Listen: IR In Focus | Episode 4: Insights to Navigate Investor Activism

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Carmen Lilly

Hey, everyone. Welcome to the IR in Focus podcast. I am your host, Carmen Lilly. In the next 20 minutes, we'll dive into investor activism trends and themes. 2022 proved to be a very active year with 1,026 campaigns, launched up from 851 in 2021, and this is according to S&P Global data. This marks a continuation of a trend we've seen gain pace over the last few years. I'm pleased to have 2 guests today to help break down what the data says, what to expect for 2023 and best practices for IROs. Welcome, Jack Spinks from Zymeworks and Ken Shimokawa from S&P Global Market Intelligence. Welcome, guys.

Ken Shimokawa

Thanks for having us.

Carmen Lilly

No problem. Thank you for joining. Now before we get started, I wanted to run through your guys' bios for our listeners. Jack, we'll start with you. Jack is a finance professional who currently leads the Investor Relations efforts at Zymeworks, Inc., which is a biotechnology company based out of Vancouver, Canada. Jack spent the majority of his career in Houston, Texas, where he led investor relations for programs in the energy space, along with spending time across many aspects of large finance organizations.

And Ken Shimokawa is a Director of the Financial Institutions for Desktop Product for S&P Global Market Intelligence. Ken drives the product and go-to-market strategy for the S&P Capital IQ Pro platform with the financial institution segment, identifying product enhancements and overseeing the rollout. Ken has 13-plus years of experience in the information services industry, with previous roles focused on product management, business analysis and strategic marketing.

All right. Now with that out of the way, let's start with you, Ken, and talk a little bit about the data and a little bit about 2022 and what might be in store for 2023. So in 2022, we saw a general rise in activism engagement across all sectors. And so tell me, what other sort of trends or interesting themes emerge when you're looking at the data?

Ken Shimokawa

Yes, happy to talk about it, Carmen. According to our data, health care sector had the most activist campaigns in 2022. But when we look at it across the past 5 years, we've seen significant increases in industries like consumer staples, where they had about a 79% jump from 2018 to 2022, all by communication services, which was a 75% increase according to the GICS classification that we have. Now some technology companies do fall within that sector. So I would also not underestimate the amount of activity that we're also seeing in the tech sector, which sometimes gets a little bit under representative maybe from a data perspective.

One interesting trend that we're seeing in general, before we dive into specific themes, is a surge in activist campaigns targeted at large market cap companies. So your large-cap companies, historically, based off of what we've seen, it's been pretty evenly split, evenly distributed, but we've definitely seen a bit of a surge where these large cap companies are, I guess, no longer safe or they're also kind of targeted. Then last year, they made up about 40% of the total campaign. So definitely something pretty significant and something we'll continue to monitor.

Question and Answer

Carmen Lilly

Interesting that you brought that up because I was reading a couple of news articles around those large cap companies you're talking about. So there was -- we saw Nelson Peltz launch a governance campaign against Disney. We saw Salesforce was swarmed by the hyperaggressive activist Elliott Management. Now both of these were -- I think, most recently were dropped and they came to terms between the 2 companies. But I found it very unusual to see these campaigns launched against these large blue-chip companies. So do you think this might be the new norm?

Ken Shimokawa

I think so. I think this is something that we'll continue to see as a trend. Part of it might be because some of the themes around ESG, not just limited to M&A matters, which has been more of the driver in the past, along with corporate governance. But I think those could be some of those elements that could lead to that rise within the large cap space.

Carmen Lilly

Jack, I just wanted to get a check here since you're on the ground, and I'm sure talking with your colleagues, like what has changed for you over 2022? And what are you guys talking about?

Jack Spinks

Yes. As far as what I'm seeing, in this mid health care space, it's a little different, right? ESG is less of an issue on the biotech side. I do come from the energy side of things where activism and in particular, ESG activism is quite active. But it's been fairly quiet thus far, which is good. I think last year, you did see -- certainly saw some activism targeted in the SMID biotech space, but it's -- thus far, it's been a pretty quiet year, which has been good from the IR side of things.

Carmen Lilly

So Jack, let me toss this next question to you. So how do you monitor and gauge activism interest?

Jack Spinks

Yes, that's a great question. It's not always very easy to do. Traditionally, you can look at things like 13Fs, 13Gs, 13Ds, but they're not incredibly helpful. The timeliness with which they're filed isn't always aligned with where you need to be from gauging an activist and their ability to make some noise in your stock. You can only really do a post-hoc review.

I think from my standpoint, it's really, really important to have things like shareholder monitoring and surveillance services. The ability to use data, I don't have the capability at the time to do that, but folks like S&P do a great job of being able to utilize the data and really tell you, okay, have these companies been activist previously? How have they done it? Where have they done it?

