Governance – the rise of the activist investor

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Catharine Sterritt: Well, first, corporate directors need to realize that climate change and ESG aren’t going away. This is a long term priority of governments, of the core population and yes, of mainstream investors, both retail and institutional. Therefore, directors need to educate themselves.

Dominique Barker: On today’s episode, I’m speaking with Catharine Sterritt, she’s Portfolio Manager of Canadian Equities at CIBC Asset Management. We’re pleased to welcome her to The Sustainability Agenda. Good morning, Cathy. How are you this morning?

Catharine Sterritt: I’m fine, Dominique. Thank you very much for inviting me today.

Dominique Barker: Great. So, Cathy, let’s get right into this. You’ve been a portfolio manager for some time and you spent a lot of time covering activist investors in prior roles and prior careers. I know, because I worked with you. What are you seeing this past year from activist funds and managers? It’s been a lot of activity there.

Catharine Sterritt: Well, we definitely saw traditional activism, which is aimed at improving operational performance at underperforming companies and pressuring them to restructure. You know, that has gone quiet because on the pandemic front, people had to focus on that. And with so many companies in crisis mode moving to protect employees and customers and in some cases pivoting, you know, companies had to pivot to change their product offerings and focus on digitalization. There was very little bandwidth for investors and companies to be focused on strategic change that comes with activism and changing out CEOs, which often comes as part of the activist agenda, just didn’t make sense. But with the rollout of vaccines and the increased visibility of the economic recovery, we’re seeing a resurgence in activism. And one huge area of change in this last year and a half has been on the climate side. And this huge support of the idea of building back better and making ESG and climate a core focus as the global economy restarts. For years, we’ve seen environmental related shareholder proposals at annual meetings backed by environmental groups, and they will buy a symbolic share in a company in order to have a voice on the floor at the annual meeting to try and raise the profile of issues through news coverage and publicity. However, with the urgency for the response to climate change, the coordinated government response we’ve seen starting with the Paris Accord and the increased focus on responsible investing by institutional shareholders, you know, we’ve started to see a mainstreaming of the ESG approach to both corporate decisions and investor priorities. And we’ve seen the tools and playbooks that have been used by institutional investor activists looking to affect operational change and strategic change through shareholder proxy votes as a way to influence the board of directors is now being adopted by the climate activists to affect real change in a way that companies are operated. And this is why the Engine No. 1 proxy battle for board seats at Exxon was such a huge wake up call to the corporate community because proxy battles work.

Dominique Barker: And Cathy, I guess maybe just back up a second. You and I know about this, but maybe some of our audience is not aware. So Engine No. 1 was a small fund manager that extracted a lot of change out of Exxon. And they put in a proposal for four new board members and three of them came on. So that’s very interesting. So sorry. Continue on. So you were saying that we’re seeing additional activity from activists as being sort of stimulated by what we’ve seen from Engine No. 1.

Catharine Sterritt: Yeah so if you think about what Engine No. 1 did at Exxon, they took a meaningful share position. They canvassed for institutional investor support and they proposed alternative director candidates. These tactics have long been successful in traditional shareholder activism and they’re being adopted to move forward climate activism. That first step is establishing a meaningful share position and it’s because shareholders have a true power in their proxy votes to affect strategic change at the board level because boards of directors that the strategic agenda for publicly traded companies. So this change from non-binding shareholder proposals on climate and other issues, and let’s face it, they were often treated as a nuisance by company management at annual meetings, has morphed into genuine proxy battles for board seats. And it gives climate change priority a true seat at the table when company strategy and decisions are being made.

Dominique Barker: Now, did you see, I mentioned Engine No. 1 earlier, did you see that they’re launching an ETF, which they’ve cleverly called VOTE for activist actions. What are your thoughts on that?

Catharine Sterritt: Well, yes, it is interesting to see. It’s a move by Engine No. 1 to have a meaningful investment position in the top five hundred US public companies in order to give them the flexibility to launch proxy battles on companies in a broad number of industries. And it helps them access more capital in order to forward this agenda. So the wake up call continues. Any of these companies could be the next Engine No. 1 target.

Dominique Barker: That’s interesting. And I think it is fair to assume that we’re going to see more activist action related to climate over the next year or two, which leads me to my last question. What advice do you have for corporate directors? What do people like myself, investment bankers, need to know when we think about advising our corporate clients and their boards of directors?

Catharine Sterritt: Well, first, corporate directors need to realize that climate change and ESG aren’t going away. This is a long term priority of governments, of the core population and yes, of mainstream investors, both retail and institutional. Therefore, directors need to educate themselves. There needs to be a core climate transition expertise on the board and in company management. We often talk to companies about their skills matrix and they think about recruiting people. But you’re going to have to educate the entire board. ESG considerations are going to be integrated into every corporate decision and there is definitely a multiplier effect. Exxon now has three specific ESG oriented board members. Other major oil and gas companies are re-examining that board skills matrix and their approach to energy transition as a result. As to where we’re going to be seeing activity next, I do expect we’re going to see it continuing in oil and gas and mining, but we’re already seeing a pickup in climate activism in the financial industry as activists aim to give banks, such as ourselves, a wake up call. You know, in terms of making sure that lending practices and cost of capital take into consideration climate transition. So I think we’re going to see this across the entire broad spectrum of industries.

Dominique Barker: Well, I think this is an important moment and potential inflexion point for climate action. So thank you for breaking it down for us, Cathy. That was really clear. Thank you for joining us today. And thank you to our listeners for tuning in. Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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