Activist Investors Must Disrupt Corporate Business As Usual
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Once known by terms like “asset strippers” or “corporate raiders,” activist investors — shareholders who take large stakes in a company and pressure or replace its management in order to raise share prices — have now entered the mainstream and are spreading like wildfire. Hundreds of companies are being singled out by activist investors, who are hungrily adding European firms to their target list after having nearly saturated the US market. Most recently, financier Nelson Peltz set his eyes on Proctor & Gamble (P&G), disclosing a $3.5 billion stake in the consumer goods behemoth and announcing that he’s vying for a seat on the board. The move came a few weeks after Third Point, led by activist investor Daniel Loeb, clinched an equally large stake in Nestlé, the world’s biggest food company.
Peltz, Loeb and other activists are now making headlines with their calls for P&G and Nestlé to shed unprofitable brands and streamline operations, all in a bid to boost their own bank accounts by reconfiguring their investees’ operations. Their supposedly “disruptive” campaigns to “shake things up” at bloated Fortune 500 firms have won them applause from the media, commentators and fellow investors.
Unfortunately, activist investors’ demands for change often steer wide of corporate social responsibility (CSR), a movement that pushes companies to acknowledge the social and environmental impacts of their businesses and strive for sustainability. In fact, they don’t usually get more creative than suggestions to sell off stakes in L’Oréal, in the case of Loeb. It’s fair to say these investors could do much more to live up to their activist label.
A major study led by Stanford Professor Sarah A. Soule shows how both boycotts directed at firms and proxy proposals, or shareholder resolutions, are effective ways to influence firms over the long-term and devote more resources to CSR. During the ’80s and ’90s, for example, Nike was faced with a consumer-driven boycott to protest labor abuses committed by its overseas subcontractors. After Nike earned a reputation for using “sweatshops,” the athletic company finally instituted major changes: it raised its minimum wage, improved air quality at facilities, and embraced greater transparency and expanded oversight. Nike further recast itself as a CSR leader by reducing its environmental footprint, policing its water and chemicals usage.
Besides boycotts, shareholder resolutions — normally brought by activist investing units run by social movement organizations — are more discreet ways to target corporations. The problem with both strategies, of course, is that they’re protracted and often unconvincing, given that most nongovernment organizations (NGOs) can’t afford to buy stakes in major corporations. This is where activist investors could think beyond their own pocketbooks and fight for real changes.
The two firms most recently targeted by activist investors, after all, could certainly do with some prodding on their CSR strategies — or lack thereof. Consider the case of P&G, where Peltz is setting up “the world’s biggest proxy fight.” That is to say, a fight about profitability, not about issues of sustainability, climate stewardship or responsible labor practices.
It’s unfortunate, since P&G’s environmental record could certainly benefit from major outside pressure. In 2014, the company began to pay long-overdue lip service to CSR, yielding to activists demanding more supply-chain accountability. The campaign came after a Greenpeace report exposed how P&G suppliers were setting fire to Indonesian rainforests to build palm oil plantations, believed to be the single biggest cause of deforestation in the country. Not to mention that the fires also contribute to pollution, poor health and international tensions — all for the price of Gillette shaving gel.
The report succeeded — temporarily — in pressuring consumers and other stakeholders to place enough pressure on P&G for it to announce new oversight policies for its supply chains. Yet once again, in November 2016 the company was the target of activists — not investors, but human rights campaigners. An Amnesty International investigative report tracked palm oil production for nine firms, including P&G, and found worker abuses, including abysmally low wages, child labor and serious safety compromises that cast a pall over P&G’s supposed commitment to sustainability. Once again, in what seems to be a pattern, the firm issued a bland statement saying it was working with its partners to prevent any further infringements. But absent sustained pressure from any stakeholders other than NGOs and small consumer coalitions, the firm will almost certainly continue to drag its feet.
Another firm under scrutiny in that same Amnesty report is Nestlé, whose sins don’t stop at destroying Indonesian rainforests. Daniel Loeb’s newest pet project has been the target of international controversy and consumer boycotts for some 40 years now, especially over marketing practices designed to convince unsuspecting mothers to choose baby formula over breastfeeding. Despite professing compliance to global standards of marketing baby milk, Nestlé’s sales and marketing strategies continue to focus on the developing world. For that and other reasons, charities like International Baby Food Action Network (IBFAN) maintain long-running boycotts of the company.
The company’s tactics have gotten it into hot water in China, among other emerging markets. In one example of blatant disregard for decades-old guidance from the World Health Organization and China’s own laws, six Nestlé China employees were charged with bribing hospital staff and illegally accessing medical records in order to push baby formula sales. Nestlé is hardly alone among corporations to have dabbled in bribery to gain a competitive advantage overseas, even though such practices can technically be punished (at least in the US) through tools like the Foreign Corrupt Practices Act (FCPA).
Perhaps of more direct interest to activist investors like Loeb is that Nestlé has engaged in shady business closer to home. In California and Michigan, the company has been facing a backlash for guzzling public water and bottling it for profit. Despite outcry among consumer groups, these controversial practices continue, thanks to the $1.3 million the company spent on lobbying public officials like Sen. Richard Blumenthal, who sits on critical subcommittees overseeing trade and consumer protection. Any investor looking to take on a stake in the company would need to admit that these kinds of conflicts and reputational issues are as damaging to the corporate brand as they are to the impacted communities.
While they might still be known as corporate “raiders,” activist investors are armed with both the deep pockets and the willingness to broadcast to the press needed to convince companies like P&G and Nestlé to effect real and lasting change. In a few all-too-rare cases, shareholders have demonstrated how they can use their seats at the table for the greater good, as we saw in the case of the long-overdue fall of Uber CEO Travis Kalanick. There’s no reason why Peltz and Loeb can’t follow their lead.