The rise of conservative shareholder activism

This is an audio transcript of the FT News Briefing podcast episode: The rise of conservative shareholder activism

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, April 12th, and this is your FT News Briefing.

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Investors are bracing for another high US inflation report. And the war in Ukraine could worsen one of Russia’s biggest long-term economic challenges. Plus, there’s a new kind of activist shareholder in town.

Andrew Edgecliffe-Johnson
A lot of conservative activists feel that they lost the universities, they lost Hollywood, and now they’re losing corporate America.

Marc Filippino
The FT’s Andrew Edgecliffe-Johnson talks about the new conservative shareholder movement. I’m Marc Filippino and here’s the news you need to start your day.

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OK, so you might have noticed that the markets are a jumble of jitters right now. There’s debate over whether there’ll be a recession. There are Covid lockdowns in China, which could impact all kinds of global trade. And of course, there is inflation. Today, we’ll get the latest report on US inflation, and it’s expected to be another doozy. Estimates have consumer prices for March increasing more than 8 per cent. Here’s the FT’s Colby Smith with more.

Colby Smith
I think in a lot of ways this is priced in to a certain extent because expectations have built up over the course of the month for this March CPI report to be pretty terrible given developments with Russia’s war in Ukraine and the following surge in energy and food prices. So in a lot of ways, I think people are looking at this report, as you know, a snapshot in the immediate aftermath of these geopolitical tensions and a lot of ways I think their expectations that perhaps this represents close to, if not the peak, in inflation. But nonetheless, when you see consumer price growth, you know well above 8 per cent annually, it definitely is noteworthy for market participants.

Marc Filippino
So Colby, do you think that investors are more concerned about inflation or a recession, which you know some people point to as the end result of all these rate rises that the Federal Reserve is expected to put down this year?

Colby Smith
Mm hmm. I think investors are really split on what’s more concerning at this point. When you do look at some of these inflation figures, I think what’s quite notable is you’re starting to see a pick up in services inflation, which economists know is stickier and harder to reverse than, let’s say, you know, inflation in the goods sector, which was by and large a result of supply and demand mismatches. So when you’re seeing inflation pick up in the services sector, that fuels concerns that, you know, inflation is gonna become even more embedded in the US economy. But on the flip side, the more embedded inflation is, the more the Fed is going to have to act aggressively to root it out. And that’s why you’ve seen this pick up in recession risks as well over the past couple of weeks, because the Fed has really tried to position itself as acting aggressively to contain inflation from here on forward. So given how far inflation is above the Fed’s 2 per cent target, I think there are some pretty credible concerns that the Fed might actually overdo things at the end of this year and into early next.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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So a few months ago, Russia’s president Vladimir Putin was at a conference, and he said that his number one long-term economic challenge is population decline. Russia’s fertility rate has dropped, just like it has for other developed countries. And it’s really contributing to the slowing growth of Russia’s population.

Federica Cocco
Well, many believe that with this war, Putin is shooting himself in the foot. It’s definitely going to exacerbate it.

Marc Filippino
That’s Federica Cocco, she’s a statistical journalist for the FT.

Federica Cocco
It’s sparked a sort of exodus of highly educated professionals, which the country needs for its economic recovery from Covid, for example, not to mention the sanctions now. It’s going to possibly yield thousands of casualties and many of them are gonna be men of childbearing age. No, well maybe not childbearing, but you know what I mean. And also people who would have contributed to the productivity of the country for decades to come.

Marc Filippino
Federica says Russia’s population problem also goes back to the 1990s.

Federica Cocco
After the fall of the Soviet Union, there was a big economic crisis across the region and that led to alcoholism, which led to chronic diseases. Russia also registered a very high suicide rate. There was just a whole swath of factors and that led to the mortality rate, particularly for men, to skyrocket. And 30 years later, Russia is still suffering the consequences of that. Because, of course, with the reduced population in the 90s, there are now fewer people in their thirties. And so what’s happening now is that many of these, particularly men, are either being enlisted or they are in professional jobs and are now facing an economic crisis due to the sanctions, and so many of them are now leaving.

Marc Filippino
Federica Cocco is a statistical journalist for the FT.

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When we talk about investor activism, we usually mean hedge funds or other big shareholders who pressure corporate boards to change the way they run their company, usually to make it more profitable. It also refers to investors who push companies to be more environmentally friendly or racially diverse. This year, though, we’re seeing an uptick in proposals coming from conservative shareholders. Our US business editor Andrew Edgecliffe-Johnson joins me now to talk more about this. Hey, Edge.

Andrew Edgecliffe-Johnson
Hi, thanks for having me.

Marc Filippino
So what are you seeing, Edge? What kinds of issues are right-leaning activists focusing on?

Andrew Edgecliffe-Johnson
What’s interesting is that often choosing the very same subjects and maybe even the same language, sometimes, to raise questions about human rights, about racial equity, about political donations and charitable donations, which have been issues that have been mostly raised by the left, by sort of centrist groups.

Marc Filippino
OK, so is there an example that jumps out at you?

Andrew Edgecliffe-Johnson
Yeah, there’s an interesting case study at Johnson & Johnson, where you actually have two separate proposals asking for racial equity audits. One from a conservative group called NCPPR, one from a group which represents a bunch of nuns called Mercy Investment Services. And the conservative group is arguing, while its proposal itself is of very similar language, its kind of supporting statement argues that the racial equity programmes that companies like Johnson & Johnson use are themselves deeply racist and that possibly employees who are deemed non-diverse could face discrimination. Now, Johnson & Johnson obviously contests that view.

Marc Filippino
Edge, what do you think is behind this rise in conservative shareholder activism, you know, what did folks tell you?

Andrew Edgecliffe-Johnson
The big picture is really a breach between the conservative movement or certainly one wing of the conservative movement and the mainstream of corporate America. A lot of conservative activists feel that they lost the universities, they lost Hollywood years ago. And now they’re losing corporate America as CEOs adopt more liberal, with a small L, causes. And essentially, they’ve seen the liberal opponents use annual meetings as quite an effective platform to first get publicity for their favourite issues, but second to change corporate behaviour. And they’re trying to use the same strategy to achieve the same ends.

Marc Filippino
Just out of curiosity, do we have a sense of how effective their proposals are?

Andrew Edgecliffe-Johnson
Well, one analysis of this proxy season that we quote found that there were a record 529 environmental, social and governance proposals filed, by the point that they did this analysis. But conservative groups had filed only 5 per cent of them. So this is still very much a minority pursuit. And I think the other important point to make is that so far, conservative groups have had very little success at persuading other mainstream institutional investors to join them. That said, it is on the rise from a very low base.

Marc Filippino
Andrew Edgecliffe-Johnson is the FT’s US business editor. Thanks, Edge.

Andrew Edgecliffe-Johnson
Thank you.

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Marc Filippino
And before we go, entertainment companies continue to team up in the race to build a metaverse, you know, the online worlds where people play and buy stuff as avatars. PlayStation maker Sony recently partnered with Lego to create a metaverse for children. Now, those two companies have bought stakes in Epic Games. That’s the developer behind the wildly popular Fortnite. Yesterday, Epic said Sony and Lego had taken sizeable stakes, which put the value of Epic at more than $31bn.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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