By now, everyone in the workforce solutions space has heard about the mass layoffs rattling the business landscape like an earthquake erupting under the actual fault lines that California’s big tech juggernauts sit over. Google and Salesforce have already made headlines with their substantial job cuts. Disney’s recently returned CEO Bob Iger is also embroiled in a battle with activist investors that will soon see 7,000 positions slashed at the House of Mouse. Clearly, the impact of activist investing can leave in its wake a trail of displaced talent. But what exactly is activist investing, how does it affect a company’s human capital, and what potential opportunities exist for staffing industry firms that want to make difference with like-minded investors?
What Is Activist Investing?
To describe activist investing in the parlance of relationship statuses, “it’s complicated.” The “activist” in activist investing is a broad, complex, multifaceted, and ideologically charged word. On the surface, “activist” evokes images of employee rights advocates waving picket signs, impassioned union organizers trying to inspire a movement, or labor reform champions like Norma Rae and Chris Smalls rallying talent to fight for better working conditions. And on one level, activist investors do sometimes embody those principles. But to quote the colloquial wisdom of yesteryear, “Ain’t no pancake so thin it don’t have two sides.” Because other activists are legitimately greedy shareholders who care only about increasing their own profits or enforcing their exclusive vision over a company’s operations.
Investopedia offers a succinct and lucid definition of activist investing: “An activist investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run. The activist investor's goals may be as modest as advising company management or as ambitious as forcing the sale of the company, divestitures or restructuring, or replacing the board of directors.”
- Activist investors buy minority stakes in publicly traded companies to alter how they are run.
- They are most commonly wealthy investors who have formed hedge funds.
- Investor activism may focus on maximizing shareholder value (show me the money) or the company's social responsibilities (let’s do some good in the world with all that money).
- If they fail to persuade company managers to embrace their ideas for change, they may wage a proxy fight for board seats, replacing existing executives and board members with their own allies.
- There’s a big debate between investors and the SEC about imposing tougher disclosure rules for activists. Hedge funds are largely unregulated and, therefore, more prone to controversies.
Activists have actually been around for many years, eventually capturing the public’s attention during the Enron scandal of the early 2000s. Prior to that, however, the rise of activism was labeled a market response to the “agency problem,” which is attributed to management seizing the means and opportunities to enrich themselves at the expense of shareholders. Activism, in the original investment sense, was a method of utilizing small groups with limited powers to safeguard the ownership interests of the shareholder community.
Activist investors, sometimes called shareholder activists, essentially fall into two main groups, which I have taken the liberty of naming.
These investors lobby companies to improve working conditions for employees and contractors or to promote corporate social responsibility, such as backing a dissident board elected to fight climate change, as happened in the battle between Exxon Mobil and activist Engine No. 1, a tiny hedge fund that believed curbing emissions could simultaneously boost the bottom line. The activists emerged victorious — a sort of David and Goliath narrative catapulted by mainstream media.
The other, perhaps more traditional activists, are what I refer to as shareholder capitalists. As Investopedia explained, “Many activist investor campaigns seek only to maximize shareholder value, and most of those are the work of hedge funds specializing in the unique mix of public pressure, behind-the-scenes lobbying, and business expertise required.”
They buy stocks they view as undervalued while pressuring management to adopt policies they think will raise value, such as giving more cash back to shareholders or shedding divisions that the activists see as driving down the stock price. With increasing frequency, they get deeply entrenched in governance — demanding board seats, replacing CEOs, and endorsing specific business strategies.
How Activists Harness Power
Given their minority shares and small numbers, one may wonder how activist investors get any power at all in the wider discourse. Well, the power of persuasion is a big arrow in their quiver. Activists are deft lobbyists. They’re skilled at detailed research and public relations (PR). Activists apply pressure by using data they’ve uncovered to lobby other shareholders to their cause. They also rely on elaborate PR campaigns, public awareness, and media coverage to get their point across. Where board members generally conduct their affairs in private, outside of regularly scheduled shareholder meetings, activists take their message to the streets. When enough people in the public (i.e., consumers) latch onto a particular set of values or new mission statements, their influence can help strengthen the pressure used to drive change. In this way, activists may rely on politicizing business objectives rather than simply expressing financial recommendations, offering advice, or suggesting performance strategies.
Activism Is Spreading
Reporting for Forbes, Emily Washburn pointed out that activist investing is on the rise and has been since the pandemic. “The number of activists in the market has increased since 2017, potentially due to low stock prices making it easier for activists to buy-up large shares of companies they think can be improved,” she wrote.
The recent presence of activists in the market has become more aggressive, targeting multiple companies that we wouldn’t usually depict as “underperforming” or associate with low stock prices. It’s a phenomenon called “swarming.”
