Activism’s New Paradigm

There has been a pronounced change on the part of shareholders—their makeup, tactics, goals and powers—a fact that every public company must pay close attention to today.

Shareholder activism in the U.S. has increased greatly over the past decade, measured not only in scope and the pools of capital dedicated to it but also in sophistication and in the range of tactics employed. There is currently more than $120 billion in dedicated activist funds at work, and these funds launched nearly 300 activist campaigns globally in 2016. Another 400 campaigns were launched by “occasional” activists.

Indeed, a fair number of companies should expect a knock at their door soon—21% of the S&P 500 were approached publicly by an activist in 2016 according to FactSet (and many others received quiet, private overtures). Such activism will likely grow more prevalent, as it has proven to generate alpha (i.e. uncorrelated returns) for these funds’ investors.

Activists and activism draw sharp emotional responses: some cheer activists as appropriate scolds of lazy and under-performing Boards; others paint activists as locusts focused solely on short-term strategies. Activism is a natural outgrowth of our market’s structure and can be a force for good. All capital markets need a mechanism to “police” strategy selection and Board performance in those rare instances when the corporate governance system does not work.

“For the most part,
our system of corporate governance does work.”

For the most part, our system of corporate governance does work, and Boards self-correct to put companies on the optimal strategic path. But the Board mechanism is not perfect: Not all boards are as independent as they ought to be and directors also have some interests, such as director fees and job continuity, that differ from shareholders.

For these reasons and others, activists can and do play an important role as last-resort overseers of the shareholders’ interests, but as in every human endeavor, some perform better than others.

Activist techniques were once used only by specialist funds. Now, traditional, long-term investors are adopting (and adapting) activist techniques, increasing the volume of shareholder engagements. They’ve seen that engagement at companies with sub-optimal strategies or under-performing management teams can help generate alpha. It also can help justify the larger fees charged by active managers. At the same time, some specialized activist funds are taking a longer-term view of performance.

All of these factors are driving a new wave of shareholder activism, with campaigns often reaching outside traditional targets. Companies of all sizes and types can have “opinionated” stockholders.

Today, in fact, even good stock performance does not immunize a company. Take the  example of restaurant chain Buffalo Wild Wings. Over the 14 years since the company went public in 2003, the stock compounded shareholders’ money by 24% per year, dramatically outperforming its casual dining peers. On operating metrics, the business also outperformed nearly all of its peers. In the three years before the spring 2017 proxy battle, the stock was up 18% in a difficult sector, where many of its peers had gone belly up. Yet, even a strong performance like this did not protect Buffalo Wild Wings from Marcato Capital’s advances and demands.

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