Activist Versus Institutional Investors, and the Role of Sustainability

Sustainability concepts are now widely accepted as legitimate, mainstream considerations for boards of directors and corporate management. (See, for example, this Doug’s Note.) As a result, many companies now routinely consider the long-term impact on their entire universe of stakeholders of various environmental, social and governance (ESG) issues. Conversely, most boards of directors and C-suites no longer solely consider maximizing short-term shareholder profits in their decision-making. A balanced corporate mindset now factors in long-term considerations (see this Doug’s Note) and the interests of employees, business partners, communities and society as a whole.

The emergence of sustainability may also be blurring the traditional distinction between “activist” and “institutional” investors. At the risk of over-generalizing, activist investors have historically been associated with maximizing short-term shareholder profits through a variety of often harsh corporate maneuvers. Institutional investors, on the other hand, have often been seen as taking a longer view, which resulted in general support of management accompanied by behind-the-scenes efforts to influence corporate strategy.

Those two camps may now be moving toward the middle of that spectrum, driven in significant part not only by the dramatic rise in popularity of sustainability as a corporate principle, but also the increased desire among institutional investors to engage with management on such issues. After a few years of resistance, companies have embraced the concept of regular, substantive shareholder engagement, resulting in lines of communication that are more open than ever, which allows traditionally passive institutional investors more ability to routinely influence management priorities and strategic decisions.

Activist investors, on the other hand, now seem more interested in influencing governance policies, as well as management and board composition, including perhaps gaining a seat on the board. It’s tempting to conclude that this trend away from scorched earth approaches has been influenced, in part, by a growing awareness of the shift toward long-term perspectives and the profit value of ESG initiatives. Certainly the “traditional” activists are still out there, but they seem fewer and more out of step with their fellow institutional investors, which can hinder their ability to marshal support for a takeover effort.

Due to the proactivity of investors such as BlackRock, State Street, Vanguard, CalPERS and the New York City Pension Funds, to name a few, one might reasonably envision a day when the old activist/institutional investor distinctions have dropped away entirely. In the meantime, companies should recognize, and take advantage of, the strong trend toward sustainability as a valid and necessary governance and strategic principle.

All the best,

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