The Passive Activists

Public corporate boards used to quake at the prospect of an attack by the “activists.” These corporate “raiders” force management to abandon long-term strategy, sell off parts of their business, reduce R&D, increase prices, pump the stock value in the near term, and then cash out their investment. This would leave the loyal long-term stockholder holding the bag, which was by then pretty much empty.

Enter today the new “activist” investor. These are large, long-term holders of your equity. Think State Street and BlackRock. Think the Investor Stewardship Group, a consortium of the world’s largest investors holding perhaps 20% of the value of U.S. equities. These major investors are seeking dialogue with boards, according to a panel convened today in Newton by the New England Chapter of the National Association of Corporate Directors.

And what do these newly active investors want to discuss?

They counsel good corporate governance. They counsel focusing on long-term strategy, as they are “value” investors. They counsel listening to the old-time activists, because they might have a good idea, but not caving in immediately in order to avoid a proxy fight. They look for engaged discussions with directors, touching on such matters as the strategic use of big data, diversity, overall strategy for employee compensation, and adequacy of climate change reporting (as it bears on long-term strategy).

When the panel members from Black Rock and State Street were asked directly by the moderator, “well then, aren’t YOU the activist investors now?” there followed an awkward silence. The audience laughed. The panel declined to admit to such a role until one finally said, “well, perhaps activists with a small a.” How do BlackRock and State Street Investments like to view themselves? Not activists certainly; just “not passive.”

So the corporate landscape today contains two kinds of constituencies pressing upon boards of directors: the more now polite, but still-lurking, old-school activist directors seeking perhaps a change in the long-term strategic goals of a company; and, the major institutional equity investor seeking good governance and an articulated long-term strategic plan.

Bottom line from the institutional investors: directors should be available to speak with their major shareholders, and not just to create a relationship but, rather, to also provide substantive dialogue around matters important to long-term strategic direction.


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