Canvassing the Shareholder Franchise in 2021 – Institutional (Coates, BlackRock and Hohn, ESG, XOM, Ubben, GM) and Retail (WSB, GME, AMC)
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Today’s topic broadly covers the current shareholder landscape. There are many things happening right now in the shareholder landscape, including a growing focus on ESG from institutional investors like BlackRock and TCI, and the rising collective consciousness of the retail shareholder. Here are some connections on things that are interesting to me:
John Coates was named Acting Director of the SEC’s Division of Corporate Finance. A former Professor of Law and Economics at Harvard University and partner at WLRK, one of the things Coates is known for is the Problem of the Twelve. The Problem of Twelve, as noted by Matt Levine, is Coates’ “term for ‘the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies’”.
BlackRock would no doubt be one of those twelve individuals. Sometimes regulators lead the market, other times the market leads. Larry Fink at BlackRock arguably did the latter in his latest annual letter to CEOs which was toothier than his previous missives. The letter requests that companies “disclose a plan for how their business model will be compatible with a net zero economy… and how this plan is incorporated into [their] long-term strategy and reviewed by [their] board of directors” in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TFCD). The obvious counter to the view that Fink is showing more teeth in this letter is that BlackRock consists of mostly passive index funds that can’t sell a company that doesn’t comply with its request since that particular capital is mostly permanent.
How have some commentators responded?
“Generally Accepted ESG Reporting Principles” – Samuel Liss argues that there needs to be more standardization from some regulatory third-party, but it won’t be easy as “E&S is difficult to tightly define, and cross-currents influencing the definition will intensify. The burden in 2021 will continue to fall on the marketplace, as we struggle toward ‘generally accepted ESG reporting principles.’ We do need more standardization here and expect the Biden Administration will propel the SEC to take action beyond the human capital request, likely next addressing climate disclosures and overriding the debate of jurisdictional authority. The SEC is ill-equipped to address the broad objectives incorporated in ESG. That said, there is ample rationale for seeking a referee.”
But the proof is in the pudding and even though BlackRock isn’t that flexible with respect to the disposition of the shares of companies in its passive indexes, we can still monitor how BlackRock votes. Christopher Hohn, for one, is not convinced, noting back in October (prior to Fink’s 2021 letter) that BlackRock and Vanguard are “acting like sheep when it comes to climate change, [and] arguing that large asset managers are taking ‘insufficient and ineffective action’ on global warming.” Hohn, a prominent shareholder activist, is leading his own Say on Climate campaign, stating “You only need to buy $25,000 of stock and hold it for one year to file a shareholder resolution in the U.S. and $2,000 in Canada” ... “With $12 million you can buy enough shares to file them with every company in the S&P 500.” A low cost, volume intensive campaign from a shareholder activist known for his engagement beyond precatory proposal-activism? That’s one to watch.
Hohn has already seen some of his efforts pay off with Moody’s, the first S&P 500 company to join Hohn's Say on Climate Campaign. TCI’s goal is actually similar to BlackRock’s as the campaign is centered around goals towards net-zero emissions by 2050 and the implementation of “sustainable business practices around the globe by advocating for corporate climate action plans”. In Europe, where Hohn is based, he has had recent success at Aena, a Spanish airport group, which became “the first company in the world to give shareholders an annual vote on its effort to tackle climate change.” Aena’s majority shareholder is Entidad Pública Empresarial ENAIRE (a state-controlled entity), so the work is easier (or harder) with the need to convince only one shareholder.
But, Europe tends to be a bit ahead with respect to ESG focus and infrastructure. Take for example, another European asset manager, Nordea Bank, who has declared that it expects all of its $425 billion wealth unit to be close to 100% ESG in 5 to 10 years. And while I said Europe is ahead, in the U.S., see GM’s commercial taking the Euro competition seriously with a commitment to go all-electric by 2035.
Hohn is not the only shareholder activist with ESG goals. The potential proxy contest at XOM by Engine #1 (previously covered here) has taken a twist, with reports that Jeff Ubben could take an investment and board seat (previously it was also reported that D.E. Shaw might get a seat[1]). Ubben is well known as an activist with less hostile and more constructivist tendencies and with ties to notable institutional investors. Up to this point, much has been made of the institutional forces being assembled to move XOM towards a focus on energy transition, with more than 135 investors managing more than $2 trillion seeking to effect change. If you recall, I previously noted that retail at XOM had a large presence (say ~50% of its shareholders, give or take) and that it could potentially sway in favor of management, which may have bolstered XOM’s resistance to the coalition of institutional investors knocking at its door. In addition to Ubben’s potential arrival as a white knight for the institutional vote, the media has reported on a potential tie-up between XOM and Chevron, although regulatory and antitrust concerns could be an obvious impediment[2].
I would say that generally speaking, most advisors believe that Retail leans towards management[3], but Retail has also traditionally been viewed as short-term holders, and therefore unpredictable. For example, in the SPAC context – ChargePoint’s SPAC’s de-spac transaction was delayed because shareholder turnout was too low, with only 45% of its shares voting. There's speculation that a higher percentage of retail in the SPAC meant a high percentage of share turnover thereby making it more difficult to get the votes needed (since owners of record date may have sold by the vote date). Proxy plumbing.
But, Retail may also be capable of cutting the other way. While Retail may be a boon for existing management at XOM, and while it may stand for short-term unpredictability, it may also have the ability to be its own independent and unified force. That is to say, the promise of Retail’s ability to act collectively is very interesting. Without delving into the murky details of GME/AMC (i.e., liquidity play, Reddit, WSB and Roaring Kitty, two-day settlement, Robin Hood, payment for order flow, Citadel, was there institutional money backing GME’s Retail rise, and if so, how much, etc.[4]), if the narrative that GME was driven by WSB at Reddit is legitimate (even partially), then this could be more than an isolated event. Although, as I previously speculated – would Retail need to be the tip of the spear in a potential activist campaign? And would there need to be the same unusual conditions that GME had in place?
And finally, to tie it all up, we have a memo from WLRK that describes the ESG/TSR two-pincer attack from shareholder activists (like Hohn, Ubben, Engine No. 1), noting that while the attack is not necessarily new, the “growth in the number and size of activist ESG-impact funds…has significantly increased the exposure to pincer attacks.”
[1] Activists can and are used against each other, and view others as competitors (even if friendly) for spotlight and those LPs. Thus, while the narrative is often company vs. activist, sometimes the intra- competition is more cutthroat. But, it’s obviously situation dependent.
[2] From a defense standpoint, it feels like XOM is trying to throw things at the wall to see what sticks – question the activists’ legitimacy? Check; white knight? Check; previously explored M&A opportunity with obvious risks? Check.
[3] Like dark matter in space, we determine how retail votes by accounting for the votes left over once institutional votes have been calculated. Why is that? Because most institutional disclose how they vote in their form N-PX or via voluntary disclosure on their websites and because retail is not…yet…or typically…a monolith. Context is also important; retail does not always consist of ~50% of the shareholders like they do at brand names like XOM.
[4] Well, one murky detail that is obviously important to this argument is whether GME was really retail vs. institutional, or institutional vs. institutional. Right now, the argument hinges on a perception that it was retail vs. institutional – but in the future as regulators uncover more details, we may see a new narrative emerge.
