As more types of funds make their voices heard in corporate boardrooms, companies of all sizes are being forced to prepare for the possibility of an activist approach. New factors, such as calls for a greater emphasis on environmental, social and governance (ESG) issues, are changing the game as well. How will these and other trends shape shareholder activism in 2019?
Mergermarket on behalf of Toppan Merrill spoke with four experts on how shareholder activism will impact dealmaking in 2019.
Toppan Merrill question: More traditional activist investors are increasingly incorporating ESG messaging into their campaigns and funds. Do you think this could be effective – either as an investment strategy, a means of attracting investors, or as a means of attracting media attention? Leading industry experts weigh in...
Jack “Rusty” O’Kelley III, Russell Reynolds says: I think ESG is critical. Particularly when you look outside of the US, it is how a lot of investing is done these days. I think it probably is clever marketing, but it's also a real issue – so if it is not sincere, it should be, because there will be more and more capital that people will want to dedicate to it. From what we hear and from talking to asset managers who take the money, it is very much here to stay – it is not a passing fad.
Professor Claire Hill, University of Minnesota Law School adds: Companies are concerned about reputation, and many activists are as well. And ESG initiatives are something companies will be asked about and pushed to do; it’s come to be considered necessary to have a good answer to the question, “What are you doing about ESG?” Do the companies and those asking ‘really care’ about ESG? There is no monolithic answer: some people involved care, and others may not but think pursuing ESG is necessary for reputational reasons. Does whether they care matter? Maybe not so much. What matters is what companies do.
How ESG plays out as an investment matter is, not surprisingly, hard to measure. There are many different ways it could matter: for instance, might a company particularly known for ESG be better able to weather bad news? Could it have other effects on the bottom line and if so, how and what? There is reason to be agnostic. In some quarters, there has been a hope—maybe even an expectation—that markets would “reward virtue and punish sin”—maybe enough investors would be reluctant to buy sin stocks, or start pricing in significant discounts for legal and other risks. But the better evidence is that sin stocks are not generally subject to a vice penalty. It’s easy to think of ways ESG might pay off, including changes in various laws, reputational benefits, as well as business results; it’s, again, very hard to measure the incremental effect of ESG on a company’s earnings.
The ESG situation is very dynamic. ESG messaging and activity is definitely increasing; precisely what the real-world effects will be remains an open question.