Overview of Shareholder Activism in Russia 2022

Corporate Governance Practices
SACM Professor Alexander Lebedev, DBA
One of the current practices of corporate governance, not very popular in Russia, but rapidly developing in the world, is the so-called shareholder (investor) activism. In this paper, we set ourselves the task of describing and analyzing in detail the phenomenon of shareholder activism, the reasons for its unpopularity in Russia, the quantitative dynamics and qualitative development in the world. Any research work, scientific or professional discussion devoted to corporate governance outside of one jurisdiction, to a certain extent, faces the problem of definition: there are several hundred valid definitions of corporate governance in the world, they are established by:

• Normative-legal acts of countries and blocs, an example is the Sarbanes-Oxley Act (USA);
• Recommendation documents (codes, manifestos), example - Codes of Corporate Conduct and Corporate Governance of the Russian Federation;
• Public organizations (associations) involved in the improvement and promotion of corporate governance practices that are relevant to the region of their presence, for example, the definitions of corporate governance OECD, IFC, ICGN;
• Selected corporations and holdings to clearly prioritize internal use, examples are Ericsson, Apple, Interros;
• Individual authors and experts for their field of influence, such as James Wolfensohn, President of the World Bank.

This, of course, complicates the discussions, including due to the fact that it enables their unscrupulous participants to reduce a constructive de facto discussion to a “viscous” de jure discussion, which, for example, regularly occurs at public hearings that accompany the process of rule-making in the field of corporate governance In Russian federation. However, almost all definitions in all jurisdictions have a number of cross-cutting elements, which allows us to speak of corporate governance as a cross-cutting phenomenon for the capitalist world. In particular, a line appears to one degree or another, they say, corporate governance is a tool that protects a shareholder or investor - a person or institution that makes an investment by transferring capital to a company. High-quality corporate governance reduces the likelihood of the theft or unreasonable use of this capital, thereby increasing the investment attractiveness of companies, and the more it develops, the more it increases - for example, a study by CGI Russia and Korn Ferry published in the first quarter of 2022 "The weight of an effective board of directors in the cost companies:

Global Investor Assessment, based on assessments of 18 global investment funds with $11.53 trillion under management, concludes:

• Weak corporate governance in the company leads to a discount of up to 80% of the value, and most portfolio managers exclude it from the list of investment objects;
• The premium for good corporate governance ranges from 10% to 50% of the company's value.

The statement accompanying the study by Anton Storozhenko, head of the Board Efficiency practice, senior partner at Korn Ferry, is indicative: “It has long been known that a quality board of directors affects the value of a company. Today we are witnessing how this award is becoming too big to ignore.” Qualified shareholders and investors are persons interested in preserving and increasing their capital, including through the improvement of corporate governance practices. To do this, they use the tools of the so-called shareholder activism (the wording investor activism is less common). The meaning of shareholder activism is that the investor acquires a share of the company's shares (in the classical sense, usually public), and then begins to take actions aimed at changing the vector of the company's development and adjusting operating activities. The main goal of implementing shareholder activism is to maximize the return on invested funds, in fact, activists are trying to increase the market capitalization of the company through their actions, which, in turn, leads to an increase in the wealth of activist shareholders themselves.

Although hedge funds rarely used this strategy until recently, in recent years they have increasingly begun to make active investments. Among the main motives for the manifestation of shareholder activism, researchers identify: restructuring the Board of Directors of the company (often with the inclusion of a representative in the Board), changing the management of the company or changing their remuneration, changing the dividend policy, and others. An action within the framework of equity activism on the verge of ethics is the so-called greenmail (English greenmail, neologism from English greenback "dollar bill" + English blackmail "blackmail") - the sale of a block of shares to the issuing company, management or the current owner of the issuing company for price well above the market rate. At the same time, the person selling the block of shares (greenmailer) threatens to conduct a hostile takeover or create difficulties in the functioning of this target company in case of refusal of the transaction. Greenmail is similar to corporate raiding, in particular - it is often aimed at undervalued companies, that is, companies whose asset value exceeds the value of their market capitalization. However, the goal of the raider is to capture the target company, and the goal of the greenmailer is only to receive payments. Unlike "black raiding", greenmail is usually regarded (legally) only as an action on the "border of ethics". Indeed, often quite conscientious minority shareholders become greenmailers, whose interests are consistently ignored in the company and therefore they are forced to fight for their rights, including by “snarling” with greenmail.

It is difficult to talk about equity activism in the world and in Russia without mentioning two figures who have achieved the most notable results in this area - Сarl Icahn and Alexei Navalny:

• Carl Icahn founded a brokerage company in the 60s, a hedge fund in the 2000s, and in 2016 he was nominated to the post of special adviser to the President of the United States on issues related to business regulation reform;
• Aleksey Anatolievich Navalny began his career as a shareholder activist by protecting his own funds, his quote is from 2009: “I graduated from the Financial Academy with a degree in securities and exchange business with my second education (first in law). There was even a short period in my life when I was professionally engaged in stock trading. Therefore, I always closely monitored the situation in the companies.

