After years of growth in shareholder activism activity, the onset of COVID-19 across the world caused a decline in shareholder activism campaigns in the spring and summer of 2020. Economic recovery in the second half of the year coincided with the end-of-year proxy season. And gave rise to a renewed appetite for activist campaigns that continued through the first half of 2021. While uncertainty remains, particularly on a regional basis due to variations in vaccination rates and the impact of new variants of COVID-19. We expect to see renewed vigor in shareholder activism to continue through the second half of 2021 and into 2022.
While shareholder activism declined sharply in the spring and summer of 2020. The overall number of campaigns was lower but did not result in a significant year-over-year decline. This was in large part because the two annual proxy seasons book-ended the market turbulence of 2020. Such that many of the activist campaigns were initiated either before COVID-19 or after the economic recovery at the end of the year. The rebound of activism continued through the first half of 2021. With activist campaigns in the U.S. accelerating at a higher pace—large-cap United States companies experienced an approximately 30% increase in the number of activist campaigns in the first half of 2021 compared to 2020. Notwithstanding this renewed push, activism levels remain muted compared to the 2017–2020 averages. Nevertheless, we expect the growth momentum to continue into the second half of 2021 and into 2022.
M&A-Related Activism Remains in Focus
M&A-related activist campaigns remain the most common campaigns in 2020 and in the first half of 2021. Constituting 41% and 44% of the total campaigns initiated at large-cap companies during such periods. Respectively, consistent with levels of recent years.
Activism Continues to Rise
ESG-themed or ESG-related campaigns are trending
Activists launched multiple ESG-themed campaigns in 2020 and early 2021, with environmental issues standing front and center. In 2020, London-based hedge fund Bluebell Capital Partners announced its “One Share ESG Campaign” whereby it buys one share of a company that it believes has questionable ESG practices. And later that year it targeted Belgian chemicals company Solvay to demand. It ceases discharging waste from its Tuscany plant into the sea. In early 2020, another London-based hedge fund. The Children’s Investment Fund (TCI), launched its “Say on Climate” campaign (modeled after the “Say on Pay” executive compensation initiative).
This has resulted in more than 20 companies, including Unilever, Moody’s, Canadian National Railway, Rio Tinto, S&P Global, and the Spanish airport’s operator Arena, committing to hold Say on Climate votes. Perhaps the most notable ESG activist victory. Thus far was the recently formed ESG-focused activist fund Engine No. 1’s successful campaign to elect three directors to the board of ExxonMobil in a bid to push the company toward transitioning to a low-carbon economy.
The campaign received significant institutional investor support, including from Vanguard, BlackRock, State Street, T. Rowe Price, and CalPERS, as well as support from Institutional Shareholder Services (ISS) and Glass Lewis. Even shareholder activists that have historically not focused on ESG matters are now integrating ESG issues into their campaigns. After pushing for what was an unsuccessful sale of the utility company Energy. Activist firm Elliott settled its campaign when Energy agreed to a five-year business plan.
Environmental and social (E&S) proposals gain more support
While the number of social and political proposals in 2021 remains comparable with prior years. They are garnering more support among shareholders. Nearly 20% of the social and political proposals voted on received majority shareholder support, up from approximately 10% in 2020 and 7% in 2019. All social and political proposals voted on received an average support of 34.4%, up from 27.7% in 2020 and 28.1% in 2019. Among the social proposals, those relating to racial equity reporting received a record number of submissions (eight submissions). And those related to workforce diversity increased dramatically (more than doubling the 2020 submissions and quadrupling the 2019 submissions).
Environmental proposals are also receiving more support from shareholders in the 2021 proxy season. Approximately 38% of all environmental proposals were voted on. This year received majority shareholder support, compared to none in 2019 and about 21% in 2020. The average support for all environmental proposals voted on also increased.
We expect to see activists continuing to pivot to ESG issues in their campaigns and that companies that are both behind on ESG issues and financial underperformers will be more vulnerable to activist campaigns. We also expect shareholders to continue to engage on E&S issues inside and outside of the proxy ballot. It remains to be seen at what pace ESG-focused activist funds will grow. Or whether ESG issues will become a primary campaign objective given the perceived tension between the ESG-themed impact investing strategy and the conventional activist objectives of maximizing shareholder returns.
Convergence of Activists and Private Equity
The convergence of activist investing and private equity persisted throughout the COVID-19 pandemic:
Activists pursue a new pool of capital and engage in acquisitions.
Several activist funds, including Hudson Executive Capital, Pershing Square, Starboard Value, and Elliott, found new avenues for raising capital during the SPAC frenzy of 2020–2021. And have deployed capital raised in SPAC IPOs to engage in heightened M&A activity. Activist investors are also finding inroads into new publicly listed companies by participating in PIPE investments associated with many of the de-SPAC transactions. Alongside private equity firms (e.g., Value Act’s investment in the EV maker Nikola and Inclusive Capital’s investment in Apparels. An agriculture technology company). Certain activists are also turning to what was once known as private equity turf—privately held companies—to seek the lucrative gains enjoyed by private equity in these investments and gain access to additional information that can help inform other investment decisions.