Previously, if you're just looking at 13Fs, 13Gs, I mean, folks can build a massive position before they have to file. And at that point, it's too late. So if you can have the surveillance team in place, which I think is really important, I would recommend any IRO to have, it helps. It's not always perfect, but it's certainly very helpful.

Carmen Lilly

Yes, definitely. And we'll talk a little bit more about some proposed rules by the SEC around 13D filings. But I did want to hop back with Ken around some of the themes that you saw in 2022. In 2023, I think we're expecting M&A activity to really cool off. But what did you see in 2022 in terms of themes of campaigns or themes of successful campaigns?

Ken Shimokawa

I would say we've seen a continuation of this trend, especially around ESG since maybe 2020 in terms of just that whole ESG-related investor activist campaign accelerating last year. Roughly 60% of the campaigns that we track in our database is related to some kind of ESG theme around environmental, social, governance. And it's definitely at a much higher rate compared to a couple of years ago, where previously corporate governance made a significant majority of these ESG-related campaigns.

Back in 2018, corporate governance was more around your 80% of those ESG-related campaigns. So anything around Board seats, voting rights, et cetera. But in 2022, that kind of allocation of corporate governance has dipped a little bit to more around 63%. So we're seeing a little bit more of that interest in social or environmental-related type initiatives kind of up at the rise starting from 2020 and then carrying into 2022. And I feel like part of it is if we reflect back, there were quite a few -- or there were a couple of milestone campaigns that took place during those years, right?

So I think in the energy space back in 2020 with -- take ExxonMobil, for example, where Engine No. 1, with the backing of, I think, CalSTRS, they pushed for 4 outside Board members to move the company towards cleaner energy, and this ended up being successful and I think was a bit of a monumental campaign from an ESG perspective.

And we've seen other campaigns, let's say, last year, where Walt Disney received a proposal requesting for more reporting and kind of transparency around median and adjusted pay gaps across race and gender. So I think that theme around ESG, which started to kind of kick in back in 2020, has definitely continued into 2022. And we're definitely seeing it from the headlines of news, but also from a data perspective that we're kind of closely monitoring.

Carmen Lilly

Great. And I think, Jack, I'm going to throw this next question to you. So ESG and sustainability is very topical these days. A lot of companies are really focusing and then honing in on that and trying to prep for potential activism. So can you tell me how can IRO monitor investor sentiment and potential weaknesses that would potentially make you a target for an activist?

Jack Spinks

First of all, it's pretty easy, I think, for IROs to get your sentiment, which is always helpful. I think traditionally, activists can come in when there's a value gap right? And so if this sentiment is poor, your value is low. That's kind of the first place I always start.

But I think really, as Ken mentioned, I think you're seeing a rise in ESG-driven activism, which personally, I think, is a good thing. It's leading to positive change on companies and bringing it to the forefront. But from an IRO standpoint, it's really important to just constantly evaluate best governance practices. It's not something that I necessarily can drive on the IR side of things, but it's something that I'm constantly looking at and with help from external counsel and various service providers, just making sure you're aligned on simple things. Are your governance best practices investor-friendly? Is your Board set up in such a way that you're getting a good refresh and you also have good executive comp practices?

I think all those things are really important. Not always something that I can drive myself, but it's -- given the rise in ESG activism, I think it's really important. You can also do things like you can do a perception survey if you're struggling to understand what people think about you. And then once you have these thoughts, okay, are we aligned with our peers on best practices? I think that's really important to think about and communicate those things as an IRO with the rest of the senior management team.

Carmen Lilly

Yes. So let's dig into governance just a little bit more. So we saw with the new universal proxy rule that was passed last fall, it was speculated that this could turbocharge investor activism activities. I think we might have seen that and you can correct me if I'm wrong here, but -- so let's get your thoughts on this.

With the universal proxy rule, I guess, in theory, could also turbocharge ESG activism with investors nominating sustainability experts to the Board and integrating that ESG governance strategy. What are your thoughts on that? Did we actually see that come to fruition?

Ken Shimokawa

Yes. I think that has definitely made an impact. The example of the Exxon campaign back in 2020, I think, was just one example. Obviously, that got a lot of media attention given the sheer size of the company. But I would say that has definitely created some of that additional momentum in terms of really bringing other shareholders and other activists and experts in those fields to drive those changes from an ESG angle perspective.

But I think one thing that I've started to see in the data is that while the number of kind of campaigns being launched has definitely increased over the years, what's interesting is that not necessarily the success rate or the settle rate has kind of followed that same level of trend. As a matter of fact, from a data perspective, we've seen those success or settle rates slightly dip actually over the past 5 years. So while I think the number of campaigns have increased based off of the rule -- the new rules, it might not necessarily have led to higher rates of success and settle.