It always amused me how much attention Russian investors pay to technical or classical fundamental analysis of the stock market, when completely subjective things play a role in our market in the first place. Here they carried out a seizure, and there an arrest. And then they brought in their top manager, and he begins to openly work in favor of a small group of shareholders to the detriment of the rest. And any levels of support or resistance on a stock chart are nothing compared to a crook in the government admitted to making decisions. A couple of years ago, I decided to invest my personal funds in stocks and very soon felt that the reports in the media about corruption in companies, instead of the previous irritation, caused me a purely personal rage. They steal from me! And I decided to protect my money ... It's not just about theft. For example, Surgutneftegaz.

The fourth largest oil company in the country is owned by no one knows who does not publish international reports, etc. I am sure that if Surgut published information about the ultimate beneficiaries and made normal reporting, then tomorrow its shares would increase by twenty percent. Gazprom has not yet been listed on the stock exchange. Traded as an unlisted share. The largest company in the country. This is fine? If Gazprom implements elementary information disclosure procedures, clearly explains the situation with the withdrawal of assets from the company through Gazprombank, and finally stops pumping colossal money into non-core business - from the construction of skyscrapers to a media holding, then, of course, its capitalization will increase significantly. In general, I believe that opacity and theft as a result of it reduces the cost of Russian companies by 30-40 percent.” In the second half of 2000, Alexey bought small stakes in large companies (Rosneft, VTB, Transneft, Gazprom, Surgutneftegaz and structures that were previously part of the Russian open joint-stock company for energy and electrification UES of Russia) and then as a minority shareholder, he demanded from management to disclose information about the activities of management, on which the income of shareholders could depend. From February 2012 to February 2013, Navalny was a member of the Board of Directors of Aeroflot.

The quality of corporate governance in the country was still low, despite the vector emphasized by the statement of the President of the Russian Federation Vladimir Vladimirovich Putin at the session of the World Economic Forum in Moscow on October 30, 2001: “Russia has a strategic goal - to become a country producing competitive goods and services . And all our actions are aimed precisely at this. We understand that in order to integrate into international capital markets, it is necessary to resolve issues related to protecting the rights of owners, improving corporate governance and financial transparency of business”, accompanied by the rapid development and adoption in the first quarter of 2002 of the Code of Corporate Conduct of the Russian Federation. After a period of shareholder activism by Alexei Navalny, in 2014 the Corporate Governance Code of the Russian Federation was adopted, containing the best global corporate governance practices in the field of transparency in decision-making and protecting the rights of minority shareholders, adapted to the Russian regulatory and legal field, a more accurate and detailed document than Code of Corporate Conduct.

The Code of Corporate Governance of the Russian Federation supplemented the Federal Laws, which primarily regulate the activities of joint-stock companies, forming the “rules of the game” in the field of corporate governance that were progressive at the world level (at that time). However, the norms of the Code to this day (8 years later) are redundant and limitedly applicable to the vast majority of Russian companies, due to the small number of public joint-stock companies, the low rate of development of the stock market, excessive and often unscrupulous regulation, low solvent demand in the domestic market and the reduction of foreign sales markets for Russian enterprises due to sanctions and quasi-sanctions pressure.

Considering that in modern Russia most of the economy is companies with state participation in capital (the average, according to various estimates, is in the region of 60-70% of GDP), and a culture of active feedback on constructive criticism is not formed under conditions of excessive regulation, shareholder activism is not a widespread occurrence. Yes, there are foundations and individual activists, the so-called. Shareholder advisory councils (including in one of the largest banks in the country - VTB), however, their activities are forced to be very politically correct, cautious and gradual, not creating discomfort for the majority shareholder and key stakeholder (the existing government). Otherwise, they may experience an asymmetric response. If the most prominent equity activist in the world has been invited by the US President to be his Special Adviser on Business Regulatory Reform, the most prominent equity activist in Russia is incarcerated.

Which looks especially disappointing against the background of progressive rules in the field of corporate governance in Russia. For example, cumulative voting, which simplifies the procedure for nominating a candidate to the Board of Directors by the consolidated position of minority shareholders, is still not accepted even in all US states, not to mention European countries, in Russia it is possible according to corporate governance rules, but as a tool for shareholder activism (nomination of an activist's representative to a corporate governance body) is used very limitedly.

