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An Activist Investors Latest Tactic: Playing Nice

As Nelson Peltz, founder of Trian Fund Management, angles for a seat on Procter & Gamble Co.’s board, he’s pledging to back social, environmental, and governance issues in ways that may appeal to the consumer-products giant’s institutional investors.

Weeks after disclosing its stake in P&G in February, Trian updated its website with a section expounding its commitment to corporate stewardship. The money manager also published its first policy statement on the subject and signed a pledge to follow certain investment principles, such as working constructively with company leadership and laying out a system for evaluating governance.

Peltz, 75, who’s previously targeted consumer brands such as H.J. Heinz, Cadbury Schweppes, and Mondelēz International, has been rallying shareholder support to win a seat on P&G’s board at the company’s Oct. 10 annual meeting in Cincinnati. His approach could resonate with BlackRock, State Street, and Vanguard Group, which own the three largest publicly disclosed blocks of P&G and have each championed holistic corporate governance in recent years.

“Index funds drive a lot of the behavior in the activism world due to their sheer size,” says Derek Zaba, co-head of the contested situations practice at advisory firm CamberView Partners LLC. Promoting long-term responsibility can help win over asset managers who might otherwise be concerned that an activist is too focused on the short term, he says.

Many big asset managers now routinely press companies to address issues that could boost costs decades later, such as unhealthy work conditions or high greenhouse gas emissions, trying to protect returns over an indefinite investment horizon. That clashes with the stereotypical image of an activist investor looking to make quick changes at companies to flip the stock at a profit in a few years. Trian, which shuns the activist label and instead calls itself a “highly engaged shareholder,” declined to comment.

“Promoting good business practices and strong corporate governance principles has been part of Trian’s operating strategy since our inception,” the firm said in a June policy statement. Highlighting governance weaknesses, such as too much uniformity among directors or a lack of turnover on the board, is a time-tested activist strategy. But Trian’s peers, including Pershing Square Capital Management, Third Point, and ValueAct Capital Management, haven’t made similar commitments to push responsible causes on their websites.

An exception to the activist rule is Blue Harbour Group, often dubbed the “friendly activist.” Chief Executive Officer Cliff Robbins wrote in a March letter to investors that the firm is taking a “wider, deeper, more rigorous approach” to environmental and governance issues. “We’re 100 percent convinced that it’s a good way to control risk,” says David Silverman, a Blue Harbour managing director.

Asset managers are increasingly likely to question activists over such issues when deciding which strategy to back, says Rakhi Kumar, head of corporate governance at Boston-based State Street. “We have more data, awareness, and understanding of how these factors impact returns over time,” Kumar says. Activists “have to recognize that if they want the support of a broader investor base, they need to take into consideration what’s of interest to those investors.”

P&G’s chairman and CEO, David Taylor, opposes Trian’s nomination of Peltz, saying in letters to shareholders that the activist’s ideas are out of date and add little value. Peltz, whose firm owned 37.6 million shares, or about 1.5 percent, of P&G as of June 30, has said the company suffers from “suffocating bureaucracy” and isn’t properly managing its large catalog of brands. He’s said he wants P&G to remain intact and to keep Taylor at the helm.

BlackRock, State Street, and Vanguard collectively hold about 18 percent of P&G’s stock. Securing their support could prove decisive for Peltz, who narrowly lost out on a board seat at DuPont Co. in 2015 after the same three asset managers sided with the chemical maker.

At least one other big investor is wary of Peltz. Anne Simpson, head of corporate governance at the California Public Employees’ Retirement System, which controls about 6.2 million P&G shares, wants to see Peltz act on his new commitments before extending her trust. “The proof will be in the pudding,” she says.

    BOTTOM LINE – Index funds’ focus on long-term outlook has pushed investors typically thought of as interested in short-term gains to consider issues of corporate social responsibility.

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