Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

This public program was initiated in collaboration with The Conference Board Task Force on Corporate/Investor Engagement and with Thomson Reuters support of communication technologies. The Forum is providing continuing reports of the issues that concern this program's participants, as summarized  in the January 5, 2015 Forum Report of Conclusions.

"Fair Access" Home Page

"Fair Access" Program Reference

 

Related Projects 2012-2019

For graphed analyses of company and related industry returns, see

Returns on Corporate Capital

See also analyses of

Shareholder Support Rankings

 
 
 

Forum distribution:

Corporate adviser embraces professional opportunities generated by activist advocacy of social issues

 

For the initial explanation of professional fund manager interests attributed to an unidentified "commentator" in the article below, see:

 

Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, January 31, 2018 posting

Activists and Socially Responsible Investing

Posted by Charles Nathan, Finsbury LLC, on Wednesday, January 31, 2018

Editor’s Note: Charles Nathan is a senior advisor at Finsbury LLC, and an adjunct professor of law at Yale Law School and Columbia Law School. This post is based on a commentary by Mr. Nathan. Related research from the Program on Corporate Governance includes Who Bleeds When the Wolves Bite? By Leo E. Strine, Jr. (discussed on the Forum here), and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

At first blush, activists embracing socially responsible investing sounds like an oxymoron. After all, a common perception is that activist investors are solely financial engineers who seek short-term stock market gains by leveraging balance sheets, selling off valuable corporate assets and imprudent cost-cutting of R&D and other long-term value creators. What could be farther from short-term financial engineering than socially responsible investing, which typically looks to a much longer-term impact on the company’s financial and commercial performance?

However, like so much in life, the real world is far more complicated and harder to categorize. First, many activist campaigns are not about financial engineering in any sense. While activists sometimes do campaign on platforms that include (or perhaps consist principally of) cost-cutting, far from all of these are imprudent cost reductions at the expense of long-term growth. More important, many activist campaigns focus on building the business through better organizational structures and/or more effective focus on improving the quality of goods and services. Indeed, the latter type of activist investor policy has been in the ascendant among leading activist investors for several years now.

But even so, a focus on organizational, operational and product improvement seems a far cry from socially responsible investing. So it attracted some notice when Trian Partners modified its web site last year to add a statement embracing ESG and a compendium of ESG highlights at its current portfolio companies. For example:

“Trian believes that ESG issues can have an impact on a company’s culture and long-term performance and that companies can implement appropriate ESG initiatives that increase their sales and earnings.”

“We also believe that the consideration of ESG factors enhances our overall investment process.”

Trian’s ESG investment policy does seem significantly different from the ESG investment policies of many leading institutional investors, particularly the largest index investors (e.g., BlackRock, Vanguard and State Street). Indeed, the examples of its ESG investing which Trian provides on its website could as easily have been posted by a conventional institutional investor highlighting its ESG initiatives, such as promoting diversity in the workforce, director independence, board refreshment, emission and waste reduction and adoption of supplier codes of conduct.

The similarity of Trian’s ESG policy to that of other major institutional investors suggests it has two complementary purposes.

  • First, an increasing number of institutional investors believe that a company’s economic performance and stock market valuation is frequently dependent on specific ESG issues inherent in its business model and are thus integral to any investment decision involving the company. It is natural for Trian as a value investor to subscribe to this investing policy.

  • Second, the success of Trian’s activist business model depends on support for its company specific campaigns from traditional long institutional investors. In this view, Trian’s very public embrace of ESG investing can be viewed as courting, in particular, the three major index investors (all of whom are staunch supporters of ESG investing), as well as state and local pension funds, union pension funds and other core corporate governance activists who almost universally champion ESG investing.

More recently and far more dramatically than Trian’s embrace of ESG investing, Jana Partners published a joint letter with CalSTRS calling on Apple to recognize the potential dangers to children and teenagers of too frequent use and abuse of their iPhones and to implement a far-reaching program of research on the effects of excessive social media use by youngsters as well as far more sophisticated and effective programming choices on iPhones to enable parents to limit the devices’ usage by their children.

