submitted a letter calling on Danone's board to begin looking for a new CEO, and recommending the division of chairman and CEO roles. "The underperformance of Danone's share price has been driven, in our view, by a combination of poor operational record and questionable capital allocation choices," the fund stated in the letter. Bluebell further declared that Danone's total shareholder returns have trailed larger rivals Nestlé (NSRGY) and Unilever (UL) since Faber assumed the helm in October 2014. Danone's shares are up 2.7% since then, while Nestle's have increased 45% and Unilever's 72%. When queried about Bluebell's emergence, Danone said: "We value constructive dialogue with all our shareholders. The leadership team of Danone is highly focused on delivering long-term sustainable value." The company defended its "strong results" under Faber, citing its 3.1% average organic sales growth and 50% earnings per share growth from 2014 to 2019. The fund's arrival coincides with a problematic situation for Danone, with lockdowns depriving its bottled water business of its biggest profits at restaurants, bars, and convenience stores. Increasing costs of transport, raw materials, and logistics also have taken a bite. In response, Faber announced a major restructuring in October entailing up to 2,000 job cuts, and pledged to sell assets and trim the product portfolio. Some shareholders also doubt Faber's commitment to environmental and social goals, and are frustrated by Danone's inability to meet its financial targets. In June, investors voted for Danone to become a purpose-driven company to bring "health through food" to consumers. Danone's legal status requires it to not only generate profit for shareholders, but also do so in a way indicating that it will benefit its customers' health and the planet. "However, we feel that under the leadership of Mr. Faber, Danone did not manage to strike the right balance between shareholder value creation and sustainability," Bluebell said. The fund further noted how Unilever and Nestlé were also "extremely committed to sustainability" yet realized better shareholder returns. France has seen an increase in investor campaigns in recent years, mounted by hedge funds including Elliott Management and Amber Capital, taking aim at blue-chip companies previously thought to be untouchable. As a consequence, last year France's government mulled tighter controls on short sellers and activists, but ultimately implemented more modest measures, including a requirement for better disclosure.
Swiss-Irish baked goods group Aryzta (ARZTY) will scrap its Irish stock-market listing that dates back to 1988. The company said the decision reflected the relatively low level of trading in Aryzta shares on Euronext Dublin compared with the SIX Swiss exchange, a move to simplify regulatory requirements and reduce central costs. The center of power at Aryzta moved late last year as it parted ways with a group of Irish directors, led by then chairman Gary McGann and chief executive Kevin Toland, both of whom had been brought on board between 2016 and 2017 to try to steady a troubled company. An investor coup led by Swiss firm Veraison, which recently sold out of its 9.81% stake in the company, led to a board refresh and a new chairman in the form of Swiss food industry veteran Urs Jordi. Jordi presided over a decision on Dec. 18 to reject a €734 million takeover offer from Elliott Management. The company is now focusing on the European and Asia Pacific markets and has put its businesses in both North America and Latin America up for sale. The company aims to raise between €600 million and €800 million from disposals. Aryzta said it will be writing to Euronext Dublin to request the cancellation of the Irish listing of the group’s shares. Shares in Aryzta are down 19% over the past 12 months, notwithstanding a rally from late April.
Toshiba (TOSYY) has set Feb. 1 as the reference date for an extraordinary general meeting (EGM) requested last December by major shareholders Effissimo Capital Management and Chinook Holdings. The company said the exact date of the meeting is undecided but that it should be held within three months from Feb. 1. Sources say the meeting is expected to take place in March, while Toshiba said the date will be announced immediately after it has been decided. Effissimo has questioned voting rights exercised at the annual shareholders meeting in July last year and wants an investigation. Chinook views the medium-term management plan revised by Toshiba in November 2020 as problematic. It expressed concern over the shift to large investments in mergers and acquisitions and is requesting clarification.
