The Long and the Short of It: Institutional Investors’ Views on Activism

SquareWell Partners (“SquareWell”) conducted a survey of over 30 institutional investors collectively responsible for more than $35 trillion in AUM from North America, Europe, and Asia. The survey engaged both Stewardship Team professionals and Portfolio Managers from investors of a range of sizes, employing both active and passive strategies, ensuring a balance of perspectives.

Survey questions were organized around three key themes: (1) Views on Activism, (2) Evaluation Criteria, and (3) Engagement Dynamics.

The full survey can be downloaded from our website: https://squarewell-partners.com/insights/

(1) Views on Activism

Investors overwhelmingly agreed that activism is a valuable market force; roughly three-quarters of responses appreciate the role of activists in catalysing change and driving accountability. More than half of respondents also credited activists with bringing fresh perspectives and promoting transparency and engagement from the target company.

Despite this widespread appreciation for the outcomes of activism, two-thirds of respondents remain cautious that activists can overlook complexities by having a narrow focus. Half of investors surveyed cited short-termism as a primary concern.

As shown in the graph, main contributors to an activist’s credibility are intrinsically linked to these factors. Given the prominence of investor concern that activists have a narrow and short-term focus, the central element to credibility is the quality of the arguments made. Similarly, given investors appreciate activists most for catalysing change and bringing accountability, an activists track record elsewhere matters. Features like length of investment and holding size, are seen to be less relevant.

Graph 1

(2) Evaluation Criteria

In making the case for change, respondents ranked Return Metrics (TSR, ROIC, ROE..) and Profitability Ratios (Operating Margin, Net Profit Margin…) as the most appropriate for evaluating company performance.

Poor governance was seen as a trigger for activism by a large majority of respondents (84%), reflecting the 71% of investors that confirmed they were most comfortable supporting board-related activism (i.e. affecting governance or management change).

The other types of activism – M&A, Balance Sheet and Operational – were significantly less supported, indicating that while these issues may be strong underlying rationale, investors prefer governance-related demands. As shown in the graph, when these demands are taken to a shareholder vote, investors consider the proposal’s justification to be the first hurdle, followed by assessments of overreach, prescriptiveness, and proposals matching issues identified.

Graph 2

 

(3) Engagement Dynamics

Reflective of the content of activism campaigns, Fund Managers play a leading role in final voting decisions – with the support of Stewardship Teams. Only 16% of respondents indicated that the final voting decision is taken by the Stewardship Team alone.

Investors reported that they primarily engage with campaigns through letters and press releases, followed by direct engagement and fight decks. Dedicated websites and webinars ranked lower, potentially reflective of the limited use of webpages for content delivery, and the preference of investors for direct engagement versus group webinars.

Nearly half of investors said they were open to engaging before a campaign is public, and as shown below, just over half responded that they actively engage with other investors (other than the activist) to discuss a campaign. This openness to engage offers activists an opportunity to gain traction with large holders and heightens the responsibility on companies to maintain strong relationships throughout the shareholder base.

Graph 3

 

Concluding Remarks

Responses from the survey indicate that companies are at risk if they rest on their laurels when it comes to investor relations. At a time where long-term institutional investors are increasingly more willing to engage with activists, and amongst each other,  companies must have confidence in the alignment of the shareholder base with the equity story being told.

This increases the importance of peacetime engagement activities, recognising these as the first line of defence to an activist situation, should one arise. Companies must ensure engagements are impactful by asking the following questions:

• Do we understand our investors (including their investment strategies, the decision makers, and the inputs of third-party research)?
• Do we understand what investor sensitivities exist, and for which constituencies?
• Are we involving the right people? Should board members be part of the engagement to better instil trust in elected representatives?
• Are our engagements leading to valuable investor feedback and actionable items?

A thoughtful approach to these questions not only strengthens shareholder relations but also enhances a company’s ability to anticipate and address concerns before they escalate. For companies aiming to build trust in the capital markets, prevention is better than remedy.