Increasing support of activist investors is cause for concern
A Wall Street Journal article published on Sunday August 9th referenced the subtle backing by large institutional investors of small activist investors to invoke change within large U.S. companies. Activist investors are prevailing frequently and targeting even larger companies, usually as a result of private support from mutual funds. This partnership is altering how U.S. businesses deal with challenges from activist campaigns – if they resist they risk losing shareholder votes. In a 2015 survey of over 350 mutual-fund managers, Rivel Research Group discovered that half had been contacted by an activist in the past year, and 45% of those contacted chose to support the activist. According to FactSet, activists acquired board seats at 107 companies last year, 91 of them through pacts negotiated with the companies. In the first half of 2015, activists are on pace to surpass that mark after acquiring seats at 86 companies. FactSet also reported that activists won a record 73% of battles for board seats in the U.S. in 2014, a 21% increase since 2012.
Buyers of D&O insurance at large cap companies should take heed of this article and its potential implications. Compared to small and mid-cap companies, large companies have not been targeted nearly as frequently by plaintiffs’ lawyers seeking damages for shareholder losses. However, given the increase in activist investors gaining board seats at what they deem to be underperforming large cap companies and the activists’ ensuing demands for financial, strategic or leadership changes at these companies, it is hard to imagine that shareholder litigation is far behind.
Nor does this unlikely alliance between big mutual funds and activist investors appear to be an anomaly. Driven by an outflow of retail investors’ money from stock-picking mutual funds to index funds, mutual fund managers are under increasing pressure to beat the market. The relevant question isn’t whether big mutual funds are or aren’t supporting activist investors (the vast majority of them clearly are), it is whether or not they are doing it publicly. Many are still concerned that overt support for activists could cost them access to management at companies in which they’re invested.
The best defense for companies against this two-headed hydra is twofold: 1) a clearly articulated corporate strategy for maximizing a strong strengthen investor-relations program to improve overall engagement with institutional shareholders. Mutual funds have already begun voting against management of large cap companies (think corporate governance), albeit slowly. Will activist investors accelerate this trend or will mutual funds be content to use activists as their proxy?
About the Author
Rich Leavitt is an Area Principal and is responsible for the firm’s overall strategy for attracting and retaining large clients with complex risks and dynamic needs, as well as the delivery of solutions and services to those organizations.