On Jan. 15, Citigroup posted fourth-quarter results that beat analysts' estimates for profit as it released reserves for loan losses. Citigroup said earnings declined by 7% to $4.63 billion, or $2.08 a share, compared with the $1.34 a share expected by analysts surveyed by Refinitiv. Companywide revenue declined by 10% to $16.5 billion, below the estimate of $16.7 billion. Citigroup has been hobbled by relatively poor performance compared with competitors. The results have frustrated investors including ValueAct. The bank released $1.5 billion in reserves for credit losses, a move that was higher than predicted by analysts. That compared with a reserve build of $436 million in the third quarter and $253 million a year earlier. As a result, credit costs in the period were more than $2 billion less than a year earlier. Outgoing CEO Mike Corbat said. "As a sign of the strength and durability of our diversified franchise, our revenues were flat to 2019, despite the massive economic impact of Covid-19." Citigroup shares fell 1.8% on Jan. 15 in premarket trading. Citigroup made history when it announced Jane Fraser was taking over as CEO, making it the first major bank to be managed by a woman. Fraser is slated to address investors and analysts for the first time on Jan. 15. Shareholders want to hear how Fraser, a former McKinsey partner who oversaw Citi's Latin American operations before becoming president in 2019, will improve returns at the company. Citigroup has said it expected fourth-quarter trading revenues to rise by 15% from a year earlier, while investment banking fees should rise by 10% to 15%.
Carl Icahn's CVR Energy Inc. (CVI) is pushing for a shakeup at Delek US Holdings Inc. (DK) while denying that a takeover bid is under consideration. CVR CEO David L. Lamp said his company wants Delek to sell its retail business and cease operations at two refineries that are at competitive disadvantage, with no prospect of consistently generating cash. He continued that Delek should accept the replacement of three directors with CVR nominees at the next shareholders meeting. "Delek desperately needs new strategic direction," Lamp stated in a letter to Delek Chairman Uzi Yemin. "We would like to work collaboratively with you to replace three of your nominees at Delek's upcoming 2021 Annual Meeting." CVR's campaign coincides with investors increasingly pressuring struggling energy companies to trim costs, reduce capital spending, and boost profits. Lamp said Delek's stock is "undervalued," and Delek responded that it welcomes discussions with investors, and that a board committee "will evaluate any nominees from CVR if and when they are received." CVR is Delek's biggest shareholder with a stake of about 15%, according to Lamp's letter. Icahn controls more than 70% of CVR, and he posted a revision to a March 2020 filing where a potential takeover of Delek was raised, echoing Lamp's letter. Delek stock climbed 5.5% on Thursday, extending its gain to 87% since Icahn's initial filing on March 19, 2020, versus a 58% appreciation in the S&P 500 over the same period. Lamp also articulated in his letter that CVR has no interest in a takeover of Delek. The letter additionally urges Delek to sell its retail business "at current high prices while retaining wholesale marketing," and to halt refining operations at the Krotz Springs and El Dorado refineries and transition them to terminals, renewable diesel production, or to other operations. Also advised is for Delek to discontinue non-core supply and trading activities and all other operations that add no value to its core refining business. CVR further calls on Delek to streamline its corporate structure and reduce general and administrative expense significantly, and to stop "dropping down core refining assets into Delek Logistics Partners LP at value-destroying prices."
Ovintiv (OVV) shareholder Kimmeridge Energy Management says it is prepared to nominate directors to the oil company's board if it fails to take steps to improve its performance and restore investor confidence. Kimmeridge says the company is falling behind its peers due to misguided spending, expensive acquisitions, poor governance, and inadequate environmental stewardship. The private equity firm, which owns a 2.4% stake in Ovintiv, also wants the company to better align executive compensation with performance, sell non-core assets, and shift spending to the Permian Basin, among other measures. Kimmeridge says Ovintiv's total shareholder returns during CEO Doug Suttles' tenure, which began in 2013, have been negative 85% while his compensation has climbed from $6.7 million in 2014 to $12.6 million in 2019. Kimmeridge threatened in November that it could launch a proxy fight, as it first went public with some of its concerns around Ovintiv's executive pay.
GameStop (GME) has recorded its best winning streak ever after investor and Chewy (CHWY) co-founder Ryan Cohen joined its board. Cohen's investment vehicle, RC Ventures, is the second largest shareholder in the video-game seller. RC Ventures has been engaging the Grapevine, Texas-based retailer on undertaking a strategic review, lowering costs, and diversifying its online offerings. GameStop also has added two of Cohen's colleagues at Chewy to its board. Cohen helped build up online pet retailer Chewy, which was acquired by PetSmart for $3.35 billion two years before it went public in 2019 and saw its market value surge. Over the last four days, GameStop's market value has risen by $1.2 billion. The stock rose as much as 23% Thursday to hit a high of $38.55. Many traders are betting that GameStop will undergo a renaissance or will be sold.
