Summer of '21 - a pivotal moment?

Over time there have been many years or parts of years which have, with or without the benefit of hindsight, been viewed as “key moments” - 1789, 1816 (the year with no summer), 1914-18, 1939-45, 1966 (Cultural Revolution begins), May ’68, 1971 (the year that music changed everything) and of course 2020 (pandemic year).

As we pack our satchels for a new school term, I have been reflecting that the summer of 2021 is also likely to be viewed as a “moment” in the natural, business and political worlds.

In particular, there have been totemic occurrences in:

• Climate
• Shareholder activism
• Chinese state interventionism
• Gender diversity in business leadership and, alas
• Afghanistan

Climate

On Monday 28 June the temperature in Portland Oregon hit 116 degrees Fahrenheit (46.6 Centigrade). The even more staggering statistic, though, was that this was 9 degrees Fahrenheit (5 Centigrade) higher than the previous record high. There were also heatwaves elsewhere. Moscow, for example, had its hottest ever June day on 23 June (34.8 Centigrade).

And then came the extraordinary rains in Germany in July. As we all saw, trucks and houses were picked up and thrown around like toys and many lives were tragically lost. In the Stammheim district of Cologne 154mm of rain fell in one day, obliterating the previous daily record of 95mm.

We already knew that big and worrying things were happening to the climate but the shattering of existing records hammered the point home (if you’ll forgive the jumbled metaphors).

So, it was no surprise to read the conclusions of the IPCC Report on Climate Change issued on 7 August and signed off by 234 scientists from more than 60 countries. The world is likely to reach 1.5C of warming compared to pre-industrial levels within 20 years, even in a best-case scenario of emissions cutting. António Guterres, UN Secretary General, described the report as a “code red for humanity”.

All of this must, of course, focus the minds of world leaders on agreeing a route to net zero emissions at the COP 26 summit in November and supercharge corporate climate transition plans. But there are a plethora of other themes to be kept front of mind. They include:

• adaptation - even if the climate can be stabilised (itself a big if) dramatic heatwaves, wildfires, rainfall and floods will continue. So, policymakers need to focus on improving early warning systems, building infrastructure (more shaded public areas, better flood defences) and developing building codes which ensure that homes and offices can withstand more heat and better insulate against flood water. And Paris commitments for annual transfers of $100m from rich countries to poor countries, to help in this endeavour, need to be honoured;
• solar geoengineering - this is the notion that clouds or particle layers could be refashioned to be more like a mirror and reflect back some sun-light. Whilst this sounds like the stuff of a science fiction movie and raises hugely complex issue - who pays, how do you share the cooling, what might unintended side effects be? - it should surely be investigated; and
• carbon offsets - the FT’s Lex column has made the astute observation that the scale of recent forest fires in California, Siberia, Greece and Turkey may have implications for forest-backed carbon credits bought by corporates (such as BP and Shell). Whilst offset projects normally have a buffer of 10 to 15% to allow for natural disasters, this may not cover recent and prospective damage to forests. So, going forwards, there will need to be more focus and reporting on the physical state of offset assets.

Shareholder activism

The last few months have seen continued activity in the UK by traditional activist investors. Elliott are challenging the future role of Dame Emma Walmsley at GlaxoSmithKline, the curiously named Cat Rock Capital is upset about Just Eat Takeaway’s “deeply flawed communication” and Cevian is, with some success, pressing Aviva to increase returns to shareholders.

Whilst Drahi’s recent acquisition of a 12.1 percent stake in BT is not a typical activist play, I have to mention it. The slick purchase of an interest which is just a whisper higher than the size of BT’s other big shareholder (Deutsche Telekom) is an engagingly cheeky move by a smart investor. Surely there is a decent mini-series coming here.

Over this same period, however, two rather different forms of shareholder activism have made striking appearances.

The first is what we might describe as long shareholder push-back on takeover recommendations.

