Activist Investor Focus in 2020

View the facts and figures of activist investor campaigns in 2020. What have been the key target areas and how can companies be better prepared?

08.13.2020

Activist investor campaigns have increased, and activist numbers are growing. In 2020 campaigns have almost doubled compared to four years prior with majority of activist campaigns targeting specific areas of corporate governance.

Click below to see the facts and review the key target areas.

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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How Glass Lewis improved their executive compensation analysis and Say on Pay recommendations for European markets

Andrew Gebelin from Glass Lewis talks through how he and his team of analysts have benefited from using the CGLytics data and tools to improve their executive compensation analysis and Say on Pay recommendations for European markets.

In the continuously evolving and sometimes volatile economic times, investors have to make tough decisions. To ensure they are making the best possible decisions they require greater insights into activities within portfolios. Whether it’s sustainability practices, gender and cultural diversity, or executive compensation and remuneration, Glass Lewis has experienced, first-hand, the increasing demand for additional information from their investor clients.

CHALLENGE

Glass Lewis had a vision to create the next generation version of their quantitative pay and peer analysis, which they include in their Proxy Papers for annual shareholder meetings. Their approach to proxy advising focuses on providing investor clients with independent, in-depth analysis that looks at each company on a case-by-case basis. When it comes to executive pay, regardless of the company’s size or sector, Glass Lewis’ methodology requires a contextual assessment incorporating two consistent peer comparisons: one against similarly sized peers in the same country, and the other against a wider geographic pool of companies in the same industry.

Prior to the partnership with CGLytics, Glass Lewis’ analysis of the relationship between executive pay and performance within the European market was limited by the quantitative pay and peer tools they had available. With their client investors expecting increasingly detailed evaluations of an
ever-wider pool of companies, Glass Lewis realized that achieving their vision would require tools that provide:

  • • Greater flexibility to model unique peer groups;
  • • An ability to view CEO pay comparisons over different time periods that appropriately reflect a company’s business cycle or performance period;
  • • Comparisons incorporating a larger range of key performance indicators and remuneration metrics, allowing deep-dives into individual pay practices;
  • • Flexibility to consider and make comparisons between grant-date, target and realized pay over different time periods; and
  • • The ability to model differences in pay outcomes based on any changes contemplated to the remuneration framework or metrics.
  • APPROACH

    For the 2018 proxy season Glass Lewis integrated CGLytics data and analytics into their analytical processes and Proxy Papers for the European markets.

    Working with CGLytics, Glass Lewis defined a new peer group methodology focused around two distinct comparator groups:cross-border industry groups, and in-country groups based on company size. These peer groups were proofed and refined with CGLytics’ support to ensure they provide an appropriate basis of comparison. Glass Lewis analysts then incorporated key metrics from CGLytics’ rich library of performance data, displayed against three years of realized pay to allow for a balanced assessment over the longer term.

    CGLytics’ platform allowed Glass Lewis to provide their clients with a standardized approach to pay analytics across Europe, while retaining flexibility to account for market-, company- or plan-specific features. The performance metrics included in the Proxy Paper analysis were chosen for the greatest possible consistency across all European listed companies, providing a common point of comparison regardless of market or sector. That said, not all companies (or pay plans) are alike. Where unique circumstances require bespoke pay analytics using different indicators or uniquely designed peer groups, access to the CGLytics SaaS platform allows Glass Lewis analysts to drilldown and perform a multitude of quantitative  comparisons and tests.
    With the new peer group methodology in place, CGLytics helped Glass Lewis develop a graphical layout that illustrates the relationship between pay and performance. The new Remuneration Analysis section within the Proxy Paper
    incorporates peer comparisons and a breakdown of remuneration components to present a comprehensive picture, allowing investors to assess pay outcomes on both a relative and absolute basis.

    SUCCESS

    Incorporating CGLytics compensation data and analytics into Glass Lewis’ Proxy Paper and voting recommendations has yielded overwhelmingly positive feedback from investor clients and from companies.

    By implementing a standardized display that allows every company to be compared on a like-for-like basis, while retaining the flexibility to utilize an array of customized key performance metrics, CGLytics and Glass Lewis developed the tools to produce quantitative pay analysis and peer comparisons that are second-to-none. Investors appreciate the easy access to CGLytics rich data and powerful tools, yielding valuable remuneration insights whether they are comparing the entire market or diving deep into a single pay plan. For the companies that Glass Lewis covers, the use of bespoke peer groups and the sheer range of options that can be customized provide reassurance that their company’s pay policies will be assessed appropriately.