Health system consultancy Evolent Health Inc. (EVH) will sell part of its business to Bright Health Management Inc. Evolent will sell wholly owned subsidiary True Health New Mexico Inc., which it formed after acquiring certain assets in 2018, for $22 million plus risk-based capital. The deal comes after Evolent entered into a cooperation agreement with investor Engaged Capital LLC in December. As part of that deal, the company’s board of directors formed a new strategy committee to strengthen operations and cut costs. Craig Barbarosh, a partner with Katten Munchin Rosenman LLP and board director for multiple companies, joined the committee and board as part of that arrangement. The deal with Engaged, Evolent's largest shareholder with a 10% stake, materialized after Engaged said in August it wanted the company to explore improvements to its core business including a potential sale. In July, Evolent had entered a deal to sell assets from subsidiary Passport Health Plan to Molina Healthcare Inc. (MOH). Evolent had acquired insurance provider Passport in May 2019 for $70 million and a 30% equity stake. Evolent was then sued over the acquisition in a class-action lawsuit alleging securities law violations. Evolent reported $264.6 million in revenue for the third quarter of 2020, up 20.2% from $220.1 million in revenue for the third quarter of 2019. Of that, revenue from True Health premiums totaled just $29.5 million for Q3 of 2020, down from $43.8 million for Q3 of 2019. This week Evolent saw more change to its board, with Bruce Felt’s departure and Kim Keck’s appointment, both effective Monday per Securities and Exchange Commission filings.
Intel (INTC) CEO Bob Swan is stepping down from the top post, effective Feb. 15, and will be succeeded by VMWare (VMW) CEO Pat Gelsinger. Swan has served as the chipmaker's CEO since January 2019 after serving as interim CEO for seven months. During his tenure, Intel has been hit hard by its industry rivals. This summer the company stated that its latest generation chips would be delayed while AMD's (AMD) were already shipping inside laptops. Apple (AAPL) announced in the fall that it will use its own proprietary chips in its Mac computers, breaking a 15-year partnership with Intel for its chip supplies. Dan Loeb's Third Point hedge fund recently took a nearly $1 billion stake in Intel and promptly called for its board of directors to explore "strategic alternatives." Third Point urged Intel to divest from "failed acquisitions" and criticized Intel for its "loss of manufacturing leadership." Third Point recently took about a $1 billion stake in Intel. After the news of Swan’s departure, Loeb said he was "a class act" and that he "did the right thing for all stakeholders stepping aside for Gelsinger."
Driver Opportunity Partners will nominate managing member Abbott Cooper for election as a director at First United's (FUNC) next annual meeting. First United shared the development in a filing, saying it was notified by Driver a few days before. Driver, which has been pushing First United to sell, unsuccessfully tried to have three nominees elected to the company's board at last year's annual meeting. First United filed a lawsuit against Driver in May in U.S. District Court for the District of Maryland, claiming the investor violated Maryland law as it amassed a 5% stake in the company. Driver filed a lawsuit against First United on Sept. 4, alleging that they lied to investors and abused the regulatory process to quash dissent and win a proxy battle.
Within days of adding Ryan Cohen, an investor and Chewy Inc. (CHWY) co-founder, to GameStop Corp.'s (GME) board, GameStop experienced an unprecedented stock increase. A rush of short covering and day trading caused the company's shares to rise by 94% on Jan. 13. Traders betting on Cohen's plans to revitalize the chain similar to how he handled Chewy contributed to the now three-day rally with the stock, in contrast to years of underperformance. GameStop shares climbed by as much as 118% in the three days since news of Cohen's addition to the board, and reached the highest price since November 2015. Short interest in GameStop remains near recent highs, with 138% of shares available for trading currently sold short, data compiled by S3 Partners shows. Cohen's spot on the board, along with two other former Chewy colleagues, was praised by financial analysts. Telsey's Joseph Feldman said in a Jan. 12 note that the three individuals will "make GameStop a more digitally focused retailer," while Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, asserted, "This is much like the chicken and egg question—did long buying lead to short covering/squeeze or short covering/squeeze lead to long buying?" Overall call volume was outpacing put volume by a rate of 2-to-1 by noon Eastern time on Jan. 13. Total call volume increased to more than four times its 20-day average, led by the January $40 calls. Those contracts are set to expire on Jan. 15.
