As companies plan for their post-pandemic future there are signs that they will have to contend with a new threat: activist investors.
Activists have so far been biding their time. The usually vocal Edward Bramson paused his campaign against Barclays boss Jes Staley at the start of the year.
Bramson has repeatedly called for the bank to cut its trading division to boost profitability.
In the UK just 36 corporates have been targeted by activists this year, compared with 55 in 2019.
But as companies get back on their feet 2021 will likely signal crunch time for many companies that have underperformed during the crisis.
UK corporates vulnerable to activism
In the US there has been a well-documented history of more aggressive and very public campaigns, which don’t gain as much traction in continental Europe.
The UK sits in the middle of the two and new research by professional services firm Alvarez & Marsal predicts there will be a significant increase in campaigns next year.
The UK is forecasted to see the largest increase in public activist campaigns, with 60 companies now predicted to be at risk compared with 54 in December 2019.
It exceeds France and Germany’s combined total and accounts for 37 per cent of all at-risk companies.
Why the UK? Corporates have been among some of the worst hit during the pandemic, with a number falling into administration. And with more of an activist-friendly governance and regulatory environment, the UK is more conducive to shareholder activism.
Fundamentally activists tend to thrive in times of disruption, so the impact of Brexit will also undoubtedly push activists to question decision-making at the top of firms.
“Brexit is going to lead to the mispricing which is why the UK market generally is quite lowly valued at the moment… that’s one of the reasons why we’re forecasting more activity in the UK relative to continental Europe over the next 12 months,” Malcolm McKenzie, managing director at A&M tells City A.M.
That is not to say that there will be a flurry of deals come 1 January because activists will need to shore up their own position.
“An activist needs a wolf pack around them… if they get five per cent of the votes that’s not enough to get somebody on the board. It’s only if they can get the support of the institutional investors behind them that they can really get their teeth in,” says McKenzie.
What is essential is getting the Fidelitys and Blackrocks of the world on side and making them amenable to work with activists. “But you’ve got to do it in a way which works in the City of London culture,” he adds.
ESG concerns will fuel campaigns
With the end of the crisis in sight following news of the rollout of a vaccine what will activist campaigns look like?
Not only do companies have to deal with the operational difficulties as they come out of the Covid crisis they are also going to come under pressure to shore up their ESG credentials.
“If you’re a chief executive or chairman of a company with a poor ESG rating you’re likely to be more lowly valued than an equivalent company with a better ESG rating, and secondly you’re more likely to be attacked by an activist,” McKenzie says.
ESG has been a buzzword among investors for a while now and the pandemic has pushed these ideas into the mainstream.
“The E and S is very much the growing force that is driving ESG more broadly,” Paul Kinrade, A&M special adviser adds.
Exxon Mobil is the most recent corporate to face pressure from multiple activist investor groups for a failure to address long-term energy transition needs, and Blackrock has also been making statements about voting down directors over climate inaction.
“It’s time to wake up and smell the coffee and start taking serious action about how you can improve the ESG rating,” McKenzie adds.
Industrials and healthcare feel the pressure
As a result of this renewed focus on ESG A&M’s research has found that industrials will be the most targeted sector.
“It obviously plays straight into the ESG domain because clearly there’s waste… they tend to be global businesses so there’s a lot of logistics costs,” McKenzie says
The number of UK industrial firms at risk has grown from 52 in 2019 to 61 and the sector now accounts for 38 per cent of all “at risk” companies.
That said it is extremely unlikely ESG activist campaigns will be limited to the industrials sector, with McKenzie predicting tech firms will come under increased scrutiny.
“[They] will come more into focus as opposed to always referring to the nasty oil companies… people will increasingly start looking at tech companies. When you dive into it… a lot of those companies don’t have very good ESG ratings.”
Healthcare has naturally enjoyed largely positive headlines this year with a proliferation of new healthtech firms as well as more established players like Pfizer and Astrazeneca which have been essential in the fight against the pandemic.
But with scrutiny on big pharma’s pricing strategies for different parts of the world health companies could soon come under pressure from investors.
“It’s all about the societal licence to operate and people think they’ve got the pricing strategy wrong like we saw with Aids drugs. There will be fuss about it and their ESG rating will go down,” says McKenzie. “This is further amplified by the government funds these firms are receiving and how it’s being used for the public good.”
Issues related to healthcare supply chains could also come into sharp focus next year. “We saw it with companies like Boohoo and healthcare is going to be receiving the same kind of focus. They’re going a good thing at the public level, but how are they driving that in the background?” says Paul.
The pause in activity from activists who were reluctant to be perceived as tone deaf during the height of the crisis will change in the new year.
“It won’t be a sudden avalanche in January… but more campaigns will breed more campaigns because people will see it working… and it will build and you’ll get real momentum,” Kinrade concludes.