“Disney and software giant Salesforce are both involved with multiple activist investors, the Wall Street Journal reported Wednesday. This phenomenon is called “swarming,” and it's on the rise–jumping from 7 companies in 2020 with multiple activists to 17 in 2022,” Washburn explained.
Washburn also illustrated how activists harness the power of PR to gain traction in their efforts: “Indian billionaire Gautum Adani lost $64.7 billion in the last ten days after activist investor Hindenburg Research published a report accusing Adani’s Adani Group of being ‘engaged in brazen stock manipulation and accounting fraud scheme over the course of decades.’ Meanwhile, Nordstrom’s stock increased over 20% following activist investor Ryan Cohen reported big buy-in.” Some data, a few press releases, and a little patience make all the difference.
This swarming has created a “democratization” of activist investing, according to an article by Nick Rockel in Fortune. First time investors are getting more involved, and “activist investors, who might own 1% or 2% of a company’s stock, are seeing institutional owners join forces with them to pressure companies.”
Expanding on the growth of activism, Rockel cited research that indicates the burgeoning omnipresence of these investors: “FTI Consulting just published the latest edition of its quarterly Activism Vulnerability Report, which includes trends in shareholder activism. Activist investors launched 321 campaigns involving U.S.-based companies in the first half of 2022, a 23% jump over the same period last year. Activists gained 31 out of 71, or 44%, of the board seats they sought in the second quarter, versus 14 out of 43 (33%) during the same period in 2021. Among the 10 sectors covered in the report, technology, media, and telecom (TMT) was the most targeted in the first half, accounting for 25% of all U.S. campaigns.”
The Darkside of Activism
Many activist investors are in it for themselves, and their motivation is to benefit their agendas, even when the PR would indicate otherwise. Consider a 2022 expose by Kristie Pladson for Germany’s Deutsche Welle on BlackRock CEO Larry Fink’s call to fight climate change. BlackRock is perhaps one of the most recognizable activist investors, overseeing more than $10 trillion in assets. Fink’s noble gesture didn’t go over so well, as Pladson explained: “Environmentalists accuse him of exploiting the climate crisis for the sake of profit. Many in the corporate world think he's pushing a green agenda at the expense of profits or growth.”
Fink failed to convince investors that he was working to bolster profits. He also failed to convince environmentalists of his commitment to going green when he refused to back BlackRock away from fossil fuels.
“Some believe it's misguided to trust in the free market to solve the climate crisis, which it arguably caused, and that activist shareholders are doing more harm than good,” Pladson said. “Environmentalists have also criticized BlackRock's refusal to divest their holdings in fossil fuels, something Fink has called ‘a bad answer’ to stopping global warming.” Quite the pickle.
Next we have Alana Semuels’ thought-provoking 2016 exploration of activist investing in DuPont, one of the nation’s leading scientific innovators. Between 2009 and 2015, DuPont’s share price had increased by 210%. When activist investor Trian began its battle with DuPont, shareholder returns had grown to 256%. But Trian wanted more. So it slashed the company’s R&D budget. For an organization that looks to solve future problems or improve quality of life, this decision may have benefited investors in the short term, but it created bigger problems for society.
“Ron Ozer says he noticed interest in research and innovation decline over his time at DuPont,” Semuels noted. “At DuPont and many other American research companies, scientists used to be able to embark on projects because they were scientifically important or interesting, even if they weren’t obviously profitable. This led to discoveries that helped advance science, and in many cases also proved quite lucrative. ‘At one time, the research was more academic, with people doing things that might not have an obvious application,’ he said. ‘As time went on there was more expectation that the research have a good profit objective.’”
How Activist Investing Impacts the Workforce
Citing a 2013 study on activist investing's impact on target companies, BuzzFeed reporter Mariah Summers highlighted findings that “employees of target firms experience a reduction in work hours and stagnation in wages despite an increase in labor productivity. Results show ‘a de facto but implicit wage reduction: productivity-adjusted per hour wages decrease by 6.1%.’”
Certainly, most of us understand that aggressive investors often start by culling jobs when seeking to maximize company profits. But voluntary attrition is also a factor. In 2019, Song Ma, an assistant professor of finance at Yale SOM, conducted his own research on activist investing. Song and his co-authors found evidence that hedge fund activists can have a positive effect on firms, at least during the five years after intervention. Companies targeted by activists performed better on measures of innovation during that period than similar firms which weren’t targeted.
“Targeted firms’ patent filings were 15% higher than those of control firms. And their patents were cited 15% more times, suggesting they were higher quality,” Song discovered. But staff turnover remained an issue. “After intervention, the percentage of inventors leaving or arriving at targeted companies rose by 6-9%. New hires filed more patents than those at control firms, and the average productivity of existing staff members increased.”
However, “inventors who left had higher patent citation rates, suggesting they had landed on greener pastures.” More recently, Philipp Meyer-Doyle of INSEAD delved further into this scenario with a study on the human capital ramifications of activist investing.
