Jeffrey Sonnenfeld, Yale School of Management
Scott Mlyn | CNBC
As this year’s proxy season draws to a close, defeat after defeat for activist investors in proxy fights this year – most prominently at Disney and Norfolk Southern – raises the question: Are activist investors increasingly getting de-activated, losing their credibility and power? These self-styled “activist investors” are distinct from the original activists who helped catalyze needed governance reforms two decades back.
Whether today’s activist investors contribute any genuine economic value is open for debate. Their own track records suggest the answer has been a resounding “no.” We revealed previously during a misguided campaign against Salesforce, that practically every major activist fund dramatically trails the returns of passive stock market indexes such as the S&P 500 and the Dow Jones Industrial Average, over virtually every and any time period while Salesforce’s value soared.
It is no wonder investors are becoming increasingly wary in allocating toward activist funds, if not withdrawing their money altogether. Assets under management have slid in recent years, reversing a decades-long growth trend.
Even many activists themselves acknowledge that activism itself will need to evolve to deliver more value, as Nelson Peltz’s son-in-law and former Trian partner Ed Garden said on CNBC in October.
Today’s activists find themselves under siege on not only their value proposition and credibility, but their entire purpose. Many of today’s activist investors are a far cry from the original, heroic crusaders for shareholder value who pioneered the activism space decades ago. The genuine, original activist investors include Ralph Whitworth of Relational Investors, John Biggs of TIAA, John Bogle of Vanguard, Ira Millstein of Weil Gotshal, as well as Institutional Shareholder Services’ co-founders Nell Minow and Bob Monks. They were at the forefront of a virtuous and necessary movement in corporate governance, bringing accountability, transparency and shareholder value to the forefront while exposing and ending rampant corporate misconduct, cronyism and excess.
But over past two decades, the noble mission and language of these genuine investor activists was hijacked by the notorious “greenmailers” of that era – that is, parties that snap up shares and threaten a takeover in a bid to force the company to buy back shares at a higher price. This is why the original activists such as Nell Minow and Harvard’s Stephen Davis so often part ways in many of today’s activist campaigns.
Today’s activist campaigns will occasionally expose genuine misconduct and mismanagement – such as Carl Icahn’s campaign against Chesapeake Energy’s Aubrey McClendon, who was ultimately indicted. Far more often, however, activist plans nowadays seem to consist of stripping target companies down to the studs, breaking healthy companies into parts, cutting corners on necessary capex and other short-term financial engineering, all to the long-term detriment of the companies and shareholders they are supposed to be helping.
No wonder shareholders are rejecting the approach of these profiteering activists, seemingly understanding that they bring more trouble than they are worth. We found that across the last five years at publicly traded companies with a market cap greater than $10 billion dollars, activist investors have substantively lost every single proxy fight they initiated, including at Disney and Norfolk Southern this year, and failed to oust even a single incumbent CEO – despite spending tens if not hundreds of millions of dollars on each fight.
This streak of defeats for activists in proxy fights has many commentators wondering whether there is even any point to these engagements. As author and former investment banker Bill Cohan wrote in the FT, “I, for one, increasingly have no idea what the point of proxy fights is anymore. They are wildly expensive. They are extremely divisive. They go on for too long. Isn’t it obvious by now that proxy fights have outlived their usefulness?”
Considering their evident inability to buy victory at the ballot box, more activists are bludgeoning their target companies into preemptive settlements, often highly favorable to the activists short of a change in CEO, including at companies such as Macy’s, Match, Etsy, Alight, JetBlue and Elanco. In fact, more than half of companies defuse proxy fights through negotiated settlements today, whereas only 17% of boards caved into activists in offering preemptive costly settlements 20 years ago. But some argue the pressure activists bring to bear in pushing for settlements amounts to little more than glorified greenmailing under a different name, with activists receiving preferential treatment and cutting the line past far larger shareholders thanks to their bullying.
Meanwhile, the credibility of the cottage industry of proxy firms profiteering from the drama of activists’ campaigns is imploding even more than that the activists themselves. Leading business voices such as JPMorgan CEO Jamie Dimon are openly questioning the credibility of proxy advisors such as ISS and Glass Lewis, whose recommendations used to shape many proxy fights: “It is increasingly clear that proxy advisors have undue influence…. many companies would argue that their information is frequently not balanced, not representative of the full view, and not accurate,” wrote Dimon in his shareholder letter this year.
Indeed, in the highest-profile proxy fights this year, including Disney and Norfolk Southern, proxy advisors overwhelmingly favored the activists over management, but all ended up with egg on their faces when shareholders resoundingly rejected their recommendations.
Ironically, these proxy advisors were originally created in the 1980s alongside peer shareholder rights groups such as the Council of Institutional Investors, the United Shareholders Association and the Investor Responsibility Research Center to protect workers and investors from greenmailers. However, since then, these proxy advisory firms have traded hands between a rotating cast of conflicted foreign buyers and private equity firms. ISS alone traded hands over a half-dozen times in the last roughly three decades. One wonders how ISS can be evaluating long-term value for shareholders when their own governance shows that their ownership has a shorter shelf life than a can of tomatoes.
Of course, not all activist investors are alike. Some, like Mason Morfit’s ValueAct, prize constructive relations with management and eschew proxy fights, while recognizing that corporate America is surely not free of misconduct, waste and excess. However, given the failing financial performance of many of today’s activist investors, their losing streak in proxy fights and increasing public rejection of their bullying tactics, the credibility and value of activist investors writ large is increasingly imperiled. We must always be on guard for deception and greed masquerading as nobility.
Jeffrey Sonnenfeld is the Lester Crown Professor in the Practice of Management at Yale University. Steven Tian is the research director at Yale’s Chief Executive Leadership Institute.