Shareholder Activism in France—A Model for the US

In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists. The key recommendations are:

‘[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance. An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer, along with any hedging position. This information should be updated as the campaign progresses. The AMF [the French financial markets regulator] could also ask the investor to confirm or deny the rumors that an activist campaign is being prepared’.

‘[T]hat information made public by activists as part of a campaign should be subject to rules inspired by those applying to investment recommendations, in order to ensure the objective nature of information included in the white papers published by activists and the appropriate treatment of conflicts of interest’.

‘[T]hat activists apply similar rules [to those applying to investment recommendations] in the context of their campaign. It is also proposed that, during a public campaign, the activist (i) explains to what extent its approach considers ‘the company’s social interest and takes into consideration the social and environmental issues related to the company's activity’ and (ii) publishes all documents that it sends privately to other shareholders. Finally, the legal framework applicable to activist campaigns could be partly inspired by the rules on active solicitation of proxies to ensure transparency regarding the rationale for their vote’.

Facilitate the ability of a company to respond to an activist attack during a ‘quiet period’, which would otherwise restrict the content of a company’s response. 

Increase disclosure with respect to activist short positions. 

Consider rules to curb “empty voting” of borrowed shares or purchased voting rights.

Facilitate collective investor engagement with a portfolio company [bringing to mind The Investor Forum in the UK].

Improve engagement between companies and their shareholders as the best way to deter activist campaigns.

Require a dialogue process between an activist and a company before the activist can launch a campaign.

Companies, investors and regulators jointly develop a ‘guide to shareholder dialogue’.

Clarify the behavior likely to be viewed as ‘acting in concert’ in the context of an activist campaign.

Strengthen the AMF’s resources and broaden its role in activist situations. 

There was no direct recommendation with respect to ‘bumpitrage’—an activist buying shares of a company being acquired after the acquisition is announced for the purpose of foreclosing a full 100% takeover of the company unless the acquirer ‘bumps’ the price originally offered.  A legislative solution could be to take any shares purchased after a takeover is announced out of the vote necessary for a merger or to limit voting to shares that have been held for a period of time before the takeover was announced.

In light of the continuing activist campaigns in the US, it would be well for the SEC to consider creating a similarly tasked commission. With the recent action of the Business Roundtable in embracing stakeholder corporate governance, the recent publication by Hermes Investment Management of ‘Stewardship: The 2020 Vision’, and the progress being made on acceptance by companies and investors of ‘The New Paradigm’, a commission appointed by the SEC could be a major factor in promoting corporate adherence to social responsibility (ESG) and sustainable long-term investment.

Why Are America’s CEOs Talking About Stakeholder Capitalism Now?

Back in August, the Business Roundtable, which comprises the chief executive officers of America’s largest companies—with combined annual revenues of $7 trillion—updated its long-standing statement of corporate purpose. It’s not just about shareholders, the CEOs say; their firms must be committed to all stakeholders, including customers, employees, suppliers, communities, and the environment. In fact, shareholders came in last on the CEOs’ new list. And the statement’s principal author, in his apparent exhilaration, is reported to have said that he felt like Thomas Jefferson drafting the Declaration of Independence.

The August announcement generated three main strands of reaction. First, some liberal commentators applauded US business leaders for finally getting the message. They criticized not the goals but that the message proposed no direct way for stakeholders to be able to hold CEOs accountable to stakeholders. Second, more skeptical observers said that the statement differed little from previous Business Roundtable pronouncements on corporate purpose: boards and executives need, or at least want, discretion to balance the interests of various stakeholders other than the company’s owners. For these critics, this latest declaration offered nothing new but was a restated manifesto of CEO and board discretion and power to run their companies as they saw as best. The third strand came from business realists, who pointed out that successful firms cannot run roughshod over their customers, employees, suppliers, and communities. Even a company that is laser-focused on shareholder value must gain the loyalty of other stakeholders and avoid making enemies of them. Suppliers will not rush a delivery if they fear they won’t be paid, sullen employees will not produce a quality product, and irate customers will buy elsewhere.

There’s much to be said for these views. But two deeper forces help to explain why the Business Roundtable felt that it needed to say something now.

First, activist shareholders are making life uncomfortable for the boards and senior executives of America’s largest corporations. The Business Roundtable’s statement is thus, in part a plea from CEOs for more autonomy vis-à-vis shareholders. In effect, the Roundtable’s statement does constitute a ‘declaration of independence’—one seeking to further free CEOs and boards from the influence of activist investors. Thus interpreted, US corporate leaders are building a coalition against activist shareholders, and want employees, customers, and those demanding more ethical sourcing to support them. Freeing boards and executives further from shareholder influence, the statement implies, will enable corporate America to treat employees, the environment, and communities better.

Second, as politics and public opinion shift beneath corporate America, CEOs are trying to maintain their balance. US Senators Bernie Sanders and Elizabeth Warren, two of the leading contenders for the 2020 Democratic presidential nomination, have called for major changes in the way large corporations are run. Warren, for example, wants employees to be represented on boards (as is common in Germany and some other countries) and favors breaking up America’s largest firms.

And while US President Donald Trump has yet to turn his anti-elite populism against the corporate sector, Trump is unpredictable—and some of the most powerful examples of elite privilege occupy US C-suites.

It’s plausible to wonder whether the Business Roundtable is recalibrating their statement of corporate purpose to help to put big business lower on any populist target list.

True, Warren and Sanders won’t change their own views simply because powerful CEOs have stated a recalibrated the aims of US corporations. And Trump will remain unpredictable. Yet, it’s the underlying shifting of opinion that should, and seems to, concern the Roundtable. The anti-corporate ideas are in the political air, with political leaders expressing them, but the political leaders are not themselves the ideas’ basic origin. The ideas and opinions exist and will persist regardless of how any of the leaders fare. However, any of the three (or others pursuing that agenda) would need political allies to implement policies targeting large corporations. If their potential allies are more or less satisfied with corporate America’s new statement of purpose—especially if CEOs act on it in a media-visible way—then populist anti-business measures will lose traction.

Seeing such political considerations as relevant in the US becomes even more convincing when we look at the United Kingdom, which began reexamining the purpose of large companies several years before America did. In particular, the British Academy is funding a deep and serious rethink of corporate purpose, led by mainstream academics and business leaders. It is perhaps no surprise that talk of making UK firms less shareholder-centric and profit-oriented increased when Jeremy Corbyn, the left-wing leader of the opposition Labour Party, rose to power as a potential prime minister. Political currents can induce business leaders to coopt and adapt.

Yet, perhaps we should not be overly cynical. Surely not all the US CEOs who backed the Business Roundtable’s statement regarded it purely as a matter of political calculation, or as an opportunity to angle for advantage. Some, perhaps even many, have absorbed some of the values reflected in the new criticism. Business executives constantly have to adapt to changing environments—whether that change is of consumer preferences, technological demands, or, here, political currents.