The UK is in the middle of a takeover boom. Buy-out firms have done 13 public-to-private deals worth $31 billion so far this year and strategic buyers are also in the market (Parker Hannifin’s bid for Meggitt is an example). But, within this boom, we are seeing target shareholders take a noticeably more muscular approach than hitherto in being willing to challenge the board’s recommendation to accept a bid.

A few examples are:

• St Modwen and UDG Healthcare, where investor pressure led the private equity bidders to make, respectively, 3% and 6% increases in the price initially agreed by the target boards;
• Spire Healthcare, where the takeover by Ramsay agreed by the Spire board was rejected by shareholders at the meeting convened to approve it; and
• Morrisons. Here Silchester, Morrisons’ largest shareholder, said that it was “not inclined to support” the original Fortress-led bid recommended by the board. Other shareholders voiced concerns and Fortress took the unusual step of increasing, by a material amount, its bid ahead of an expected new competing bid from CD&R (which has now materialised).

Three observations:

1. there is a widespread feeling that UK public companies are undervalued compared to potential targets in other jurisdictions and that private equity is taking undue advantage - and this is fuelling investors’ confidence to look for the very “best price” (in Portobello Road parlance) and to increase the pressure on target boards;
2. whilst that is understandable, it would not be fair to conclude as some have that PLC boards have in general become too feeble in agreeing to recommend bids. Many boards are driving hard bargains (by way of example, premia of 39% at Aggreko and 41% at Stock Spirits are decent). They are forcing bidders to make multiple proposals before agreeing to recommend and to focus on non-financial terms which will be important to employees and other stakeholders. They may also take the view that a recommendable offer, once public, may draw forth competitors willing to make an (even better) offer; but
3. given the natural anxiety about the impact of private equity ownership of businesses - the FT quotes Professor John Kay as saying that private equity is “very good at its best and very bad at its worst” - PLC directors need to be ever-more aware of the fine line they walk between looking for best value for shareholders and having regard to the interests of the business and its other stakeholders. Cool heads, good chairing and quality advice will be at a premium.

The second type of activism to make a splash is climate activism.

The success in late May of Engine No. 1, an activist fund founded in San Francisco only last year, in installing three directors on the Board of ExxonMobil was stunning. With only 0.02% of the company’s stock Engine No 1’s feat was extraordinary and spoke powerfully of the resonance of their message, with the broader investor-base, that the energy experience of their nominees would aid the company’s transition from fossil fuels.

Activists had other successes in May.

At BP, Dutch activist group Follow This received the support of 21% of shareholders for a resolution seeking to press the Board to set more aggressive transition targets, in opposition to the Board’s recommended plan. Whilst the resolution failed, the meaningful support will keep the pressure on the Board. And at Royal Dutch Shell a Dutch court ordered Shell to ensure that its net carbon emissions were 45% lower in 2030 than in 2019. The decision will be appealed but it is another win for climate activism.

The significance of all this is underlined by the climatic extremes experienced in June and July. And the message for Boards is surely that the wheel has turned. Motivated climate and ESG activists, who might until now have been seen as fringe operators, are likely to find more support among traditional investors who are increasingly focussed on demonstrating their own ESG credentials.

Whilst hydrocarbon businesses will naturally attract most attention, businesses in all sectors would be well advised to get on the front foot. One example of that which we are seeing in the UK is the developing trend of PLCs putting climate transition plans to advisory shareholder votes.

Chinese State interventionism

The FT reported that thirty four Chinese companies raised a record $12.4 bn in New York in the first half of 2021. That’s a lot. Then, on 6 July, Chinese cyberspace regulators announced an investigation into the ride-hailing app of Didi which had listed on 30 June. Cue a 25% fall in its share price. It has since fallen much further.

6 July will surely be seen as a critical turning point in China’s state interventionism.

Since then it has been made illegal for tutoring companies to make profits, raise capital or list abroad. A sector eviscerated - so much for those who bought shares in, for example, New Oriental Education and Technology Group (down 90 percent from highs at the end of 2020). Then Beijing said on 25 July that it would “notably improve order” in the property management sector resulting in a 17% fall in the Hong Kong share price of industry leader Country Garden Services.

