Nelson Peltz's reputation alone can cause stock prices to jump ©Getty Images
Nelson Peltz's reputation alone can cause stock prices to jump ©Getty Images

Do activist investors really hold power?

17 August 2022

Activist investors don’t just make change happen, they make it pay off.

Billionaire investor Nelson Peltz’s appointment to the board of Unilever in May caused an initial share price jump of 9%. Considered an experienced activist investor, the US-based founder and CEO of Trian Fund Management has a reputation for overhauling companies including Procter & Gamble and Heinz. Now, he has pledged to help “drive Unilever’s strategy, operations, sustainability and shareholder value for the benefit of all stakeholders”.

Today, investors and boards recognise the power such people have to enact change from within. “Nelson Peltz brings with him not just many decades’ experience of questioning and cajoling management and board members, but also a research operation much more extensive than the resources most non-executive directors can bring to bear,” said Joshua Black, editor-in-chief of Diligent-owned Insightia. “In many cases, activist hedge funds will sign a confidentiality agreement that allows their analysts to pore over a company’s numbers so their representative on the board can go into discussions as well – or better – informed than the CEO.”

Typically, activist investors are known for joining firms with intentions to restructure the business in some way. This could range from looking at corporate governance, M&A activity, influencing strategy and operations, and imposing different capital structures. A strong company that has recently been underperforming is a likely target.

Change can be rewarding

Such arrangements can provide positive outcomes for the investors, and the business generally. Joe Cyriac, a partner at McKinsey, gives an example: when Elliott Management invested in India-based IT-outsourcing firm Cognizant in 2017, the US company demanded better operating performance of the latter, and a return of capital to shareholders. The board’s first share buyback and paid dividend took place shortly after. And Elliott Management publicly backed the long investments, realising they were needed to push growth further.

In the past few years, activist investors have moved more towards putting pressure on businesses to improve their environmental, social and governance credentials; something Insightia attributes to an almost 10% year-on-year rise in the number of activist campaigns at UK companies, with those in the energy, mining and banking sectors coming under most scrutiny.

And the impact can be significant. At P&G, Peltz’s term led to changes to the company’s remuneration packages, organisational structure and culture – and a significant rise in the firm’s value. While change may not have been down to Peltz alone, it’s likely his efforts – and the fact that the board knew it was subject to scrutiny – helped deliver positive change; the same logic behind the rise seen in Unilever’s share price.

Put progress on the board

Businesses themselves are also starting to see the benefit. In 2021, oil firm ExxonMobil elected three environmental activists from hedge fund Engine No. 1 on to the company board. This caused a change in focus, where money was returned to shareholders through dividends and a share repurchase plan, rather than invested into high-risk and environmentally-damaging projects. The company’s share price has risen 60% since, and its board has advocated the re-election of the three activist investors.

“[Giving] an activist minority representation on the board introduces diversity of thought and gives the activist information that wasn’t previously available to outsiders – helping mitigate the risks of a mistake,” Black says.

Ultimately, welcoming activist investors is akin to taking a good look in the mirror and being prepared for what might be revealed. “Executives and boards who understand activist techniques are better placed to meet the demands of activists and simultaneously drive shareholder value,” a Deloitte report concludes. “This means they may […] ask some difficult internal questions about company performance and future direction, and then take concrete steps to improve shareholder returns. These pre-emptive actions can demonstrate that management is listening to shareholders and taking measures to achieve superior results.”

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