The following case studies are excerpted from Glass Lewis’ 2022 M&A Season Review, available to clients in our Governance Hub library, or on Viewpoint.
2022 marked the first substantial test of investor appetite for ESG activism. It might be worth remembering that the acronym, growing more ubiquitous by the day, encompasses a myriad of issues and concerns, means different things to different constituencies, and evokes viewpoints ranging from extreme skepticism to dogmatic belief in stakeholder capitalism. It’s also worth noting that the “G” brand of investing and shareholder activism is well established and widely accepted, arising after the governance failures at Enron, Worldcom, Tyco and others at the turn of the century.
Background
In more recent years, “E” and “S” considerations have come to the forefront with mixed success. A longtime focus of a subset of shareholders, environmental and social issues are increasingly believed to be a driving force behind investor decisions and behavior more broadly, challenging the longstanding shareholder primacy narrative. At the same time, there has been pushback against “greenwashing” practices, “brown-spinning” dirty assets, or simply exploiting ESG as a marketing tool. And certain elements of ESG investing have yet to prove viable when market or geopolitical conditions become strained, as they did over the past year.
As it relates to shareholder activism specifically, environmental issues have been either the initial focus or an ancillary consideration of activist campaigns, in parallel with general corporate governance. Perhaps unsurprisingly, companies in the energy sector are more likely to be in the crosshairs of environmental-focused shareholder activism campaigns, the vast majority of which have related to climate change and greenhouse gas emissions. In recent years, their scope has evolved from focusing on the impact of certain activities on the environment to raising concerns about the implications on companies’ business models, returns on capital and long-term economic viability.
RWE AG (RWE) April 28, 2022
A notable example that went to a shareholder vote involved Germany’s largest power producer, RWE AG, where a small shareholder submitted a proposal for consideration at the company’s AGM calling for RWE to spin-off its coal business. RWE is one of the largest carbon emitters in Europe, but it has also built a leading renewable energy platform. In making its case, the activist appealed more to shareholders’ economic interests than their potential concerns regarding the environment, arguing that continuing to own and operate coal-fired power plants made RWE un-investable and suppressed its market valuation at lower levels relative to pure-play renewable energy companies.
The board countered that, while it fully intends to transform RWE into a 100% green energy company, any spin-off or disposal of the company’s coal assets would best be achieved for all stakeholders through a carefully orchestrated process in conjunction with the German government. RWE has stated its support for Germany’s ambition for a coal phase-out by 2030, and both the company and the activist seemed to agree that a government-sponsored foundation model for RWE’s coal business would be the best outcome for all constituencies. As a result, while recognizing the potential valuation upside of an eventual separation of RWE’s “clean” and “dirty” assets, we advised shareholders to oppose the activist’s proposal and to continue monitoring the company’s progress towards a more feasible and constructive solution.
AGL Energy Ltd. (AGL) Meeting Canceled / Ongoing Developments
A somewhat similar situation played out at Australia’s largest electricity generator and carbon emitter, AGL Energy Ltd. The company proposed a demerger to separate its energy retail business and network of renewable assets from the electricity generation business, predominantly consisting of coal and gas powerplants as well as renewable offtake agreements and a touted pipeline of renewable energy projects that would eventually replace the coal plants upon closure. AGL first announced the demerger plan in 2021 and planned to present it for shareholder approval in June 2022. But the demerger proposal was met with widespread opposition from climate activists and shareholder activists alike.
In February 2022, a tech billionaire, through his fund Grok Ventures, and Brookfield Asset Management made an unsolicited offer to acquire AGL with the intention of pursuing a plan to exit all of AGL’s coal operations on a more accelerated timeline than set out under the board’s demerger plan. But the takeover bid was promptly rejected by AGL management. Undeterred, Grok launched a public campaign against the demerger proposal and accumulated a large enough stake in AGL’s shares to effectively block the transaction.
At AGL, other parties including climate-focused investor Snowcap, the Australasian Centre for Corporate Responsibility and even Greenpeace, presented compelling arguments against the demerger plan from a business and economic perspective. The mounting opposition ultimately forced AGL to scrap the plan and announce a renewed review of the company’s strategic direction. Furthermore, AGL’s chairman and CEO both agreed to step down, as did two other directors. In the wake of the failed proposal and leadership changes, Grok called for the company to act swiftly in its review of strategic and transaction alternatives and initially requested two seats on the board.