The prelude to these developments was seen in the peremptory cancellation of the flotation of Ant Group late last year, the anti-trust investigation into Alibaba and the apparent humbling of Jack Ma. The implementation of the National Security Law in Hong Kong is an additional chapter in the story.

Much has been written to speculate on what all this means. For example:

• Chinese regulators taking control of unruly digital markets and thus, as The Economist hazards, “sharpen their country’s technological edge while boosting competition and benefitting consumers”;
• China curbing Chinese companies’ access to (particularly) US capital markets where they will increasingly have to submit to normal disclosure and regulatory rules - “financial decoupling” as it is known in the USA; and
• the Party bringing to heel influential entrepreneurs like Jack Ma, Pony Ma and Robin Li.

But, however one reads these tealeaves, the big takeaway for investors and business counterparties is that unpredictability is the order of the day. Rules can change overnight, governance norms are not normal and recourse for aggrieved investors is doubtful. This will be reflected in investor caution and “China discount”.

Another important point made by John Plender is that if US-China friction in the financial arena runs out of control the consequences could be profound - “The global financial alchemy whereby the relatively poor Chinese help finance rich countries’ pensions is no longer a given.”

Gender diversity in business leadership

I could be wrong here but I do think that a switch has been flipped over recent months, at least in the UK, when it comes to gender diversity in business leadership.

In May Linklaters elected its first female senior partner, Aedamar Comiskey, in its 180-year history and Ashurst elected Karen Davies as its first ever Global Chair. These appointments followed on from the previous elections of Georgia Dawson as Senior Partner at Freshfields and Rebecca Maslen-Stannage as Senior Partner and Chair at Herbert Smith Freehills.

This is a striking change of gear in the world of leading law firms, where Senior and Managing Partners have traditionally been male, and will send a strong message of inclusiveness to clients, team members and potential recruits.

In the corporate world, Rolls Royce announced in June that Anita Frew will succeed Sir Ian Davis as Chair. She will be the first female chair of this totemic engineering company in its 115-year history (one can see the parallels with Linklaters here). Again, there have been other recent appointments of women to senior Chair roles at Schroders, National Grid, Prudential and Electrocomponents. The winds of change are blowing through the senior echelons of UK plc boardrooms

To underline the importance of diversity, moreover, the Financial Conduct Authority is consulting on changes to its Listing Rules which would require listed companies to make an annual comply or explain statement as to whether they have achieved certain targets:

• at least 40% of the board should be women;
• at least one of the senior board positions (Chair, CEO, CFO, SID) should be a woman; and
• at least one member of the board should be from a non-white ethnic minority background.

The FCA is aiming to introduce the changes to companies with accounting periods starting on or after January 1 2022.

Afghanistan

It would be disrespectful not to mark here the terrible events which have unfolded this month in Afghanistan. A few short weeks after the US withdrawal, the country has fallen to the Taliban and we have seen heart-breaking pictures of desperate citizens clinging to the undercarriage of a US military plane in an effort to escape the country.

It is a tragedy for the people of a blighted country, particularly its women and its young. It will further destabilise a region of the world in desperate need of stability. It can only, moreover, weaken American international prestige at a time when the balance of US/China influence in the world is delicately poised.

Finally

One final reflection for this Summer of ’21.

The pandemic has wrought awful pain and loss for many but could we really have thought, last summer, that excellent vaccines would have been discovered and delivered into arms at such speed and in such quantity? Could we have expected economies to recover so quickly (4.8% growth in UK GDP in Q2)? Could we have expected employment to remain so strong? We couldn’t. There is a long way to go, of course, and many bumps in the road no doubt but the fact that so much has been achieved in the face of adversity is a huge endorsement of human ingenuity, resilience and team spirit.

And we have live music back. I leave you with Bryan Adams and Summer of ’69 - https://www.youtube.com/watch?v=HtipPCt317Y - so well known to the audience that they sing the first verse instead of Mr Adams.

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

Send this article to a friend...