Therefore, the topic of shareholder activism in Russia in the first quarter of 2022 will not be considered, let's pay attention to global markets led by the United States, where the pace of development of shareholder activism is record:

• 73 new campaigns (major episodes of shareholder activism) launched in the first quarter of 2022 – a world record on record, and combined with the fourth quarter of 2021, the most active six-month period of activity since 2018.
• The US continues to account for the largest share of global activity, accounting for 60% of new campaigns and 55% of capital raised.
• Activity in the first quarter in Asia-Pacific increased, accounting for 16% of new campaigns, compared with a decline in 2021 (11%).

Despite the pullback after the start of the Ukrainian crisis, there is an increase in activity in Europe:

• In the first quarter, 15 new campaigns were registered in Europe, representing a 50% increase in activity compared to the first quarter of 2021.
• French companies experienced a disproportionate amount of shareholder activism in the first quarter of 2022, accounting for about 27% of European activist targets, almost 3 times the highest ever share of activity for French companies among European companies.
• The crisis in Ukraine led to significant market disruption and a decrease in shareholder activism, in March 2022, overall activity in Europe decreased by about 38%, and in the US increased by about 50% compared to the previous month. Activity has particularly declined on the part of non-European equity activists; perhaps reduced to behind-the-scenes pressure rather than public campaigns by shareholder activists.

There are fewer episodes of shareholder activism related to mergers and acquisitions:

• 30% of all activist campaigns in the first quarter of 2022 contained an M&A talking point, slightly down year-to-date at the beginning of the year.
• Direct sale demands have become the most frequent vector of M&A equity activism, with Everbridge/Ancora and Cano Health/Third Point being prominent examples.

Shareholder activists receive seats on the Boards of Directors of the largest companies:

• In the first quarter of 2022, shareholder activists gained 38 seats on the Boards of Directors, and change in the composition of the Board was the goal of approximately 40% of all new campaigns.
• So far, only one seat on the Board of Directors has been won by an activist through a proxy fight in 2022 (via Voss Capital in Griffon), with the rest of the seats obtained through open negotiations.
• Starboard's high-profile battle for four Huntsman board seats came to a head in late March, with all ten of the company's nominees winning at the AGM.
• 85 seats on Boards of Directors contested by shareholder activists still outstanding ahead of the second quarter, including notables: Kohl's (10 seats), Southwest Gas (10 seats), U.S. Foods (5 seats) and Hasbro (5 seats).

The behavior of shareholder activists may be affected by regulatory changes in the United States:

• November adoption by the US Securities and Exchange Commission (SEC) of the universal trustee rule is intended to lower entry barriers to nominations from both traditional equity activists and other groups (for example, non-equity activists representing climate interests). and labour, current and former employees).
• The proposed amendments to Rules 13D and 13G, which have recently completed public hearings with the SEC, will benefit issuers by strengthening the “early warning” function of disclosure violations, making it even less likely to deviate from best corporate governance practices, such as those that led to collapse of Enron.
• These same amendments promote timely and broad disclosure of information to the public, thereby potentially reducing the ability of equity activists to unfairly capitalize on information asymmetries in public markets and use tools such as greenmail.
The pressure on companies under the ESG line is growing:
• Due to the SEC's climate change disclosure rule and the growing number of environmental and social proposals being presented at US AGMs, attention to ESG, primarily in public companies, continues to increase. The proposed broader disclosure of long-term emissions targets, if approved, would increase the transparency of corporate climate strategies.
• Increased transparency will potentially lead to further activity of shareholders and other stakeholders in the field of ESG, which, according to Lazard experts, are already at elevated levels (more than a third of the agenda of the Boards of Directors is devoted to issues related to ESG), this may be a temporary measure , a response to public scrutiny.

Conclusion and Conclusions

The meaning of shareholder activism is that the investor acquires a share of the company and begins to take actions aimed at changing the vector of the company's development and adjusting its operating activities. The main goal of shareholder activism is to maximize the return on invested funds, in fact, activists are trying to increase the market capitalization of the company through their actions, which, in turn, leads to an increase in the wealth of activist shareholders themselves.

There are global trends in shareholder activism, quantitative and qualitative:

• Shareholders and investors around the world are increasingly protecting and multiplying their capital using the tools of shareholder activism. For a number of reasons, primarily political, these tools are limited in their applicability for Russian companies.
• Not only shareholders are active, but also – increasingly – other stakeholders (representing interests in the field of climate, labor protection, employees of the company). That is, one can be cautious about the replacement of Shareholder Activism by a new phenomenon, Stakeholder Activism, by analogy with the replacement of Shareholder Capitalism by Stakeholder Capitalism, which (change) has become a key theme of the World economic forum in Davos in 2020.
• The best corporate governance experts should not be politically repressed in their own countries. Their experience is very important for the development of corporate culture and the evolutionary development of business around the world in the 21st century. 


"I am confident that with time you will become leaders among business professionals, and, perhaps, return to the academy to share your knowledge and experience with new doctoral students.."

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