     

    BENEFITS OF IMPLEMENTING CGLYTICS’ DATA AND ANALYTICS

    Analysts can access 10+ years of historical compensation data
    Glass Lewis analysts are able to both view historical pay practices over an extended horizon, and model the anticipated future impact of new pay policies.

    Comparison of pay practices on a like-for-like basis
    Standardized display options for every company across Europe supports greater consistency when comparing pay practices across industries and regions.

    Greater flexibility to analyze information beyond Proxy Papers
    Analysts can now use CGLytics SaaS platform to look at specific remuneration components and factors outside of the standard information displayed in Proxy Papers.

    Expanded European market coverage
    Glass Lewis expanded their European market with additional indexes and 200+ companies to cover more than 1,100 companies.

    50% time-savings when generating quantitative pay analysis
    Using graphical templates and standardized data, analysts were able to complete the
    quantatitive pay component of the Proxy Paper in half the time compared to prior years.

    Empowered investor clients to customize their own pay for performance analysis Glass Lewis clients have embraced the ability to customize their own analysis for Say on Pay in accordance with their own methodologies using CGLytics’ data.

    Leveled the playing field for corporate issuers
    With access to the same tools and underlying data as Glass Lewis, corporate issuers can now proactively understand how they are viewed in relation to their peers.

     

    USE THE SAME DATA AND TOOLS AS GLASS LEWIS

    Customers can now instantly view the Glass Lewis executive compensation analysis and peer group modeling for planning their Say on Pay agenda via CGLytics. CGLytics and Glass Lewis have established a global partnership to provide unmatched compensation data and analytics for corporates, investors and advisors.

     • Ensure effective engagement, risk oversight and modern governance practices with CGLytics.

     • Instantly view the Glass Lewis CEO and executive remuneration analysis in the CGLytics platform.

     • Use the same data set and analytical tools trusted by Glass Lewis’ global research team and featured in the reports used by its institutional investor clients.

     • Self-construct peer groups from an extensive global data set of 5,000+ public companies for benchmarking executive pay

    Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

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    The increasing popularity of linking equity compensation to socially responsible practices

    Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

    Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

    However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

    A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

    Linking social impact to executive compensation

    One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

    As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

    • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
    • Allocating employee time and resources to positively impact society, or
    • Specific metrics regarding health and safety at work.

    An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

    In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

    Gathering momentum

    By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

    Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

    The Glass Lewis Equity Compensation Model

    Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

    Click here to experience Glass Lewis’ new application.

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    Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

    Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

    Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company’s reputation, gains attention from activist investors, and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

    Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

    Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

    As stated by the FTC it is their responsibility to, “take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation”.

    WHEN INTERLOCKS BECOME A CONCERN

    An example of where interlocks became a concern for the FTC was during 2009. During this year Apple’s director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC’s chairman praised Google and Levinson “for their willingness to resolve our concerns without the need for litigation”.

    That same year also saw Google’s Eric Schmidt resign from Apple’s board, three years after accepting a seat.

    Eric Schmidt
    Eric Schmidt resigns from Apple’s board in 2009

    It’s important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

    The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members’ seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

    This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

     

    CGLytics online solution provides instant information about a company’s board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

     

    Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

    That being said, interlocking directorates can be indicators of the following:

    – Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.

    – Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.

    – Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.

    – Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

    By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

    THINK LIKE AN ACTIVIST

    Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills that a director brings to the board.

    Activist investors are using CGLytics’ data and analytics for assessing the board effectiveness of listed companies worldwide.

     

    With deep insights into how boards are composed in the CGLytics platform, and a skills matrix applied consistently across all companies in its universe, activist investors easily benchmark a board and assess if its compliant with regulatory and stewardship codes, hence see if there is any reputational risk.

    Companies can access these very same insights in the CGLytics platform.

    Corporate issuers, their boards and stakeholders can see exactly how they are perceived by activist investors. CGLytics is helping to promote good governance through transparency to the market. View director interlocks, see how board composition compares to competitors and raise concerns of any red flags. Identify any potential skills gaps and be proactive in succession planning, with access to a database of 125,000+ executive profiles draw from 5,500+ publicly listed companies across 40 indexes and 24 countries.

    Curious to see how companies are viewed through the eyes of an activist investors? Click here

     

    RESOURCES

    https://www.ftc.gov/enforcement/anticompetitive-practices

    https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

    https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

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