Finance chiefs, bankers, and deal advisers say their economic outlook is improving as Covid-19 vaccines are distributed across the United States, while finance leaders are preparing for major regulatory changes. According to mergers and acquisitions executives, the second half of 2020 saw an uptick in corporate deal-making following a spring slump, and this could persist throughout 2021 as stock valuations stay high and confidence among senior executives continues to improve. "We're relatively optimistic about this year," said Bank of America Corp.'s (BAC) Steven Baronoff, who recommended that CFOs should concentrate on deals that make sense in the long term, rather than offer short-term gains in earnings. "Shareholders...more than ever before are looking for that," he explained. The incoming Biden administration could influence M&A in the year ahead, as the new president can appoint heads of agencies that vet mergers or enforce antitrust laws. Cravath, Swaine & Moore's Faiza Saeed said companies should be ready to show how potential deals could impact local communities, noting that "it's going to be important to be able to tell a story that it's good for the community in which you operate, and good for job creation." Meanwhile, investors, whose activism was mostly sidelined during the pandemic, could make a comeback in deal-making. Joele Frank, founder of the financial communications firm that bears her name, said she has witnessed more companies evaluating how they would defend their strategies from investor criticism.
Bluebell Capital Partners' Active Equity Fund has gained significant momentum since its launch in November 2019. The fund has generated a 6% return during 2020, gaining good momentum in the latter half of the year, against a Eurostoxx 600 return of -4%. Bluebell was founded by current CIOs Giuseppe Bivona and Marco Taricco, as well as Chairman Francesco Trapani. Bluebell runs campaigns focused around large cap companies, predominantly in Europe; its current portfolio comprises nine positions in Europe and one in the U.S., with a medium-term investment horizon. Recent investments have included Italian financial services firm Mediobanca (MDIBY), Dutch wind turbine manufacturer Vestas (VWDRY), German airline Lufthansa (DLAKY), Canadian movie theater chain Cineplex (CPXGF), and German luxury goods company Hugo Boss (BOSS). Taricco believes Bluebell's investment approach is “more conducive and more adaptable” to larger companies than smaller ones. Taricco also touches on how the firm's ability to mobilize more capital for campaigns stems partly from the networks it built and fostered during its early years as an advisory business. Bluebell uses a range of campaign styles, though Bivona suggests a collaborative approach is often more conducive to broader campaigns when external investors are involved. While 2020 was a particularly difficult economic environment, Bluebell gained “enormous traction and visibility in most of our campaigns,” Bivona observes. The firm also has a strong focus on environmental, social, and governance issues, which Bivona says form a core part of each of its investment campaigns. With the fund's first full year of trading completed, Bivona and Taricco are optimistic for the year ahead, noting that “significant inefficiencies” remain across large swathes of markets and companies in Europe.
Pressure is building on French food group Danone (DANOY) to turn things around now that Bluebell Capital Partners is pushing for change. The London-based hedge fund took a stake in Danone after launching in November 2019. Bluebell has sent a letter to company management that calls for the removal of Emmanuel Faber as chairman of Danone and for separating the chairman and chief executive officer roles at the company. Bruno Monteyne, an analyst at U.S. investment bank AllianceBernstein, says there is clearly a conflict in roles at Danone and Faber likely has one year left at the company. Alain Oberhuber, an analyst with investment bank and financial services firm Stifel, believes the call for Faber's departure is justified, although Faber is likely to stay and nominate a chairman and investors are likely to press the company for his removal. Executing the company's new strategic plan will be key for the current management team, says Jon Cox, an analyst at finance house Kepler Cheuvreux. "I would expect piecemeal disposals of businesses and lines that are not contributing to growth and profitability but not an outright disposal of any of its divisions," he says.
