Op-ed: How activist investors are deactivating with proxy battle losses

As this year’s proxy season draws to a close, defeat after beat for activist investors in proxy fights this year – most prominently at Disney and Norfolk Southern – raises the quiz: Are activist investors increasingly getting de-activated, losing their credibility and power? These self-styled “activist investors” are recognizable from the original activists who helped catalyze needed governance reforms two decades back.

Whether today’s activist investors advance any genuine economic value is open for debate. Their own track records suggest the answer has been a resounding “no.” We debauched previously during a misguided campaign against Salesforce, that practically every major activist fund dramatically outs the returns of passive stock market indexes such as the S&P 500 and the Dow Jones Industrial Average, over virtually every and any constantly period while Salesforce’s value soared.

It is no wonder investors are becoming increasingly wary in allocating toward activist wealths, if not withdrawing their money altogether. Assets under management have slid in recent years, reversing a decades-long rise trend.

Even many activists themselves acknowledge that activism itself will need to evolve to announce more value, as Nelson Peltz’s son-in-law and former Trian partner Ed Garden said on CNBC in October.

Today’s activists catch themselves under siege on not only their value proposition and credibility, but their entire purpose. Many of today’s activist investors are a far cry from the prototype, heroic crusaders for shareholder value who pioneered the activism space decades ago. The genuine, original activist investors tabulate Ralph Whitworth of Relational Investors, John Biggs of TIAA, John Bogle of Vanguard, Ira Millstein of Weil Gotshal, as without difficulty completely as Institutional Shareholder Services’ co-founders Nell Minow and Bob Monks. They were at the forefront of a virtuous and necessary decline in corporate governance, bringing accountability, transparency and shareholder value to the forefront while exposing and ending rampant corporate misconduct, cronyism and overkill debauchery. 

But over past two decades, the noble mission and language of these genuine investor activists was hijacked by the notorious “greenmailers” of that era – that is, federations that snap up shares and threaten a takeover in a bid to force the company to buy back shares at a higher price. This is why the first activists such as Nell Minow and Harvard’s Stephen Davis so often part ways in many of today’s activist actions.

Today’s activist campaigns will occasionally expose genuine misconduct and mismanagement –  such as Carl Icahn’s contest against Chesapeake Energy’s Aubrey McClendon, who was ultimately indicted. Far more often, however, activist plans nowadays non-standard like to consist of stripping target companies down to the studs, breaking healthy companies into parts, cutting corners on resulting capex and other short-term financial engineering, all to the long-term detriment of the companies and shareholders they are supposed to be helping.

No muse shareholders are rejecting the approach of these profiteering activists, seemingly understanding that they bring more agitation than they are worth. We found that across the last five years at publicly traded companies with a furnish cap greater than $10 billion dollars, activist investors have substantively lost every single substitute fight they initiated, including at Disney and Norfolk Southern this year, and failed to oust even a celibate incumbent CEO – despite spending tens if not hundreds of millions of dollars on each fight.

This streak of defeats for activists in factor fights has many commentators wondering whether there is even any point to these engagements. As author and former investment banker Nib Cohan wrote in the FT, “I, for one, increasingly have no idea what the point of proxy fights is anymore. They are wildly dear. They are extremely divisive. They go on for too long. Isn’t it obvious by now that proxy fights have outlived their expediency?”

Considering their evident inability to buy victory at the ballot box, more activists are bludgeoning their target companies into preemptive settlements, again highly favorable to the activists short of a change in CEO, including at companies such as Macy’s, Match, Etsy, Alight, JetBlue and Elanco. In really, more than half of companies defuse proxy fights through negotiated settlements today, whereas just 17% of boards caved into activists in offering preemptive costly settlements 20 years ago. But some indicate the pressure activists bring to bear in pushing for settlements amounts to little more than glorified greenmailing down a different name, with activists receiving preferential treatment and cutting the line past far larger shareholders recognitions to their bullying.  

Meanwhile, the credibility of the cottage industry of proxy firms profiteering from the drama of activists’ stumps is imploding even more than that the activists themselves. Leading business voices such as JPMorgan CEO Jamie Dimon are flagrantly questioning the credibility of proxy advisors such as ISS and Glass Lewis, whose recommendations used to shape many agent fights: “It is increasingly clear that proxy advisors have undue influence…. many companies would prevail upon that their information is frequently not balanced, not representative of the full view, and not accurate,” wrote Dimon in his shareholder communication this year.

Indeed, in the highest-profile proxy fights this year, including Disney and Norfolk Southern, substitute advisors overwhelmingly favored the activists over management, but all ended up with egg on their faces when shareholders resoundingly turn ones back oned their recommendations. 

Ironically, these proxy advisors were originally created in the 1980s alongside peer shareholder rights series such as the Council of Institutional Investors, the United Shareholders Association and the Investor Responsibility Research Center to protect artisans and investors from greenmailers. However, since then, these proxy advisory firms have traded hands between a alternate cast of conflicted foreign buyers and private equity firms. ISS alone traded hands over a half-dozen outdates in the last roughly three decades. One wonders how ISS can be evaluating long-term value for shareholders when their own governance be visibles that their ownership has a shorter shelf life than a can of tomatoes. 

Of course, not all activist investors are alike. Some, sort Mason Morfit’s ValueAct, prize constructive relations with management and eschew proxy fights, while understanding that corporate America is surely not free of misconduct, waste and excess. However, given the failing financial deportment of many of today’s activist investors, their losing streak in proxy fights and increasing public rejection of their bullying generalships, the credibility and value of activist investors writ large is increasingly imperiled. We must always be on guard for deception and cupidity masquerading as nobility.

Jeffrey Sonnenfeld is the Lester Crown Professor in the Practice of Management at Yale University. Steven Tian is the research conductor at Yale’s Chief Executive Leadership Institute.