Observer to instigator: the rise of the reluctavists

May 2016  |  FEATURE |  FINANCE & INVESTMENT

Financier Worldwide Magazine

Many long-term shareholders are a passive lot, content to go along with the ebb and flow of the corporate world with a regular expectation of reaping the rewards of their investment.

Yet there are times when concerns over corporate behaviour overcome even the most entrenched shareholder passivity, leading to a desire for forceful change in the upper echelons of an organisation.

This reluctant activism – propagated by ‘reluctavists’ or ‘suggestivists’, whatever one wants to call them – employs the tactics of the activist investor and is a clear indication of the broader shifts that are talking place throughout the investment world – exemplified by Villere & Co vs. Epiq Systems and Artisan Partners vs. Johnson and Johnson.

This vicissitude, which encompasses changes to securities laws and an expansion of investor rights, has resulted in shareholders, who may once have automatically deferred to management, now being seen to be considerably more vocal when unhappy with the corporate arena.

Prevalence

“Traditionally, passive investment managers have undeniably warmed up to activist-type strategies when all else fails in their engagement with management,” says Andrew M. Freedman, a partner at Olshan Frome Wolosky. “Quantitatively-speaking, of the 100 or so activist campaigns we advised on in 2015, close to 30 percent of them were led by reluctant activists or reluctavists.”

Recognising that reluctant activists have been around for some time but garner less recognition than established proactive corporate activists, Dr Alexander Stein, founder of Dolus Advisors, believes that until reluctavists are longitudinally tracked, their prevalence and impact will be difficult to measure. “The greater long-term significance to corporate leaders, shareholders, advisors, and management theorists will derive from studying and delineating the phenomenological features, not occurrence frequency,” he suggests. “What makes reluctavist activism noteworthy beyond its comparative novelty? How should its function and impact be distinguished from other forms of activism? And can – or should – it be methodically harnessed as a governance tool?”

Who are they and what makes them tick?

According to Mr Freedman, reluctant activists don’t typically look like a traditional activist investor on paper. “They tend to file more 13Gs than 13Ds. They tend to take deep, concentrated positions and do an incredible amount of diligence on their portfolio companies. They don’t come out swinging with a list of demands, but tend to employ a softer, gentler behind-the-scenes approach in their engagement with their portfolio companies,” he says. “Since companies often do not feel threatened by these investors, their agenda does not get the same attention as the true activist. They tend to get brushed off and left with a ‘fight or flight’ decision. Many of these investors, who may have chosen to go away in the past, now write public letters and agitate like an actual activist,” he adds.

For Dr Stein, the post-mortems of particular reluctavists in action usefully clarify their unique characteristics, as well as highlighting typical common traits and oft-used technical manoeuvres. “Distinct from traditional activists’ coolly rational focus on enhancing shareholder value, institutional performance and market footprint, the common underpinning catalytic drivers among reluctavists include an objection to or rejection of an institution’s socioeconomic or ideological positions and policies,” he says.

Evaluating effectiveness

Some may say that achieving corporate change via the reluctavist route is unlikely, given that a passive investor is largely unaccustomed to the stringent, round the clock behaviour typically associated with an established activist. A sound assertion perhaps, but is it fair?

“The distinctions between reluctavists and conventionalists are not analogous to the practice and performance metrics which separate elite athletes from their amateur counterparts,” points out Dr Stein. “There are endeavours in which repetitive application is a requisite for competitive mastery and where dilettantes cannot succeed. However, the ability to initiate corporate change is not necessarily among them. Governance without disagreement doesn’t exist, and sometimes people push for change more because they’re unhappy with how things are, rather than because they hold a clear vision of an improved future.”

Conclusion: reluctant activism as a mechanism for corporate change

For some, reluctant activism is a legitimate mechanism for achieving corporate change. “This type of activism is in its nascency and just beginning to catch on,” says Mr Freedman. “We see it continuing to grow as more and more once-passive investors avail themselves of the activists toolkit in certain, last resort situations.”

Catching on it may be, but this ascendant trend may have both positive and negative potential which needs to be managed. “Effectively and sustainably harnessing the productive value of reluctavists as change-agents, while mitigating the pitfalls, requires establishing thoughtful guidelines, safeguards, and advisable practices,” suggests Dr Stein. “While each instance will ultimately be defined by its own terms and circumstances, corporate leaders and boards, as well as these activists themselves, should be versed in fundamental principles, dynamics and risks.”

© Financier Worldwide

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Fraser Tennant