“First Timers” and Active Investment Funds Dominate Shareholder Activism as the “Big Three” Remain Management-Friendly (Part I)

Eighty percent of all public company annual meetings are held during the first half of the year, from January 1 through June 30 (“H1”). (ProxyPulse, Broadridge). These first two quarters of the year are often referred to as the “proxy season” or “campaign season.” During this “season,” the majority of activist shareholder resolutions are proposed to management and, if resilient enough, are brought to a shareholder vote. Activist shareholders are individuals and institutional investors who initiate public campaigns as attempts to influence the management of companies in which they invest, typically in the realm of corporate governance, environmental, and social issues. Part I of this post will briefly summarize the activity by these shareholders in the 2019 season in relation to the record-breaking shareholder activism observed in 2018 and comment on the influence of the three largest asset managers in the United States. Part II will compare who the most active shareholders are, and what trends can be observed in the 2019 proxy season. 

Despite increased visibility due to high-profile campaigns, shareholder activism in 2019 decreased from 2018. In 2018, shareholders of U.S.-based companies proposed 464 resolutions, up from 407 in 2010, and the average percentage of shares voting for environmental, social, and governance resolutions was 25.7 percent, up from 19 percent in 2010. (ACCF, CNN Business). However, only 581 companies worldwide faced activist proposals in the first half of 2019, down 16 percent from 2018’s record-breaking start of 610 in the first two quarters according to Activist Insight Online. (Activist Insight, Activist Insight Monthly June 2018; Activist Insight, Activist Insight Monthly June 2019). Of companies with market capitalizations greater than $500 million, the number of campaigns initiated was down 25 percent from 2018 at 107 in the first half of 2019 versus 142 in the first half of 2018; however, the activity level was consistent with the H1 mean of 104 from 2014 through 2019. (Lazard). In the United States, only 340 U.S.-based companies were subjected to activist demands in the first two quarters on 2019, down from 379 for the same period in 2018. (Activist Insight).

The relative market value of new activist positions was also down from 2018. In all of 2018, activist shareholders deployed $66.4 billion of capital, with $34.3 billion in the first two quarters. Comparatively, activists spent only $22 billion in the first two quarters of 2019, significantly less than 2018 and $9.9 billion less than the H1 mean from 2016 to 2019. (Lazard). New campaigns targeting non-U.S.-based companies with market capitalization greater than $500 million accounted for 45 percent of global capital deployed in H1 2019, compared to 37 percent in H1 2018. (Lazard). 

Who are these activist shareholders? Some point to the three largest asset managers in the United States: BlackRock, State Street, and Vanguard (the “Big Three”). (ACCF, CNN Business). Combined, the Big Three are the largest shareholders in over 40 percent of all public companies in the United States. Id. The size of their investments in each company is significant enough to lend them important voting power in casting votes by proxy on behalf of their many investors. 

Each Big Three firm made notable policy changes in their internal investment management and strategies in the first half of the year. Vanguard’s Chairman and Chief Executive Officer Tim Buckley announced that its funds would grant proxy voting responsibilities to external managers. (The Vanguard Group). State Street updated its climate change disclosure policy and instituted a risk oversight framework for directors in June. (State Street Global Advisors). BlackRock detailed a new investor stewardship approach with the purpose of providing shareholders an explanation of management’s implementation of long-term strategy, purpose, and culture. (Larry Fink, BlackRock). In addition to publicly sharing the refinement of their own internal environmental, social, and governance (“ESG”) policies, the Big Three publicly communicated that they expect their policy adoptions to be recognized and respected by the companies in which they invest. Their communications to companies characterized these policy disclosures as “guidance” and a framework of “principals and guidelines” (State Street Global AdvisorsBlackRock).  

However, a Cambridge University study demonstrates that while the Big Three have the power to make influential decisions and have utilized such power in the past, they have historically sided with management against activist shareholder proposals in more than 90 percent of the votes. (Fichter et al, Cambridge University Press). In relation to ESG proposals, which are typically brought forth by activist campaigns, the Big Three vote with management againstthe proposal itself the majority of the time.  Seventy-seven percent of BlackRock’s, 44 percent of Vanguard’s, and 43 percent of State Street’s “against” votes occur in opposition to shareholder proposals concerning ESG topics. Id. When the Big Three vote against a management recommendation, half of the time it occurs when they are voting against incumbents on board slates – a method of expressing discontent with management. Id. Keeping in mind that the Big Three vote with management 90 percent of the time and only half of the times that they vote against management it is over board reelection, a reasonable conclusion is that the Big Three are management-friendly and prefer to rely on private engagements with the companies they invest in. Analysis of these “engagements” and their influence on company policy is outside the scope of this post; however, it is safe to say that while the Big Three may be the shareholders with the most potential to be active, they typically are not.

If the Big Three are not the drivers of ESG and other activist campaigns, who is? See Part II for analysis of the more active players in the 2019 proxy season.