In June 2021, Exxon Mobil found themselves in an unprecedented situation. A tiny, unheard of hedge fund managed to topple the firm’s board. Their campaign? To install three new directors with the goal of reducing the oil giant’s carbon footprint.
Exxon was left blindsided by the previously unheard of Engine No. 1, who found unlikely allies in some of Exxon’s biggest investors. In a rare move, BlackRock, Vanguard and State Street all sided with the tiny hedge fund and voted against Exxon’s leadership.
The result was a bold statement on the power of shareholders and investors when it comes to the direction, action, and impact of huge companies. As Exxon was left to ponder its swift defeat, the world was waking up to the might of shareholder activists as a force for good.
What is shareholder activism?
A shareholder is an individual or organisation that has invested in shares of a company in exchange for partial ownership. Shareholders may be passive – accepting their dividends without communicating much with the company – or they may be active, leveraging their ownership to enact corporate change.
Historically, shareholder activism has had a bad reputation in the corporate world. Investors known as greenmailers – a contraction of ‘greenback’ and ‘blackmail’ – or corporate raiders became common. Their game was simple: buy stakes in a company, agitate for economic changes that would increase stock value temporarily, sell their shares at a profit and move on to the next target.
One of the most notable corporate raiders was Carl Icahn, who gained notoriety in the 1980s for profiting from the hostile takeover of Trans World Airlines. He is often credited with being one of the first activist shareholders.
But the tide is turning when it comes to shareholder activism: increasingly, shareholders are focusing on influencing a company for the better and in the longer term, with benefits for the environment, the business, and the share price.
How can shareholder activism be used purposefully?
When used for purposeful means, shareholder activism can be a powerful tool to make change for the better.
Shareholders can leverage their partial ownership to pressure companies to make long-term changes that align with their values. Larry Fink’s 2016 letter to CEOs emphasised the importance of working with activists who have a long-term mindset: “Those activists who focus on long-term value creation sometimes do offer better strategies than management. In those cases, BlackRock’s corporate governance team will support activist plans.”
“For companies to be relevant, they have to be relevant to our values.”Sam Stubbs
Many activists are also now focusing on Environmental, Social, and Governance issues (ESGs). Subjects such as diversity, global warming and compensation have become a priority for lots of investors, which has led to the emergence of ESG-focused activist hedge funds such as Inclusive Capital Partners and Clearway Capital which both use business to pursue “a healthy planet and the health of its inhabitants.”
ESG is often brought forward alongside other issues such as financial changes, so both can be addressed together. Shareholder activism is a prime example of money and the planet working hand in hand rather than against each other.
Does it work?
Absolutely. Take KiwiSaver, the New Zealand government’s retirement saving scheme. When customers found out that their hard-earned pensions were being invested in landmines and nuclear weapons, they pressured their fund managers to sell these investments – which they did within 3 months.
And that’s not the only example. Hedge fund manager Christopher Hohn has launched a Say on Climate resolution, meaning companies he’s invested in have to disclose their greenhouse gas emissions. When SumOfUs brought a proposal to the 2018 McDonalds AGM, the fast food chain committed to phasing out plastic straws. There is even a campaign against investing in tobacco stocks.
Who can participate in shareholder activism?
Almost everyone can get involved in purposeful shareholder activism. Consumers, customers and employees own $36 trillion in companies – that’s 80% of global GDP. Those with pensions can switch to a more purpose-driven fund – like the People’s Pension, who only choose net-zero investments, or Pensions for Purpose, whose investments align with the environment and society.
When it comes to investing, deciding which fund to buy into is key. Rather than pouring money into a company that has a negative impact on the planet, there are easy ways to invest in organisations that align with personal values and meet ESG investment criteria.
As You Sow run Invest Your Values – an online tool that analyses the environmental and social impact of thousands of US funds. Sustainalytics’ ESG Risk Rating tool offers insights into the ESG risks of different companies in order to help investors buy shares that will not only have a good impact on the planet, but will also be financially prudent.