eResearch | After reaching historic highs through early February 2020, by March 23 the S&P 500 had fallen 34% as investors responded to fears that the Covid-19 pandemic would lead to a global economic shutdown. Companies that were forced to reduce or suspend their operations due to the pandemic saw their stock prices plunge more than 80% from 52-week highs.
Aside from Covid-19 having an obvious impact on investors’ returns, it also enabled activist investors to quietly buy up shares at depressed prices, leaving many companies vulnerable to becoming the target of shareholder activism in the future.
A Storm is Brewing
Overall, shareholder activism was somewhat subdued in the early days of the Covid-19 pandemic. According to data compiled by Bloomberg, the number of activist campaigns decreased by 5% in the first half of 2020 compared to the same period in 2019. However this number is expected to rise in the second half of 2020 and into 2021, as activist investors scrutinize how management teams are responding to the pandemic.
More Attacks on Management and Boards
So far, evidence gathered during the pandemic has revealed a recent uptick in activist campaigns focused on the removal and replacement of top management, rather than other common campaign goals such as cost-cutting and corporate downsizing. According to a recent report by the investment bank Lazard, by mid Q2/2020, 50% of all campaigns initiated by shareholder activists involved attacks against boards or management teams, compared to a consistent 33% in the first quarter of 2020 and the whole of 2019.
Recent examples include a campaign by The Children’s Investment Fund (TCI) to remove Wirecard (DB: WDI) CEO Markus Braun after questionable accounting practices were unearthed during an audit, and Bluebell Capital Partners successfully pressuring Hugo Boss (DB: BOSS) CEO Mark Langer to leave the company’s Managing Board.
A Delayed Response
While companies may feel they are in the clear as the world slowly reopens following government mandated lockdowns, it is likely we have yet to see the full impact of Covid-19 on shareholder activism.
By the time the World Health Organization declared Covid-19 a global pandemic in March, many shareholders had already missed the deadline to submit proposals for 2020 annual meetings. It is more likely that many activist campaigns will be revealed in the 2021 proxy season.
Activists are also using methods outside of annual meetings to launch their campaigns. In April, easyJet (LSE: EZJ) founder Stelios Haji-Ioannou called a special shareholders’ vote in an attempt to oust the airline’s CEO, Chairman, CFO and Non-Executive Director from its Board.
Not be overlooked is that while it is common to hear about shareholder activism in large-cap companies through the mainstream financial media, the majority of shareholder activism actually occurs in small-cap companies – it just isn’t widely reported.
In June, Texas-based investment fund adviser Alta Fox Capital Management issued an open letter to the shareholders of Collectors Universe Inc (NASDAQ: CLCT), in which it pushed for the removal and replacement of the company’s entire Board of Directors.
Taking CEOs to Task
While Covid-19 has undoubtedly increased shareholders’ focus on balance sheets, cash flow and liquidity, responsible human capital management and executive compensation are other factors that are being more heavily scrutinized in the wake of the pandemic.
Activist investors are showing an interest in how Management teams are protecting the health and safety of their employees and customers, managing supply chains effectively, and compensating themselves during more challenging times.
At Uber’s (NYSE: UBER) annual meeting on May 11, an activist shareholder urged investors to vote against the company’s pay plan, which included a US$100 million compensation package for CEO Dara Khosrowshahi, despite lacklustre revenues and plans to lay off 3,700 drivers in the face of the pandemic.
On June 30, UK-based shareholder advisor PIRC urged Tesla (NASDAQ: TSLA) shareholders to remove founder & CEO Elon Musk from the company’s Board over a number of concerns, including his rush to reopen factories during the pandemic, and his “excessive” compensation package, worth US$56 billion over the course of 10 years.
Experts believe the volume of investor activism will follow the market and as the indices continue to climb, expect a wave of shareholder campaigns against management.
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