While some vocal activist investors target healthy firms, modeling a form of corporate extortion that channels the greenmailer heritage, others draw on the original noble mission of showcasing genuine governance pathologies.
Recently, we evaluated how many self-styled activist investors are distinct from the original activists who helped catalyze needed governance reforms two decades back. We argued that the credibility and value proposition of activist investors are increasingly imperiled, amidst mounting proxy battle losses in high-profile fights and the flailing financial performance of activist firms.
At the same time, we celebrate the instances where activist investors can help catalyze needed governance reforms, following in the footsteps of revered genuine, original activist investors, including Ralph Whitworth of Relational Investors, John Biggs of TIAA, John Bogle of Vanguard, Ira Millstein of Weil Gotshal, as well as Institutional Shareholder Services’ co-founders Nell Minow and Bob Monks, who were at the forefront of a virtuous and necessary movement in corporate governance, bringing accountability, transparency, and shareholder value to the forefront while exposing and ending corporate misconduct, cronyism, and excess.
When activists can get things right
Even as we are broadly skeptical of most of the high-profile activist investors operating today, we are also the loudest and most enthusiastic proponents of activist investors when they go after authentic, necessary governance reforms.
Just this week, a successful proxy fight waged by Browning West and advised by Longacre Square’s Greg Marose at Canadian clothing maker Gildan restored former CEO Glenn Chamandy to the c-suite, after he was abruptly fired without cause in December despite soaring financial performance and inexplicably replaced by a former athletic director with a controversial past. This string of poor governance decisions set off a revolt: Unusually, many of Gildan’s most senior executives signed onto a letter supporting the activist fight against their own company. Ahead of the annual shareholders meeting, five directors left the board. Once it became clear that shareholders were voting overwhelmingly for activist control, the entire board of directors of Gildan abruptly resigned alongside their handpicked CEO, aborting their last-ditch effort to seemingly save their jobs by selling the company for below market value.
Clearly, the activist’s commendable role in questioning poor corporate governance struck a chord with disgruntled shareholders. Browning West and Chamandy’s success calls to mind when activist Starboard Value successfully replaced the entire board of Darden Restaurants after a hard-won proxy fight in 2014, with Darden stock tripling in the time since.
In fact, there are several impressive CEOs of Fortune 500 companies operating today who came in through activist-backed proxy fights, such as Toby Rice of EQT and Lourenco Goncalves of Cleveland-Cliffs, who have turned their initial activist mandates into soaring financial performance over a sustained period of time.
Sometimes, activists expose governance travesties extending beyond poor decision-making and into misconduct, such as Carl Icahn’s campaign against Chesapeake Energy’s Aubrey McClendon.
However, these activist success stories tend to be exception rather than the norm. As we previously pointed out, across the last five years at publicly traded companies with a market cap greater than $10 billion dollars, activist investors have substantively lost every single proxy fight they initiated. And the biggest proxy fights of this year’s proxy season—at Disney and Norfolk Southern—went resoundingly against activists, though many believe activists lost the latter fight partially through Ancora’s storm of tantrums.
How proxy fights are faring in 2024
While the biggest fights in this year’s proxy season ended in defeat for activists, there are still some upcoming proxy fights at some smaller companies in which activists may fare better, including in one proxy fight being waged by Quentin Koffey’s Politan Capital and advised by Cadwalader’s Richard Brand (who also advised Ancora’s losing battle) against Masimo CEO Joe Kiani, who is fighting back hard. Governance at Johnson Controls may also be ripe for change with Soroban Capital and Elliott Management taking large stakes.
Some of the most successful activist investors succeed at driving needed corporate governance reforms by eschewing proxy fights altogether—and their returns show it. They are known for being constructive, behind-the-scenes activists who work with, rather than against, CEOs. One prominent example is ValueAct, led by Mason Morfit, which returned an impressive 46% last year and has more than doubled the return of the S&P 500 since its inception.
It goes without saying that as with any prominent corporate governance expert with five decades of expertise, in virtually all of the above proxy fights mentioned, and as with any corporate action ranging from IPOs to M&A to proxy fights, we know senior leaders on both the company and activist sides. The advisers, bankers, lawyers, and service providers on both the company and activist sides have relationships with us—but that has zero bearing on our independent and objective takes in calling the shots as we see them.
As we’ve written before, the facts clearly show that the credibility of activist investors is under increasing threat as proxy battle losses mount. But there are still pockets of opportunity where activist investors can catalyze needed governance reforms, and in these cases, the activists deserve to be celebrated as forces for good just as how certain other activists deserve to be castigated for destroying shareholder value as latter-day greenmailers. The watchword for activists should be: Choose your battle wisely for constructive impact, lest it be seen as a shakedown driven by vanity.
Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Founder and President of the Yale Chief Executive Leadership Institute. In 2023, he was named “Management Professor of the Year” by Poets & Quants magazine.
Steven Tian is the director of research at the Yale Chief Executive Leadership Institute and a former quantitative investment analyst with the Rockefeller Family Office.
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