The number of major European companies with high participation of women in leadership positions has doubled over the past year. Still, there was less progress made on gender diversity in top jobs, according to figures released by Brussels-based association European Women on Boards. The European Union-sponsored nonprofit analyzed 668 of Europe's top listed companies and found that the number with high scores on the gender diversity index rose from 32 in 2019 to 62 in 2020. The association further revealed women made up just over a third of the analyzed companies’ boards, but held only 14% of C-suite jobs. The study also found women were hit harder by the pandemic.
To understand how BHP (BHP) has come to abandon its UK listing, one can look back a few years to when 5% shareholder Elliott was pushing for an end to the Australian miner's dual listing. At that point, there was a $1 billion tax roadblock that stood in the pathway of unification. One large element of that obstacle crumbled in 2018 and 2020 when various tax authorities dealt with the issue of BHP using Singapore as a conduit through which it sold its product. Another impediment to BHP cleaning up its capital structure was the treatment of tax losses from NSW coal mines. As part of a corporate tidy up in the lead up to an asset sale, BHP announced on Wednesday it had written down the value of these tax losses. With both the tax issues resolved, BHP's largest impediment now is the will to proceed. When Elliott began agitating for listing unification of BHP Group Ltd. and BHP Plc back in 2017, BHP was disinclined to entertain the proposition. Elliott's lobbying effort was then part of a far larger push for the resource conglomerate to sell assets, reallocate capital, and apply more rigor to acquisitions. It argued that the unconventional onshore oil/gas shale assets should be divested as a priority and the offshore conventional oil assets should be next. Former BHP chief executive, Andrew Mackenzie, ultimately did sell the shale assets for a tidy price of $10.8 billion. The company didn't agree with Elliott's views on conventional oil and it remains one of BHP's key commodity pillars. At some point in 2019 Mackenzie appears to have engineered a truce with Elliott. By 2018 BHP management appeared to have softened its stance on the topic of reunification, suggesting that it would look to simplify its capital structure.
Activists, ratings agencies, and regulators are now demanding that companies take real action on environmental, social, and governance (ESG) goals. Shareholder activists are attacking boards of directors over their ESG promises, claiming they have misled investors and other stakeholders. Employee activists are filing lawsuits and going public with protests over failures to make good on promises, and the Biden administration is poised to regulate companies with ESG in mind. According to an Edelman survey of 8,000 people in six countries for its most recent Trust Barometer Survey of Brands Amidst Crisis, 86% are expecting brands to solve both societal and personal problems, as opposed to their governments. Only 31% said that the brands are living up to their expectations of helping the country and its people meet pressing challenges. Meanwhile, in Edelman's Institutional Investor Trust Survey, 79% of investors said that during Covid-19 their firms are deprioritizing ESG as an investment criteria. A high percentage of investors also said the companies they invest in have deprioritized ESG initiatives.
Elliott Management is finally pulling out of Hong Kong after winding down its operations since 2018. This decision could have to do with the mainland money flooding Hong Kong's stock market as Chinese retail investors are poised to transform it. Traditionally, Hong Kong’s marketplace has been dominated by foreign institutional investors, but this is changing. This week, trading by Chinese investors via Stock Connect accounted for roughly one-third of the total turnover, a record high. This flow is unlikely to ebb any time soon because mainlanders see Hong Kong as a safer bet, offering better market breadth than the Shanghai or Shenzhen bourses, where gains are concentrated in only a few blue-chip growth names. Furthermore, the newcomers arrive with a different set of preferences for liquidity and valuation metrics, and they might even have a different definition of value investing—Elliott's central tenet. Given the choice, foreign investors would more likely bet on less volatile stock, while mainlanders appear to prefer risk. While they may admire Elliott's feats, the Chinese don't have the hedge fund's patience, a key virtue for any activist fund. There's little reason for the hedge fund to remain and have to engage with momentum-driven, growth-oriented newcomers.
