Institutional investors represent perhaps the most important segment of shareholders that both management and dissidents must appeal to in the course of an activist campaign.
A new study of institutional investors published by FTI Consulting, Inc. (the Study), a leading US-based corporate consultancy firm, reveals interesting findings about the attitudes of such investors toward shareholder activism. The Study, which surveyed over 100 institutional investors representing $1.7 trillion in assets, shows that institutions have become increasingly engaged in their portfolio companies and more supportive of activist shareholders.
A strong majority of institutional investors now view shareholder activism positively, with 76% of those surveyed holding a favourable view of activism, and 84% believing it adds value to a target company. Specifically, the Study found that institutional shareholders believe that shareholder activism positively impacts shareholder value by: a) providing a catalyst for change; b) helping align the interests of the company with that of shareholders; and c) forcing companies to sharpen their strategic focus.
A majority of the institutional investors surveyed, however, expressed misgivings that shareholder activism may elicit corporate decision-making that is focused on short-term gains at the expense of long-term profitability, highlighting an important difference between the goals of many activists and those of the generally more stable institutional investors.
Companies facing an activist shareholder should take note of the Study’s conclusion that “when institutional investors support activist campaigns, they are primarily supporting campaigns for ‘change’ rather than the specifics of that change.” In other words, if the management of a target company is able to present its institutional investors with a better roadmap for change, it stands a good chance of surviving the activist volley and becoming a better company in the process.
The Study made several other important findings:
- Institutional investors viewed poor stock performance, ineffective capital deployment and poor corporate governance as the top characteristics contributing to a company becoming a target of shareholder activism. Even so, the Study found that in certain cases institutional shareholders may view a company that outperforms the market as one that could benefit from activism.
- Institutional shareholders surveyed were cool to some of the common lines of attack by target companies resisting activist shareholders, signaling that such companies may wish to reconsider their strategies. For instance, while target companies regularly challenge the need for and qualifications of dissident shareholder nominees, 77% of institutional shareholders surveyed believed companies benefit from shareholder-nominated independent directors. Similarly, target companies often argue that, to be qualified for board representation, dissident nominees must have significant shareholdings in those companies. However, only 30% of institutional investors agreed that this is an important attribute for independent director nominees.
- Overwhelmingly, the most important qualifications for dissident director nominees among those surveyed were: a) knowledge of the company’s industry; b) financial expertise; and c) knowledge of the company itself. Significantly lower on the list of desirable qualifications were investment expertise, prior experience as a director, experience as a c-suite executive, and significant investment in the company.
- 76% of institutional investors surveyed support an increase in shareholder activism in jurisdictions where it is not currently prevalent, including Europe, Asia and Latin America.