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Greetings from New York City,

Yesterday, we released the October 2022 issue of Insightia Monthly featuring a look at how activist investors are approaching the coming economic downturn and some of the hot takeaways from Diligent's Modern Governance Summit. 

On that note, please also check out our digest of the summit on the 100th edition of our podcast, Beyond The Boardroom. It's been four years since the first episode, and Kieran has kicked it up a gear in the nearly three years he's been hosting, so be sure to send him your appreciation and dream guests!

Kind regards,
Josh Black

Our Proxy Voting Snapshot 2022 shows the big five investors increased their support for dissidents in proxy contests by 6.0pp in 21/22 versus 20/21.

Do you expect this to increase again next year?

58% - Yes
19% - Yes
33% - Too early to tell

Josh Black, Editor-in-chief, Diligent
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Tech companies were already bearing the brunt of the selloff this year and activists seem to have taken note.

By the end of the third quarter, more U.S. tech companies had received board representation and M&A-related demands than in the whole of 2021 or 2020, according to Insightia's Activism module. But just two companies had received operational demands and not one a request to return cash to shareholders.

That could be changing, as investors digest a shifting marketplace in time to fill their pipeline for the 2023 proxy season.

This week's Active-Passive Investor Summit appears to have fired the starting gun on a new wave of tech activism. Starboard Value, which has long dabbled in the sector, pitched three ideas built around a common theme of operational discipline and returning cash to shareholders or seeking a sale.

Starboard CEO Jeff Smith's presentation started by highlighting that the market has stopped rewarding high-growth tech companies with multiples many times higher than lower-growth peers. He went on to argue that website builder Wix, data platform Splunk, and customer relationship management giant Salesforce could benefit from bringing their combined growth and profit margin up to the peer median, chiding each of them for overspending.

"We believe this combination of factors creates a compelling set of investment opportunities for high-quality and fast-growing companies," one slide read.

"Tech opportunities are definitely abundant given the valuation reset we've witnessed," another activist that witnessed the presentation told me. "A lot of companies have focused on growth as that's what the market valued... As rates have risen, longer-duration assets like SaaS [software as a service] or digital infrastructure have seen their valuations come in substantially as investors have shifted to a near-term profitability valuation framework."

(Coincidentally, Insightia's Vulnerability module published two new reports this week – one on a SaaS company and the other on a digital infrastructure company).

"There's two ways to fix this," continued the activist, who was not authorized by his firm to speak on the record. "Shift operations to be more profit-focused, or undergo that transition privately."

Of Starboard's new ideas, Splunk has reportedly drawn takeover interest and already settled this year with Hellman & Friedman, a private equity firm that took a 7.9% stake in March. Earlier this month, Legion Partners Asset Management called on Nutanix to consider all options, including a sale. "Nutanix should be valued at a multiple appropriate for the high-growth and high-quality enterprise subscription software company that it is, not like the hardware stock it has been recently valued as," the hedge fund said in a statement. Another Legion target, Momentive Global, was also reported to be considering a sale this week.

But although a few companies might hit the jackpot, current market conditions may make a wave of buyouts unlikely, ensuring that activists focus on different ways to create value. "The M&A thesis right now is challenging," said Pete Michelsen, the head of activism defense at investment bank Qatalyst. "That explains some of the activists' pivot toward standalone theses including operational improvement and capital return," he argues. 

Despite the public nature of Smith's presentation, Starboard has not yet asked for anything beyond what the companies are already doing. The activist noted Salesforce's buyback authorization back in August – the company's first ever. Yesterday, Wix, which already has a cost-reduction program in the works, announced a $300 million buyback.

For now, investors seem to think that with a bit of discipline, the technology space can have both growth and profitability. The tension will come if investors come to believe that a management team can't deliver the two in union, or if a management team thinks the activist's plans cut too deep and hurt their potential to beat the competition.

"If an activist is involved, they're much more likely to be interested in curtailing investment than growing investment," warned Michelsen. "For companies that have really interesting growth prospects, investing through a down cycle when competitors are disrupted can add a lot of value.  So, this may be an optimal time to take share and build scale."

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On October 11, the Center for Political Accountability (CPA) expanded its CPA-Zicklin Index of Corporate Political Disclosure and Accountability, which benchmarks U.S. companies on the accountability of their political spending, beyond the S&P 500 to Russell 1000 companies.

There is a "dramatic gap" in political spending transparency between S&P 500 companies and Russell 1000 companies that are not S&P 500 components, CPA said. The overall index score for all S&P 500 companies currently stands at 57%, compared to a 12.3% average for Russell 1000 companies not also in the S&P 500.

"As disclosure has become the norm among companies, fewer S&P 500 companies remain as viable targets for our proposals this season," Dan Carroll, vice president and counsel at CPA told Insightia Monthly in September. With this new method to track Russell 1000 corporate donations, a broader number of issuers will inevitably face proposals seeking disclosure of their political spending next season.

In Insightia Monthly's September magazine, CPA told us that its partners will be filing a new form of proposal asking companies to commission and share information from third-party groups on where their donation money ends up.

"This is crucial for deeper due diligence by company management and directors," CPA President Bruce Freed told me in an interview. "Investors need to be assured that companies know where their contributions end up, what these payments enable and associate them with, and the related risks."

CPA plans to file approximately 50 proposals of this kind in the 2023 proxy season, more than double the 22 political spending disclosure proposals filed by its members the previous season.

These new proposals stand to perform well. While support for ESG shareholder proposals declined significantly this season, support for political spending resolutions remained notably more stable.

As of October 15, 2022, the 52 proposals seeking lobbying disclosure at U.S.-listed companies year-to-date have won 32.3% average support, compared to 35.1% and 40.3% average support throughout 2020 and 2021, respectively, according to Insightia's Voting module.

Shareholders scored five political spending majority wins this season at Netflix, Dollar General, Twitter, Travelers Co., and Gilead Sciences. With the exception of Dollar General, these issuers ranked among the top 2,000 most generous political action committee (PAC) donors in the 2020 election cycle, according to political spending nonprofit OpenSecrets.

European companies are also facing pressure to enhance their lobbying disclosure, with ClientEarth revealing on Wednesday that a coalition of investors are taking Volkswagen to court after the German carmaker "refused repeated attempts to reveal crucial information on its corporate climate lobbying."

In an interview with Insightia Monthly in April, ClientEarth's Climate Accountability Lead, Sophie Marjanac, warned that corporate donations are becoming a priority for investors, especially where climate risk is concerned, and shareholders will not hesitate to take companies to court.

"Companies that are lagging in their engagement will eventually be caught by the regulatory wave that’s coming," she said. "Many oil and gas companies are already the targets of significant lawsuits, particularly in the U.S., so I think the trend towards litigation has already begun and it's a risk companies need to prepare for."

NEW: Kieran Poole is joined by Insightia's Rebecca Sherratt and Josh Black for the landmark 100th episode to discuss October's Insightia Monthly
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