Activist investors are the scourge of the corporate boardroom. Surreptitiously building sizeable stakes in public companies, they appear, uninvited and unannounced, bearing frightening demands. Often seeking the chief executive’s head on a platter, they are feared because they sometimes get it.
In 2020, however, the activists went quiet. As businesses struggled to respond to the greatest shock in living memory, the activists pulled their punches, with campaigns down 15 percent on the previous year.
Now, as the world emerges from the pandemic, the activists are returning. In March, a relative unknown – Bluebell Capital – forced out French dairy giant Danone’s CEO, Emmanuel Faber. Then, in April, the biggest beast of the activist investors, Elliott Management, announced a multi-billion pound stake in British pharmaceutical firm GlaxoSmithKline (GSK).
Fear inspiring though they might be, activist investors are an important corrective to a troubling trend. The age-old promise of the public company is that management is accountable to a firm’s owners, its shareholders.
In recent years, the rise of passive investment funds – who buy shares and silently hold them – has made it harder for shareholders to hold management to account. When your shareholder is an algorithm, governance naturally weakens.
A boardroom scourge is often, therefore, precisely what a boardroom needs. Caricatured by their opponents as parasitical asset strippers, in the model of Wall Street’s Gordon Gekko, a 2015 study of activist held companies showed quite the opposite. Most companies which were in the firm grip of an activist saw income, investment, R&D and market capitalisation grow.
As the mantra of the corporate boardroom slides away from accountability to shareholders, and towards an amorphous grouping of so-called “stakeholders”, the return of the activists is particularly welcome.
It is notable that the most effective activist campaign this year, defenestrating Emmanuel Faber, took aim at a CEO whose airy pronouncements on “stakeholder capitalism” went hand-in-hand with poor returns to shareholders. Faber turned Danone into France’s first entreprise à mission, but the spirit of enterprise was the cost. Danone was left behind as other consumer goods companies thrived during Covid. Faber’s departure showed that you ignore your shareholders at your peril.
GSK serves as a reminder that companies tend to best serve society by running your business profitably and well. GSK’s drugs pipeline, the early warning system for a pharma firm’s future performance, lags its rivals.
This comparatively poor performance was made manifest during Covid, when GSK failed to serve society as effectively as its peers. It was AstraZeneca, GSK’s local rival, who developed the vaccine that loosened Covid’s grip on Britain. GSK meanwhile was absent from the vaccine race, with their efforts beset by early failures.
Shareholders notice such things. In the four years since Dame Emma Walmsley became CEO, GSK’s share price has fallen by 14 percent. AstraZeneca’s, meanwhile, has catapulted upwards, growing by nearly half.
It is by no means clear that different management would have changed GSK’s performance. Walmsley won plaudits for her bold plan to split the company into two parts: a pharmaceutical business on the one hand, and a consumer business on the other. Though a non-scientist, she surrounded herself with good ones and delegated key decisions.
Come June, at an investor event described as “absolutely critical” by one analyst, Emma Walmsley will have to make this case, if she is to keep her head.
Either way, the activists can already be said to have succeeded. If Walmsley is forced out, their pressure will have brought about the change of leadership they desire. If she is not, the accountability they have created will have forced clarity on Walmsley’s strategy that was otherwise lacking.
The activists were right to give a little breathing space to hard pressed CEOs during the challenges of 2020. But their return is welcome news, and may they long serve as a reminder to those who airily opine that businesses need more stakeholders. In fact, they just need better shareholders.