So an interesting trend that I think has turbocharged things, but might not necessarily lead to the results that you might expect as a result of that. And I think part of it is also because shareholders might be looking carefully at these campaigns a little bit more closely, and they're carefully scrutinizing these campaigns in a way where the campaigns do still rely on more of the creditable economic thesis.

So while there might be ESG campaigns being launched, there still needs to be that economic rationale that would lead to higher success and settle rates and so on and so forth. So -- but going back to your question, yes, I think it had turbocharged, but has that led to even more successes on that front? I guess we'll have to see -- wait and see.

Jack Spinks

Yes. Maybe I'll jump in here. From an IR standpoint, we certainly noticed the rise in the ESG-related activism, and I do think it's really interesting. Industries like biotech that are traditionally scored quite high on things like the MSCI's ESG Index and various indices looking at ESG scores, we even in the small tech biotech space are thinking about this ESG topic and looking to put out ESG reports, which from an IR standpoint used to be reserved for those large cap companies that had mattered.

Energy companies are a great example. You wouldn't think that ESG is topical on the biotech side, but I am personally seeing it taken up by many of my peers and even my company itself is really thinking what can we do to better disclose our ESG practices and improve our ESG-related disclosures. So I think it's really topical and interesting you're seeing this trickle down even to the small tech biotech space, which isn't traditionally bad on the ESG side, but it's somewhat working and maybe that's not the intent of the activists, but it's certainly, I think, great to see folks taking it seriously.

Carmen Lilly

Right. So Jack, how would you recommend companies play offense or even prepare for an activist investor?

Jack Spinks

I think, first of all, you need to have infrastructure in place. I think a lot of companies get caught flat-footed and are just playing defense, which is fairly standard. I think most people don't think about activism until it happens. And by that point, it can be too late. You have to constantly be monitoring best practices on the governance side, on the ESG side, saying what are our peers doing? What can we do to improve our practices?

And then I think really importantly, and I don't know if it's thought of enough, the strategy side of things, do you have a road map to generating value? Is that clearly communicated? It seems really simple from an IR standpoint, duh, kind of thing. But many companies say they have this path to value, but do you have it out there? Do people understand it? And is that what's being communicated oftentimes as an activist, that's why you're stepping in? I think that the company may not be doing everything they can to generate that shareholder value. So I think that's really important. Of course, nothing is going to guarantee that you won't see one, but I think making sure that you have, again, the best practices in place.

Carmen Lilly

Right, right. So let's take that a little bit further. So now you have an activist investor, what are your dos or don'ts?

Jack Spinks

I think most importantly, again, this is a duh comment, you can't do nothing. Some people -- you may sit there and think, this doesn't make sense. This isn't how we operate our business. Well, that doesn't matter. Nowadays, with the advent of social media, things gain speed really quick. So the first thing I would recommend doing is you've got to get your legal team prepped. You've got to get your management team prepped. And you've got to get higher strategic communications team on retainer. And if you don't already have a surveillance team, you've got to get all that in place because folks can continue to build a position as you're sitting there concerned.

Obviously, being there to put out a strategic press release and respond to the activist is really important. And as an IRO, that's not something that you're going to get trained on. You got to get the entire management team in place and then just have good communications with your team, the activists and those who you're working with because it does happen often and you do need the help. I think that's something that can't go without saying.

Carmen Lilly

Something that might make your guy's job a little bit easier. So I did read that the SEC is proposing rules that would improve transparency and provide more timely information for shareholders in the market. This change looks like it would ultimately make it harder for activists to quite like garner stakes. So your thoughts on this change.

Jack Spinks

Yes. Before the advent of service providers like S&P and surveillance companies that are monitoring these and looking at trends and the actual settlement data, all you had were these SEC filings. 13Fs are filed 45 days after quarter close, and that's not helpful. 13G, 13Ds, various reporting requirements depending on how much stake you make, but changing that time to be more immediate, particularly in the day and age of today where everybody knows real time what their positions are and can report that. I'm a huge fan of that change. I think any IRO would be.

Transparency on that side of things, it's hard to get. It's expensive, frankly, and it's never perfect. So to have that kind of information, I think, is not only good for IR folks like myself and companies and corporates generally. But I think on the investor side, it's helpful to know where folks are trading and even on the retail side. They may not have access to any of this to know what physicians people have is huge.

And on the activism side, I mean, I can't go without saying it's hugely helpful. But I think just generally, the transparency that those proposed rules and shortening the reporting requirements for 13D and G filings. I think I think that would be really impactful. And I don't -- personally, I don't see a downside to it. There might be some administrative stuff going on, on the investor side. I'm not entirely sure, but I wouldn't imagine it would be huge. And I think the benefits would certainly outweigh the costs to the market. So big fan.