Engine No. 1, a tiny hedge fund that has just a $40 million stake in ExxonMobil (XOM), appears to be in a strong position to shake up the oil and gas giant. Exxon is in poor financial shape, and Engine No. 1's campaign is focused on the financial consequences of the company's irresponsible approach to climate change, which is a message broader shareholders can support. Engine No. 1 has made reasonable recommendations such as imposing greater long-term capital allocation discipline, implementing a strategic plan for sustainable value creation, and realigning management incentives. The hedge fund is skilled in proxy voting, and there is a good chance it can secure the necessary votes to get its four candidates elected to Exxon's board. The California State Teachers' Retirement System, which owns $300 million of Exxon shares, already has come out in support of Engine No. 1. The campaign is part of the trend of firms engaging companies on more long-term financial considerations.
Bluebell Capital Partners has a good chance of bringing about change at French food group Danone (DANOY), which could use a management overhaul. The investor wants Danone to split the chairman and chief executive officer roles at the company, and appoint an independent chairman. The demand could lead to the replacement of CEO and Chairman Emmanuel Faber, who has led the group since 2014. Danone is facing its second engagement campaign in three years, and according to a recent survey by Bernstein, only 10% of investors are pleased with current management. Bluebell decided against pressing Danone to take on more borrowing or to put itself up for sale. The French government resisted a potential takeover of Carrefour (CRERF). Although Danone faces some tough issues, better governance would enable the group to rebuild trust and confidence with shareholders.
Tech stocks including ACI Worldwide Inc. (ACIW) appear to be likely takeover candidates in 2021 as the outlook for merger and acquisition (M&A) activity improves. Companies in tech and tech services made up nearly a quarter of M&A watchlists in a Bloomberg survey of a dozen event-driven traders, analysts, strategists, bankers, and fund managers. ACI Worldwide Inc. landed on watchlists last month after investor Starboard Value LP, wielding its 9% stake, urged the company to sell itself amid industry consolidation. Global Payments Inc. (GPN) also showed up as a takeover candidate after talks for a merger deal between it and Fidelity National Information Services Inc. (FIS) fell apart. Payments firm deals stand to continue, with the likes of JPMorgan Chase & Co. (JPM) chief Jamie Dimon on Friday saying that he would consider such an acquisition. M&A transactions in technology, media, and telecommunications ticked up in the back half of 2020 amid a flood of big-ticket transactions. Property information and analytics provider CoreLogic Inc. (CLGX) and defense and transportation systems provider Cubic Corp. (CUB) were mentioned the most. Both are tech-related companies that sit in the industrials sector and landed on watchlists as a result of activist involvement. DXC Technology Co. (DXC) was also mentioned more than once, and was recently confirmed to be the target of French IT firm Atos SE.
The number of environmental, social, and governance (ESG) issues that can pose financial risks to corporations exploded last year. Amid the coronavirus, everything from climate change to employee diversity to human rights abuses took front and center stage. However, while many CEOs now take ESG seriously in their decision making, one powerful constituency is lagging—corporate boards. Many boards have little ESG-related expertise. A significant number do not even recognize the need to pay attention to material sustainability issues. For example, PWC's 2020 Annual Corporate Directors Survey found that just 38% of board members think ESG issues have a financial impact on their company's bottom line. The lack of expertise is especially stark. According to the Harvard Business Review, "We followed up PWC's study by analyzing the individual credentials of 1,188 Fortune 100 board directors in 2018...and found that less than one-third [29%] had relevant ESG expertise."
Researchers estimate that Institutional Shareholder Services and Glass Lewis sway 6% to 33% of any given investor vote. Proposed legal reforms of the proxy advisory industry range from creating rules for proxy advisers along the lines of those governing credit rating agencies, imposing fiduciary duties on advisors or mandating testing and disclosure of the value of their recommendations, to moving to pro-rata voting. But a simpler idea would be to take advantage of technological disruption in the form of a voting visibility database. Such a website would be managed autonomously and would capture intended voting positions of active funds ahead of shareholder votes. Index funds could use the data to inform their voting. There would be no need for any legal changes. A voting visibility database would help offset the influence of proxy advisory firms, and in turn, improve the quality of shareholder voting.
