Activism for Non-Activists

September 7, 2023
16:05 minutes

On this Ropes & Gray podcast, Jeff Katz, the head of the firm's shareholder engagement practice, and Bryan Lowrance, an associate in the same practice, discuss how active asset managers are successfully—and often quietly—engaging with public companies to increase value and improve corporate governance. On this episode, Jeff and Bryan discuss what they mean by “activism for non-activists” and provide a framework for successful constructive engagement.


Jeff Katz: Hello, everyone, and thank you for joining us today on this Ropes & Gray podcast. This is the latest in our series of podcasts and webinars focused on topics of interest for asset managers and institutional investors. I’m Jeff Katz—I’m the co-head of our global capital solutions and private credit practice, and I lead our shareholder engagement practice. Joining me today is Bryan Lowrance. Bryan is an associate in our strategic transactions and shareholder engagement groups. Today, we are talking about what we are calling—and get ready for this—“activism for non-activists.” Here at Ropes & Gray we have been helping investment funds with this strategy for many years, and we’re seeing a growing application to a much broader swath of asset managers. These include the usual hedge funds and private investment funds, but also growth equity players and others. Let’s begin with what this term means. Bryan, do you want to get us started?

Bryan Lowrance: Glad to, Jeff. As many of our listeners know, shareholder activists have become a major part of the public company ecosystem over the last few decades. The rise of shareholder activism has been rapid but also controversial. The traditional activist campaign is aggressive and usually works something like this. As a first step, the activist fund takes a significant position, or even a not-so-significant position, in a public company. As a second step, the activist rolls out an aggressive investment thesis about the company, often stating that the company should return capital to its shareholders through some sort of short-term play, like a buyback, a dividend, a spin-out, a split-off or an asset sale as part of the company, or through a holdco sale of a company to a third party. In relation to pursuing these goals, a traditional activist campaign will typically advocate for a change in the senior officers of the company or the directors in the company’s board, in tandem with pushing for significant operational changes. Finally, the third step is usually the activist pressuring the company’s board and management to execute on this plan. There are a few different methods through which activists exert pressure.

Typical methods include aggressive public relations campaigns, often involving white papers, open letters, press releases, 13D filings or different media, but they usually harp on the same message, which is sharp criticism of the board and management. The other main tool is a full-on proxy contest where an activist attempts to unseat some or all members of the board of directors and put its own people on the board to pursue whatever corporate policy changes the activist is advocating for. This can be accompanied by other strategies, like litigation, or books and records requests (depending on the governing state law), but a proxy contest is the most extreme tool they’ve got. Activists also use some other atypical, non-traditional methods. A famous example is putting a giant billboard by the highway where the CEO of a target company drove to work every day, criticizing said CEO. Those are not typical, but they do happen. They point to the key fact that the traditional activist playbook isn’t just an active form of investing, it’s a highly aggressive form of investing that tries to quickly force changes in corporate decision-making from the outside.

Jeff Katz: Thanks, Bryan. That’s a great summary of the more colorful shareholder activism that we read about in the papers. I especially like the example of the billboard on the side of the road. That’s traditional, aggressive activism, but what do we mean by “activism for non-activists?”

Bryan Lowrance: By way of an initial observation, what we’re calling “activism for non-activists” is still active—it’s still an investor who wants to influence a company’s management in pursuit of maximizing shareholder value. The big difference is that it pivots away from the kind of aggressiveness and sharp-elbow tactics that we just talked about that you’d typically see in headline-grabbing activist campaigns. A key part of this type of “activism for non-activists” is focusing on a longer-term investment horizon. There’s a tendency with these types of investors not to focus on quick liquidity events like an M&A deal, a buyback or a dividend. The focus is definitely still on value creation for shareholders (and other stakeholders), but the horizons are typically a bit longer. There’s also a tendency to avoid splashiness and headlines, and a general tendency not to adjudicate these disputes in the public eye. As a result, it will appeal to a broader array of types of investors. There’s a lot of people, funds and other investors who are not willing to take on the public rep that comes with launching a very high-profile activist campaign, but would have the willingness to exert pressure on management that’s a little bit gentler and less high-profile, given that the label of a traditional activist does carry some stigma and tends to have companies put their guard up when they see you coming.