“Overall, our paper shows that hedge fund activism can become compromised on its own terms if talented employees decide not to stick around,” he wrote. “Since the positive performance effect of hedge fund activism in targeted firms is weaker if those firms experienced a higher loss of employees, it is likely that the employees who left were not deadwood but valuable, productive contributors to the organisation. Further, we undertook four separate analyses to rule out that layoffs are responsible for the effect we find. If layoffs were responsible, firms that were inefficiently run – i.e. that had lots of deadwood to chop away – should have lost more people, but the opposite was actually the case. Firms with higher operational efficiency experienced more employee exits.”
So no matter how you slice it, human capital attrition is almost always a byproduct of becoming the target of activist investors. That said, companies with stellar benefits, healthy retirement plans, profit-sharing structures, and excellent working conditions were better equipped to weather the storm and retain their talent.
But there’s an emerging trend that could flip the script in favor of workers who are traditionally imperiled by activist involvement. And this where the staffing industry could have a positive effect.
Opportunities for Workers and the Staffing Industry
Vanina Farber and Patrick Reichert, researchers for the International Institute for Management Development (IMD), have witnessed shareholder activism as a force for “changing human resource policies around workplace diversity and inclusion.”
“Nia Capital is among the most active investors making use of proxy votes that support values of inclusion, diversity in leadership, and environmental sustainability,” the authors explained. “In 2020, Nia Capital filed six resolutions for deliberation on the topic of diversity disclosure. The targeted companies – including Gilead Sciences, Sarepta, and SunPower – committed to substantive improvements in their exposure of diversity data. For example, at Fortinet Inc’s 2020 annual meeting, a Nia shareholder resolution requesting the release of quantitative diversity data and an annual workplace diversity report received 70% support from shareholders.”
Nia Capital also leveraged its position to pressure targeted firms to review policies that discourage staff from taking discrimination or harassment disputes to court. By pushing companies to focus on DEIB improvements and removing roadblocks such as forced arbitration, this activist investor actually helped spur positive working conditions and greater candidate opportunities for companies, similar to how Engine No. 1 succeeded in its campaign to implement climate controls at Exxon.
It’s one thing for activist investors to concentrate on corporate social responsibility, but it’s another for workers to get involved directly. That concept, too, has gained traction.
Ben Ashwell, editor of Corporate Secretary, wrote that “boardrooms across the country are increasingly discussing human capital management issues, as investors bring subjects like diversity and inclusion, employee safety, retention and engagement into focus.”
“At Alphabet, Amazon and Walmart, meanwhile, employee groups have cosponsored shareholder proposals that made it to the ballot during the last couple of years,” he continued. “In each instance, existing employee-activist groups decided a shareholder proposal was an appropriate escalation of their lobbying of management.”
This isn’t necessarily a new revelation outside the United States. In Germany, employee-shareholder activism is well established. Labor groups have experimented with shareholder proposals since the early 1990s. Ashwell seems to view this as a threat, and we disagree there. But the reality in America is that more employee groups are leveraging activist investors to help improve their working conditions and opportunities.
Writing for Fast Company, Kristin Toussaint featured Alice Martin, “who advises shareholders on labor rights issues at PIRC, Europe’s largest independent corporate governance advisory firm.” Martin is “a leading thinker on how workers can enlist shareholders to their cause and amplify traditional worker organizing efforts.”
“Trade unions can play a role in actually influencing what resolutions are filed in those meetings,” Martin says, “so the shareholders have to vote on something, which might relate specifically to labor rights, for example. The way that you would get that resolution filed would be through forming relationships with sympathetic shareholders.”
“Ultimately,” Martin added, “this kind of activism has to be part of a wider agenda to improve democracy within companies. That needs to be a key aim in targeting shareholders: It’s not just to win one-off concessions. It’s actually to establish a greater say for the workforce.”
The Staffing Industry as Activist?
If we boil all of this down, employees and their advocates are forging their own paths into the world of activist investing. It’s an interesting dynamic. If investing is about maximizing your own returns and business is about being competitive, this development is introducing a new type of competition into the investment mix, which could also serve as a signal to the staffing industry.
Activist investors rely on PR, public opinion, data, and support to make their cases. And activist investors can be influenced by groups within an organization to uphold their values or needs. The staffing industry is a powerful, data-driven ecosystem. This could be a prime time for industry players to exert their influence and join activist investors in driving positive changes that benefit the workforce, create jobs, and improve the economy.
Laying off workers may give investors a financial boost, but high unemployment does not avail the wider economy. People on unemployment lose their purchasing power as consumers, which hurts businesses. Companies sacrifice talent who could help innovate their products or services. Diversity, inclusion, equity, and belonging gains suffer since people of color and women are often the hardest hit during hiring downturns. This is exactly where the staffing industry can use its muscle to get involved and optimize value for shareholders and talent.
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