Activists to Gradually Leverage ESG

Lawrence Elbaum, Partner and Co-Leader of Shareholder Activism at Vinson & Elkins LLP 

When it comes to environmental, social, and governance (ESG) concerns, activist investors tend to focus much more on the “G” than the “E” or “S” – and only after they have found an economic thesis for increasing shareholder value.  Looking ahead, activists may gradually make more ESG issues part of their campaigns as the proxy advisors have begun to incorporate such concerns into their reports. That’s according to Lawrence Elbaum, Partner and Co-Leader of Shareholder Activism at Vinson & Elkins LLP, who spoke to CorpGov after participating on a panel entitled “What Should Issuers Care About” at the 2019 Corporate Governance Forum. He also said he has observed more companies resolving issues with activists before fights become public, in part because issuers take precautionary measures such as hiring specialist attorneys, investment bankers, and corporate communications firms to help conduct introspective analyses. He also said that companies are well advised to acknowledge shortfalls in areas such as total shareholder return (TSR) or capital allocation – and explain why a particular strategy remains sound – before they become centerpieces of activist campaigns. He also presented three considerations issuers should be careful not to miss ahead of an M&A announcement. The full interview is below:

CorpGov: There has been much discussion of environmental, social, and governance (ESG) issues recently. To what extent have activists focused on ESG? Are they bringing it up privately if not in the context of a proxy fight?

Mr. Elbaum: Companies typically do not hear about ESG issues unless the activist has already identified an economic thesis to unlock value for shareholders.   Once the economic thesis has been identified, then the company will most often start initially hearing from the activist about the “G” in ESG, arguing that poor governance led to a destruction in shareholder value.  We hear less about the “S” in ESG, unless the activist has identified tabloid-worthy material, in which case, we’ll probably hear about this material privately before it is used publicly to exert pressure on the company.  It is not the norm for activists to build campaigns against companies where the “E” in ESG is the centerpiece, but I suppose if the activist can link environmental shortcomings of a company to loss of value for shareholders, then presumably this could become a key and compelling campaign issue.  Now that the proxy advisory firms are focusing more on the “E” in ESG in their reports, we should expect to see activists incorporating environmental themes more prominently into future campaigns.

CorpGov: What’s been going on behind the scenes? Have activists tried to negotiate more privately and even avoided making their stakes in companies secret?

Mr. Elbaum: Each year, we see more campaigns getting resolved before activists take their fights to the court of public opinion.  2019 was no exception.  One reason this is happening is that boards are preparing in advance and more frequently.  They are hiring specialists, such as law firms, investments banks, boutique advisory firms, proxy solicitors and corporate communications firms in “peace time” before the threat of activism is imminent to look at themselves and their companies through the lens of the activists.  As a result, they are channeling their “activists from within,” which many times sets into motion a chain of events, such as board, corporate governance and business enhancements, that can convince a true shareholder activist that the company is not a worthy target.

CorpGov: Does TSR (total shareholder return) continue to be the most important factor in proxy fights and do you see that changing? At a minimum, are companies managing to train a focus on longer-term TSR rather than a few quarters?

Mr. Elbaum: TSR on an absolute basis and relative to industry and proxy peers is always a good benchmark.  However, activists are not just looking at TSR on a 1, 3 and 5 year basis, as ISS and Glass Lewis are known to do.  In fact, boards and management teams are increasingly being taken to task by activists for having bad TSR quarter-to-quarter.  This year, we saw an unprecedented number of companies facing activists within a year from their IPO or spin-off from another public company.   Activists are also taking companies and boards to task for revising guidance downward and for capital allocation blunders.  One of the worst reactions to TSR, guidance and capital allocation blips is when companies and their boards fail to acknowledge that performance is lagging.  Companies are well-advised to give a “mea culpa” when one is warranted and to clearly articulate why a hiccup occurred, how the board and management were prepared for it and not caught flatfooted and how the go-forward strategy still works and will lead to value maximization.  Bringing on activism defense specialists once it looks like the company will experience a “road bump” is a good way to get out in front of many of the issues an activist might raise before a public spectacle is made.

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