Jeff Katz: Another thing to note is that this type of engagement is happening all the time—and when I say “this type of engagement,” I mean “activism for non-activists.” As Bryan said, we don’t read about this constructive type of engagement, but it’s happening, and it’s happening a lot more than the traditional, aggressive shareholder activism that’s in the papers. It’s out of the public eye because this communication is collaborative, and people are avoiding the kind of filings that are required with the more aggressive approaches. So, this style of investing we’re talking about, or this type of active asset management, appeals to a much broader set of players, not just traditional hedge funds. It appeals to growth investors, family offices and other investors. With the growth investors, these are investors who take a private equity approach to public investments, and it’s an asset class where managers invest for the long haul. They probably originally were prepared to be more hands-off, but then the market environment may change, something happens, some inflection point that pushes these investors to take a more active approach, but always a constructive one. An example might be a post-IPO portfolio company, or simply an investor that’s been a holder in a company for many years. Also, we’re seeing hedge funds, family offices and other investors in public companies move along the constructivist-activist continuum starting from just a dialogue with management and the board, to these more formal letters, public and private engagement, talking to other investors, and then as Bryan mentioned earlier, taking board seats or in some cases just acting as board observers. Again, in this case, however, all of this activity results from constructive engagement.

Let me give you an example where a constructive approach made a big difference. In this case, a big public company noticed that a traditional, aggressive activist was accumulating a toehold position. The company was concerned: it thought this activist was going to cause a big disruption and really distract the company from its business. So, in turn, the company called another large shareholder, but this other shareholder had a reputation of being more of a long-term “constructivist” investment fund, and the company asked that fund to join the board. That fund was one of our client’s, and in that case, while our client didn’t join the board, it did take an observer seat, and the subsequent 8-K filing made the desired impact. The company used the more constructive shareholder as a buffer against the traditional activist, and, by doing this, it likely avoided a proxy contest and the distraction. It also potentially avoided having a director join the board that may not have added value and may have been disruptive.

Bryan Lowrance: This leads to the next topic we wanted to cover, which is the playbook that is used by these constructive activist investors, or “non-activist activists” (to use the terminology that we’ve been using). One big difference between this playbook and the traditional activist playbook is that these constructive activist investors may have originally been passive buy-and-hold long-term investors but become more active due to poorer company performance. That’s in contrast to the kind of classic activist investor who comes into a company as a pure activist play from the start, quickly builds a position and then looks for quick, short-term return on investments through some of the liquidity events we talked about earlier like an M&A deal, buyback or dividend. All investors, both constructive and traditional activists, need to consider whether or not to stay under the 5% threshold that triggers filings under Section 13 of the Exchange Act—that’s a key strategic consideration for any kind of investing in this space. When you trip that trigger, when you go over 5%, you become subject to Section 13, and you might have to file a Schedule 13D or a Schedule 13G, which, when you have to file, depends on your investment intent and a number of other factors, but they require you to make disclosure about how much you own and what your intent is with respect to your ownership position in a public company, which can be tricky tactically when you’re trying to wage a large-scale activist campaign or if you’re trying to be more cooperative.

Jeff Katz: I’ll interrupt here with a public service announcement. For those investors who hold more than 5%, it’s always good to consult with counsel about whether or not you do actually need to be on a D or a G, and how you can engage with a company constructively and productively without filing on a D.

Bryan Lowrance: Back to the main topic at hand. Our non-activist activists or constructivist investors also have to decide the general strategic approach to engaging with a target company—and this is a big area of departure from traditional activism. There is much less of a tendency for public statements or aggressive announcements for this type of more collaborative or constructive activists, so stuff like the classic activist surprise 13D filing or an aggressive press release, whitepaper, or a statement by a fund manager at a public conference—this type of stuff is the bread and butter of the traditional activist playbook and how they quickly turn the heat up on public company targets. But for non-activist activists or constructivist investors, they tend to want to avoid these things because it will very quickly make a company circle the wagons and put everybody’s guard up. If it’s possible to avoid doing these things, it’s generally a good idea to do so and to focus instead on private outreach. Private outreach is key for this type of activist investing. It’s probably the single biggest strategic tool in the toolbox that our clients, who use this type of investing, use. It should be framed constructively, it shouldn’t occur in the shadow of some kind of real or implicit threat, and it’s really important to maintain a tone of constructive cooperation.