In September 2022, when AGL announced its new strategic direction, including an accelerated exit from all coal-fired generation activities by the end of 2035, Grok nominated four independent directors for election at AGL’s November 2022 AGM. The existing five-member board had already appointed one of Grok’s designees and recommended that shareholders support one of the investor’s other nominees at the AGM, but Grok believed the board remained encumbered by old thinking and needed more experts around the board table to undertake the immense challenge of transforming AGL into a decarbonized renewable energy company. Investors agreed, electing all four of Grok’s external director candidates at the AGM.
Guess?, Inc. (GES) April 22, 2022
One of the year’s more notable “S” campaigns was Legion Partners’ attempt to remove two longstanding directors, Paul and Maurice Marciano, from apparel retailer Guess?, Inc.’s board. Legion Partners’ case was relatively novel in that it centered around what had become a lengthy and growing list of sexual harassment allegations against chief creative officer Paul Marciano, and the reputational risk that such allegations posed to Guess? and its shareholders.
At the time of Legion Partners’ campaign, Paul Marciano faced significant public allegations of sexual misconduct from former Guess models, many of whom had come forward since 2018, with the alleged incidents spanning the past four decades. Legion Partners also argued the alleged troubling behavior of Paul Marciano had been largely enabled by his brother, Maurice Marciano, who co-founded Guess and had served in various key leadership roles over the decades. Legion Partners made a compelling case, in our view, and we recommended that shareholders effectively withhold votes from the two brothers.
Yet, given the Marciano brothers’ collective ownership of more than 41% of Guess’ outstanding shares, the campaign was always going to be an uphill, if not insurmountable, battle. In the end, the Marciano brothers were duly re-elected by a majority of votes.
Investors should note, however, that excluding the votes cast by the Marciano brothers and other Guess directors and officers, just a paltry 18% of unaffiliated public shareholders voted to keep Paul Marciano on the board, while Maurice Marciano received 44% of the unaffiliated vote. Both of the Marciano brothers currently remain on the Guess board, though Paul Marciano remains the subject of an ongoing investigation by a demand review committee of the Guess board.
McDonalds Corporation (MCD) May 26 / The Kroger Co. (KR) June 6, 2022
Activist investor Carl Icahn stepped outside of his normal routine and ran two ESG-focused proxy contests in 2022, at McDonald’s Corp. and The Kroger Co. At McDonald’s, Mr. Icahn launched a campaign, led by his daughter, Michelle Icahn Nevin, arguing that the fast-food chain failed to deliver on a 10-year-old promise to eliminate the use of gestation crates from its pig supply chain.
Following our review and engagement with the parties, we concluded Mr. Icahn had presented an insufficient case to warrant the proposed boardroom changes. In the end, Mr. Icahn’s campaign at McDonald’s was nothing short of an abject failure in terms of shareholder support, as his two director nominees received less than 2% of the votes cast. Additionally, once the writing was on the wall, the Humane Society withdrew its separate shareholder proposal requesting certain disclosures regarding McDonald’s use of gestation crates.
Subsequent to the McDonald’s shareholder vote outcome, Mr. Icahn withdrew a largely identical proxy campaign targeting food retailer Kroger.
Looking ahead, we believe more substantive ESG campaigns that can show how a company’s unique “E” and “S” factors are restricting the realization of incremental value opportunities will likely see greater support from shareholders. ESG campaigns that remain focused on shareholder value and financial returns could arise at another oil supermajor, Shell, where Third Point has suggested a breakup plan, and at Australia’s Woodside Energy, where activists continue to circle after the company doubled down on its petroleum strategy when it acquired BHP’s oil and gas portfolio for $20 billion in May 2022.
The situations at both AGL and RWE, and at oil supermajor Exxon last year, serve as examples of how the most effective environmental-focused activism campaigns occur at companies where ESG considerations are intertwined with business fundamentals, economics and value. Attempts to merely tack on so-called ESG concerns are not likely to resonate with shareholders, or proxy advisors, nor are single-issue ESG campaigns that are explicitly detached from enhancing shareholder value, such as the situations at McDonalds and Kroger this year.
Looking for More?
The data above is excerpted from Glass Lewis’ M&A and Contested Meeting Season Review. Clients can access the full document, including deep dives into the most significant proxy contests, and a spotlight on shareholder activism in Japan, via the Previews/Reviews tab in our Governance Hub library, or on Viewpoint.