Assessing 2020 performance will be a key factor that will impact the 2021 compensation season. Preset financial goals for 2020 may no longer provide a meaningful measure of company performance due to the impact of the pandemic. Directors may need to exercise discretion and rely on subjective judgments regarding individual and company performance. Companies will need to provide clear, detailed disclosure of their 2020 compensation decisions, and early, proactive shareholder outreach will be very important for those anticipating a challenging say-on-pay vote in 2021. Due to the increased focus on environmental, social, and governance (ESG) matters through shareholder proposals and requests for disclosure, companies will need to consider including relevant ESG objectives among their incentive compensation performance goals. Moreover, companies continue to face the threat of shareholder activism and unwanted takeover attempts during the pandemic. As a result, companies will need to review and maybe strengthen compensation-related arrangements that maintain stability while facing an activist challenge or a change in control.
Market uncertainty has exacerbated the trend of investor engagement around the world. The U.K. and other countries have been adopting mechanisms that provide fertile ground for claims that can lead to an increase in litigation for multinational public companies. In the U.S., courts have narrowed the scope for bringing foreign claims. As a result, shareholders are seeking alternative jurisdictions, and countries have responded by developing their own legislation to accommodate such actions. The U.K. has now become a preferred destination for collective shareholder litigation. Companies will need to be aware of the risk of investor actions and track the jurisdictions in which they may face claims.
Last month Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules that would focus on promoting diversity. The rules would require companies to have, or explain why they do not have, at least two diverse directors, including one who identifies as a woman and one who identifies as either an underrepresented minority or LGBTQ+. Nasdaq’s efforts to promote diversity on boards has received broad support, especially for its "comply or explain" approach. The Council of Institutional Investors (CII) supported the proposal, saying that diverse boards can boost financial performance, but that quotas may lead to "check-the-box" diversity. New York City Comptroller Scott Stringer also voiced support for Nasdaq’s plan, writing that the proposed rules would "provide investors with vital information to inform investment and proxy voting decisions." At the same time, Stringer recommended that the proposal go further by requiring companies to identify their directors as individuals, not in aggregate, and that the proposed director matrix requirement be widened to include their skills, experience, and attributes. Stringer last year led a campaign that resulted in 34 S&P 100 companies agreeing to release the composition of their workforce by race, ethnicity, and gender through their annual EEO-1 report data. On the corporate side, companies including Microsoft (MSFT) and Facebook (FB) have expressed support for the proposal. David Bell, co-chair of the corporate governance practice at Fenwick & West, argues that the statistical data sought might create privacy concerns for some directors. Bell suggests this potential issue could be avoided by modifying the board diversity matrix. The CFA Institute said it generally supports Nasdaq's plan but encourages it to consider whether the proposed diversity definition could be improved by adding factors such as disability and veteran status.
Activist campaigns are likely to pick up again in 2021, this time with a greater focus on environmental, social, and governance (ESG) performance, risk management, and crisis response. With respect to proxy proposals, Okapi Partners data shows that more than 850 shareholder proposals related to ESG issues were filed and 71 passed during 2020. Many investors, not just activists, view ESG factors as vital elements of a company’s performance. Cybersecurity risks are also likely to play a role as recent high-profile breaches have drawn attention to their destructive impact. Global losses from cyber-crime in 2020 have been estimated at nearly $1 trillion, up from $600 billion in 2018. According to a survey by PwC, only 32% of corporate directors think their board understands their company's cyber-security vulnerabilities very well. With the benefit of hindsight, activist investors in 2021 may challenge how well management and the board responded to the Covid-19 crisis. Companies will need to boost shareholder engagement and assess their own vulnerabilities in light of these developments.
Companies are focusing more on corporate governance due to the European Union's Sustainability-Related Disclosure Regulation, which takes effect March 2021. Investee companies will need to follow good governance practices, as a baseline, in order to be classified as a “sustainable investment.” Certain entities will be obliged to maintain distinct compliance functions. Corporates are already facing greater pressure from stakeholders to increase gender and ethnic diversity at the board level. L&G (LGGNF) has stated that, beginning in 2022, it will vote against companies with boards that lack ethnic diversity. Market trends suggest that sustainable classifications will become increasingly important for companies to retain access to capital markets and other financing. The disclosures required under the Sustainability-Related Disclosure Regulation may lead to enhanced stakeholder awareness. More proactive financial market participants may look to initiate greater stakeholder engagement over a company's approach to sustainability.