Jeff Katz: Thanks, Bryan. Also, if an investor is over 5% and does have to make a filing, rather than just have the filing show up as a surprise to the company, clients often give the company a call, and give them a heads-up and explain what they’re doing, why they’ve been advised that they have to make the filing, and often share the content of that filing—doing this takes a lot of the sting away, and it helps with future constructive conversations.

Now, our non-activist activists, they all prioritize that type of thing—meaning, creating an open communication channel. And so, their approach is holistic. They make an assessment of the company, they take the time to learn the backgrounds and experiences of management and of the directors, and they’re constantly looking for common ground. These investors tend to do their homework, and they often impress management with how well they know the company and the industry, and these investors’ familiarity with the company’s peer group. Now, they can do this often because they have analysts whose job it is to spend hundreds of hours on the company. While this may be easier for some investors than others, it’s going to be important for all investors who are taking this collaborative “activism for non-activists” approach to really do their homework and understand the company. It’s critical to be credible.

Bryan Lowrance: Thanks, Jeff. That leads to another important point here, which is the importance of having a thoughtful narrative line run through your engagement with the company in this situation. An investor is going to increase its chances for a productive dialogue if, like you said, it does its homework about the business of the company’s operations. That requires understanding the details of the company’s operations and financial results, but it also requires understanding the big picture and what the “story” of a particular company is. What we mean here is the company’s sense of its overall purpose and mission. This goes beyond the standard quarterly earnings messaging. A successful exercise in “activism for non-activists” needs to see how management and the board fundamentally see the business and the purpose of the business in the market, and, to the extent possible, frame its own thesis in these terms, to be broadly consistent with the company’s narrative.

Jeff Katz: I think this point is becoming more important. We are living in an era where the idea of shareholder primacy has lost some of its luster. Part of this was back in 2019 with the Business Roundtable statement called “On the Purpose of a Corporation.” This statement was signed by almost 200 U.S. public company CEOs. While it doesn’t necessarily change the way these CEOs are managing their businesses, it certainly has signaled a shift in the rhetoric around how companies talk about what they do and whom they serve. The Roundtable statement made a big deal of talking about “stakeholders” more broadly—not just shareholders, but customers, suppliers, employees, the environment, and the communities in which these companies operate. Make no mistake, the companies are still focused on their bottom line, the same as they were five years ago or 10 years ago, but the way they’re telling their stories has changed, the narratives have changed. This has only been encouraged by recent pivots towards social justice concerns and ESG. So, successful constructive investors need to understand all of these contexts. They really need to understand what a company is trying to do, what it can do and what stories it wants to tell both to the markets and to these other stakeholders. Investors who are pushing for change will need to work within this framework.

Bryan Lowrance: Totally agree, Jeff. So, just to sum up our discussion a bit, it seems like we have three big priorities for any investor who wants to get involved in “activism for non-activists.” The first is to engage with the target company in a way that facilitates collaboration and communication. The second is to assess the investor’s risk and risk appetite for both the investment and any changes to how that investor’s perceived by the market early on and to calibrate strategy accordingly. The third is to think about the big picture and to understand the story that a target company is telling and how the investor’s perspective fits into that story.

Jeff Katz: That’s right, Bryan, and a theme that runs through our discussion today is really to think both strategically and holistically. Investors have shown that they can create value and help their reputations through this more constructive “activism for non-activists.” Not only are many more investors who are non-traditional activists employing this tactic, but we’re also seeing some of these traditional activists who are more aggressive are dialing it back a bit to employ this more constructive tactic, because it’s effective, less costly and less damaging to people’s reputations. But to be effective, it has to be undertaken deliberately and carefully. I strongly believe that it is this care and deliberateness that has been a key factor in the successful shareholder engagements that I’ve seen and those that I have worked on.

Bryan, thanks for joining me today, and a special thank you to our listeners. For more information on the topics that we discussed or any other topic of interest to the asset management industry, please do visit our website at And of course, Bryan and I are happy, along with the rest of our team, to help you navigate any of the topics we discussed—please don’t hesitate to get in touch. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening.