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The future role of the activist investor?

Shareholders might just be the last bastion when it comes to demanding justice


Pete Carvill

Some things are too much to ask for. On 15 April 1989, 96 people went to a football match at Hillsborough Stadium never to come home again. Despite the truth being apparent from the day of the disaster, and becoming widely known by 1990 with the Taylor Report, it still took another 26 years until a court in the United Kingdom ruled that all those who died had been killed unlawfully.

So, it was even more galling a few weeks ago when solicitor Peter Metcalf, former chief superintendent Donald Denton and former detective chief inspector Alan Foster managed to escape, once again, any penalty for their role in what came after the disaster. The three were accused of perverting the course of justice after the statements of 68 police officers serving at the time were altered considerably before the public inquiry.

As the BBC reported in May, “[The judge] said this was not a statutory inquiry and therefore not considered ‘a court of law’, so it was not a ‘course of public justice’ which could be perverted.”

In other words, if you deliberately manipulate evidence in a public inquiry, if you as a police officer present falsified evidence before a judge and have others do the same, that is now fine under British law.

What a technicality. What a farce.

Up in flames

One year after the decision the Hillsborough victims had been unlawfully killed, 72 people died when a fire broke out in a residential block called Grenfell Tower in London. Flames spiralled upwards, wrapping themselves around the building. The fire, which could and should have been contained, quickly spread due to the building’s flammable exterior.

So far, not a single person has spent a night behind bars because of Grenfell. And, after Hillsborough, it seems unlikely that this could ever happen in the UK.

And then we get last weekend’s story in The Guardian about a group of American shareholders suing Arconic, the cladding firm that outfitted Grenfell Tower. The shareholders allege that, ‘[…] they incurred financial losses when Arconic’s Reynobond PE cladding was implicated in the Grenfell fire’.

Moreover, a judge in western Pennsylvania has ruled that the case can proceed after, “[…] witnesses said managers knew the cladding performed badly in fire safety tests but was being used on high-rise buildings anyway”.

It is unwise to comment on such a case when it is still sub judice, but I doubt there will be any tears shed by the loved ones of the Grenfell victims if Arconic loses. That this is only a civil case and not a criminal one is, unfortunately, one of those disappointments in life that we have to live with.

Shareholder activism

Accountability should be vital to a society. And it is interesting that of all the actions that could have been taken around Grenfell, it is that of shareholders that seems to be gaining the most traction.

This is not a new or isolated phenomenon. Last month, Bloomberg reported that shareholder activism is likely to be ‘emboldened by an economic rebound for the rest of 2021’.

According to the publication’s Scott Deveau: “The total number of activist campaigns launched through June 21 at companies with a market value of more than $1bn reached 116, up from 87 over the same period in 2020 and 115 in 2019, according to data compiled by Bloomberg. The first six months of the year marked a rebound in activism generally as the economy started to recover from the pandemic. Advisers expect that momentum to continue into the second half of the year and into 2022 and beyond.”

Singled out in Deveau’s story was the recent actions by Engine No. 1, a hedge fund still in nappies that managed, while holding just 0.02% of ExxonMobil, to gain for itself three directors on the board. As the New York Times reported, “Last week, an activist investor successfully waged a battle to install three directors on the board of Exxon with the goal of pushing the energy giant to reduce its carbon footprint. The investor, a hedge fund called Engine No. 1, was virtually unknown before the fight.”

But Engine No. 1 only became the Little Engine That Could because it was, as the New York Times, reported, backed up by larger and more-powerful investment companies.

“The tiny firm wouldn’t have had a chance,” the world’s paper of record reported, “were it not for an unusual twist: the support of some of Exxon’s biggest institutional investors. BlackRock, Vanguard, and State Street voted against Exxon’s leadership and gave Engine No. 1 powerful support. These huge investment companies rarely side with activists on such issues.”

Exxon, the New York Times surmised, was ‘blindsided’ and ‘left to ponder its defeat’.

It is a defeat that looks unlikely to fade, given the ripples it looks set to cast.

Self awareness on the rise

Reported The New York Times: “In 2018, BlackRock, Vanguard, and State Street cast an average of about 25% of the votes in elections for directors of all of the companies in the S&P 500, according to academic research. The mere threat that some of those votes are more likely to be cast against management will force executives to think long and hard about how to address their concerns, analysts say.”

It is no secret that investment firms are becoming increasingly self-aware of their public image and how it translates to their bottom line. There are reasons beyond investing – pension funds have pulled out of firms with links to the West Bank and half of global AUM are in funds committed to climate goals (even if greenwashing is still very much a thing and fossil fuels still attract way more cash from G7 nations than renewables).

The fear of bad publicity explains a lot. Public shame does not really exist for individual figures any more – it is easier to bounce back from a scandal than ever, the initial dip in popularity merely a stepping stone on to bigger and better things.

But large firms and companies are still very conservative. They think ahead in decades, and they are acutely aware of how a bad public image translates into their end-of-year reports. If the courts and the judicial system cannot always do the jobs that they were set up to do, someone else may have to do it.

The direction for that may come at the behest of a board.