Carmen Lilly

Right, right. I'm a big fan of data and a big fan of transparency of that data insights into it. Ken, in your opinion, do you think this new proposal might deter activist investors?

Ken Shimokawa

Potentially. I know more transparency might not necessarily lead to them being able to execute on what they ultimately want to achieve from returns and the economic pieces that they would have. But I think it will take time to see if there's any kind of change in shift in terms of the amount of volume around investor activist campaigns. And so I think eventually maybe, but we'll have to see from a data standpoint if there are any kind of dramatic changes in the volume and how that could change over time.

Carmen Lilly

Right. Yes, time will tell on that. And also for both of you, Jack and Ken, feel free to chime in on this question here. We were talking a lot about like activists and companies and they're very much like -- the way we talk about, they're very much in conflict with each other. And I think traditionally, we viewed activist investors as a bad guy or a harbinger of bad things to come. And I think this is because a lot of these guys are corporate raiders in the '80s. Now has the sentiment changed or evolved at all over the past couple of years?

Jack Spinks

Yes. Maybe I'll jump in here first. From an IR standpoint, I think it's massively changed. You're seeing -- I see that as -- that's a low probability of happening. What is fairly high probabilistically from an activism standpoint is you don't have good governance practices and someone is going to come in and try to get Board seats. So your management team hasn't properly thought out a pathway to value. And investors says, hey, you've got a great company, but you're not managing it well. So they come in. Like that's -- to me, that's what activism is now, and so that's making sure you have best practices in place.

And even on the ESG side, are you measuring any of that? Are you -- these are all things that you can do to prevent an activist, make sure you have best practice to make sure you are doing the right things on the ESG side of things that you have, proper compensation practices in place, which is interesting because as an IRO, it's not necessarily -- I'm not thinking about that all the time, it's not necessarily my job, but it's certainly become more of my job to make sure that my company is thinking about it and that we're prepared for all those things. So long-winded answer, but I certainly think it's changed massively and the perception of such has shifted, particularly in my eyes.

Ken Shimokawa

Yes. Definitely, I'm not a practitioner like Jack, but I guess just looking from what we're seeing just from the data side, I think it feels like the perception has changed, and I think partly due to some of the themes around transparency and equality, which might not necessarily give the same connotation of -- negative connotation or some of that negative perception of being a corporate raider and there's something beyond the economic interest. So while it has changed in some cases, I still think it's going to be a bit of a balance where those 2 would kind of go hand-in-hand.

Carmen Lilly

Yes. And you know what's interesting, so when I was reading through the SEC proposal and the comments on that proposal, I can't remember who, but someone mentioned the Columbia Law Review article that studied activist hedge funds and then the operating performance of those companies that they took stakes in, as well as the market performance of those. And the results were interesting. And when they were looking at ROA and operating profit margin, those companies actually did better in the next 2 to 5 years.

And when you look on the equity side, the market reaction within 2 years, it didn't look like the stock price reversal that was feared would come did not come to fruition there. And then they looked at it at the 5-year mark, and again, it did not -- those companies did not exhibit abnormal negative returns during any part of the periods that they looked. So I think it's interesting to have both Jack and Ken's side here, when we look at the data and we look at how activisms play a part in company governance. And then on the flip side, the perceptions of activist investors, I think it really is something interesting and definitely a balancing act.

Okay. I'd like to close out this podcast was a final word from our experts. What is one actual insight you'd like IR departments or IROs to walk away with on investor activism?

Jack Spinks

Don't get caught flat-footed. You can always evaluate best practices. You can always be thinking about ESG and you can always be improving how you disclose things. Don't get stuck in the ways of the past and doing things how they've always done. I think it's really important to stay up to date and working with your -- whatever IR institute for whatever country you're in, make sure you're thinking about best practices because I think from an activism standpoint, it's helpful and generally corporately, it just leads to a better product broadly.

Ken Shimokawa

Yes. And I think from my perspective, just adding on to what Jack mentioned, just I think the trends, just following the trends and being prepared, as Jack mentioned, I think ESG campaigns at least is something that I'll probably see continuing. And so continuing to make sure you have your best practices up to date and having sure that transparency is available and kind of not being flat footed, as Jack mentioned, I think.

Making sure you're aware of the trends and being agile and reactive and proactive in a way to that. And I think it's something that we'll be monitoring where if there's anything interesting, we would definitely want to make sure we report. And going back to kind of my earlier comment on large cap, I think we'll still see that trend where they're going to make up a good portion of the activist campaigns throughout this year.

Carmen Lilly

Thank you, Jack. Thank you, Ken. Unfortunately, that is all the time we have for today. A very special thanks to Jack Spinks and Ken Shimokawa for joining us today. And to our listeners, I hope you found valuable insights throughout this discussion and tune in next month. Have a great day ahead.