Essec Business School

Europe is far from the Far West, but according to Professor Viviane de Beaufort, Director of the European Center for Law and Economics (CEDE), shots have started flying! Point of view by Viviane de Beaufort in collaboration with Caroline Riesco and Mahamadou Niakate.   

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Qualifying shareholder activism -- when investors attempt to use their rights as shareholders of a publicly-traded corporation to bring about change -- requires careful nuance. Jean-Pierre Jouyet, president of the ‘Autorité des Marchés Financiers’, once declared in 2010 that "France is still the Far West of corporate takeovers". In other words, he argued that takeovers involving French firms often involve a fight.

M. Jouyet’s comments, however, also speak volumes on the relative influence of minority shareholders in France: these shareholder “activists” have been able to gain an often disproportionate amount of corporate governance power. In fact, an American style shareholder activism is growing in France. Although French activists do not have the same postures, the same goals, or the same methods as their american counterparts, similarities between them are clear.

To simplify, we will evoke three categories of shareholder activism by borrowing imagery from the famous western film "The Good, the bad, and the ugly".

Institutional investor activism: "the good"

An institutional investor is a nonbank person or organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves.

Institutional investors tend to have better long-term vision and seek to correct what they consider to be business failures. In other words, they don’t aim to control the management of the company, nor to maximize the shareholder value in the short term. Instead, they aim to establish legitimacy as socially responsible actors. This type of shareholder activism ensures a better quality of governance in order to foster a sustainable strategy for the company. Guided by their sense of ethics, institutional investors tend to invest less if there is a risk of violating legal regulations or CSR guidelines.

Institutional investors favor negotiation rather than aggressive activism. In other words, they tend to work directly with off-line executives and management to make their voices heard. Institutional investors like Vanguard and Blackrock, for example, promote engagement through in-house discussions with management, which helps them avoid issuing public directives to management. However, they are more likely to threaten divestment. The Norwegian sovereign fund, for example, has divested from several firms in which they had lost confidence.

Institutional investors also rely on voting advisors (proxies) for advice and clarification on important issues. In this regard, the CDC (Caisse des Depots) is a major player in France, which has established its voting policy with a governance committee, uses services like Proxinvest and ISS, and organizes negotiations before the AGM.

Hedge fund activism: "the bad"?

Hedge funds first began appearing in the 1990s, and since 2003, more than 275 new activist pension funds have been created. Their value has climbed from $3 billion US in 2000 to $100 billion US in 2014, and US $200 billion in 2017, including $60 billion invested in Europe. Hedge funds take a stake in a company in order to restructure its assets, change its governance structure, or update its financial policies. Their ultimate aim is often to reduce costs in order to maximize short term benefits.

Hedge funds seek to achieve a significant change in the strategy of the company, and can use force to achieve this change. Pershing Square Capital put pressure on the Canadian Pacific Railway in 2012, for example, to elect its list of candidates to its board. Consequently, studies have shown that companies targeted by activist hedge funds have a lower perpetuity rate than the average: 63% after four years compared to 84%. Hedge funds are furthermore criticized for not paying much attention to operational activity, and intervening through financial maneuvers, which tend to weaken the company if it finds itself in a difficult economic situation.

For example, in August 2013, the British hedge fund activist The Children's Investment Fund (TCI), which said that it held more than 1% of EADS' capital, wrote to Executive Chairman Tom Enders asking him to step down as soon as possible. Participation in Dassault Aviation: "You have insisted that EADS is now a" normal "company, seeking the profits and interest of private shareholders." However, other authors such as Fabrice Rémon argue that this type of activism is good because it shakes-up the business.

Are other forms of minority shareholder activism therefor "the ugly"?

Is it an exaggeration to qualify some shareholder activism as 'ugly' shareholders? In our Western analogy, sometimes when minority shareholders acquire a disproportionate influence in relation to their holding of securities, there can indeed be “ugly consequences”.

Very different types of investors concern us here: individual shareholders; Holders of non-controlling minority interests such as asset managers and pension funds; Non-governmental organizations; trade unions and actors in the voluntary sector; Voting counseling agencies also have a special role in France. The common point of these shareholders is their position as minority or external shareholder and the methods they can use to gain influence. But they have very diverse objectives: the individual shareholder will often be most interested in the long-term prosperity of a company rather than its short-term.

For example, an individual shareholder voiced his concern at the 2014 Air Liquide AG, asking whether it would be wise to pay the dividend in cash when the Group had to finance the acquisition of Airgas. Sometimes, individual investors act in the name of the greater good. NGOs are also starting to intervene. In particular, Friends of the Earth, which is particularly vigilant about climate change commitments, at the AXA AGM asked "what is the threshold for disinvesting companies most involved in climate change activities related to coal?"

Legal Weapons

Among the weapons used, questions voiced at AGMs and the so-called external resolutions. The filing of a resolution can indeed be a pressure tool: PSAM, holding 0.8% of the capital of the Vivendi group, filed a resolution in December 2014 requesting the sale of Universal Music. In the spring of 2015, a second resolution is proposed for the distribution of an exceptional dividend in the amount of € 9 billion. On April 8, 2015, the amount of dividends distributed went from 5.7 billion euros to 6.75 billion euros against a withdrawal of the PSAM resolution.