In addition, Jana announced that it was planning to raise a new fund, called Jana Impact Capital. According to a press report, the new Jana fund is targeted at $1.7 billion and would invest in companies that “are good bets but could do better for the world. The fund’s board of advisers includes Sting and others who have a track record of pressuring companies on environmental, social and governance issues.”

The Jana and CalSTRS campaign at Apple, and presumably the investment thesis of its proposed Impact Fund, are clearly of a different order from Trian’s approach to ESG investing. Jana is not merely taking ESG into account in its investment analysis, it is going a significant step further by using one or several ESG issues as the fulcrum of its activist campaign. The obvious questions are what is Jana hoping to accomplish and what are the possible impediments to its goals?

An obvious answer would be to foster positive ESG change at a target company thereby enhancing the value of Jana’s equity position. There are, however, at least two underlying problems with this explanation.

  • Will the ESG issue championed by Jana resonate sufficiently with other investors to motivate the target company to adopt the proposed policy change without requiring more aggressive moves by Jana? The answer is more complicated than it might initially seem. It is probably yes, if there is broad institutional investor support and the change doesn’t materially alter the company’s business model. But if that’s the case, how likely is the change to produce a sufficient up-tick in the company’s stock price to justify the activist campaign?

  • On the other hand, if the company rejects the proposed ESG change, will it matter enough to enough shareholders to give credence to further more aggressive agitation by the activist? Historically, ESG issues have not been viewed as sufficiently connected to value to create this sort of leverage for its proponents. Will Jana be able to identify ESG issues that have so much appeal to institutional shareholders that the ESG issues can serve as the fulcrum for a threatened or actual proxy contest?

There is, however, another, somewhat cynical, explanation of Jana’s ESG strategy. As one commentator speculated:

“The [Apple campaign] will almost certainly help Rosenstein [the head of Jana] as he seeks capital allocations from public pension funds for his traditional activist fund and its more aggressive, less friendly agitations….Also, it could help Jana Partners gain support for its campaigns in the form of votes of big institutional investors…The [Apple] campaign fits squarely within the category of…ESG, an investing category that sizeable public pension funds such as CalSTRS as well as the primary index funds, including Vanguard Group, State Street, and BlackRock, are concentrating on heavily.”

This speculation about Jana’s motives also notes that the Jana’s new fund will not charge investors the traditional hedge fund “2 and 20”—that is a fee equal to 2% of the investment plus 20% of the profits. Rather, according to press reports its fee structure will be just 2% of invested fund with no success fee. The supposition is that the proposed fee structure illustrates that Jana is not counting on its ESG activism to achieve profits of the same order as its more traditional activist investing. Rather, Jana’s principal purpose is to create a “halo” effect that will advance Jana’s traditional activist investing model in terms of support for its activist campaigns by and its asset gathering from the larger index investors and state, local and union pension funds.

The more cynical explanation of Jana’s strategy has its flaws, as well. It ignores that Jana’s business model, both as an asset gatherer and as an activist investor, is wholly dependent on its ability to provide outsize returns for its investors. Creating an ESG fund that doesn’t and isn’t intended do this may adversely affect its conventional asset gathering. Moreover, Jana’s credibility and success as an activist investor is clearly based in large part on its history as a successful and to be feared opponent. A history of issuer friendly ESG investing (as it seemingly is positioning its Apple foray) and/or of failed activist ESG campaigns will not burnish its record as a conventional “to be feared” activist investor.

If Jana’s strategy and the success of that strategy are murky, so is the play book for its corporate targets. Right now, the strategy is too new and uncertain to make useful predictions, let alone develop prototype company response playbooks. At least initially, a company that is targeted by an activist ESG campaign will have to evaluate its situation against a relatively blank slate in terms of prior experience. Moreover, its response will have to be tailored to the precise ESG issue it is facing and the economic consequences of its acceding to or contesting the proposal. For Apple to embrace the Jana/CalSTRS proposals would not be the same as Exxon agreeing to an ESG based proposal to cease its ocean-based oil drilling and production. The only sensible advice for companies worrying about the implications of Jana’s attempt to create an ESG based version of activist investing is simply to “stay tuned to the program.”

 

Harvard Law School Forum on Corporate Governance and Financial Regulation
All copyright and trademarks in content on this site are owned by their respective owners. Other content © 2018 The President and Fellows of Harvard College.

 

 

This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.