Lessons for a New Generation of Economists
By Grant Fuller
Using AI to optimise the impact of activist campaigns
GlaxoSmithKline is in a clash with activist investors again: in July it was Elliott Management, now it’s the smaller, but formidable activist, Bluebell Capital Partners calling for board changes and the replacement of Chairman (Jonathan Symonds) and CEO (Emma Walmsley). Irithmics helps us understand when the next phases of this challenge may unfold.
Scholars use Agency Theory to describe and understand investor activism. Agency Theory describes how ‘principals’ (investors) task ‘agents’ (corporate management) to manage an asset (a company, its business operations, and procedures) on their behalf, in return for which the principal agrees to pay the agent a fee. This arrangement works well when the objectives of principal and agent are aligned, but friction occurs when there is disagreement or discontent between the two. When investors no longer consider the actions and activities of management to be acceptable or appropriate, they can ‘exit’ (withhold their resources and reallocate their capital, choosing to sell or divest), or they can exercise ‘voice’ (engage with management, participate in shareholder resolutions, corporate voting and the appointment of board members and directors).
Activist investors are an example of choosing ‘voice’. If efforts to engage with management are unsuccessful, activists attempt to leverage the support of other shareholders and investors with campaigns which target the company, its executive management and board, its business model, operations and procedures, its cashflow, capital structure or appropriate use of capital, seeking to highlight deficiencies, inadequacies or underperformance – voicing concerns that the ‘principal’ does not consider the activities of the ‘agent’ as desirable, proper or appropriate. If other principals accept the argument, concerns and criticisms the influence and legitimacy of the status quo is weakened and eroded.
In parallel, activist campaigns outline a researched and viable alternative proposal for desirable actions which address the shortcomings they perceive. The principal is proposing the agent adopt more desirable and appropriate activities. Again, if other principals accept this argument the influence and legitimacy of the alternative proposal is strengthened and enhanced.
Of course, counter-activist campaigns by corporates seek to achieve the opposite: strengthen and enhance the legitimacy of the company and its management, and weaken and erode the legitimacy of the activist proposal. The counter-activist agent seeks to retain the approval and support of principals, and the resources they provide (capital).
Nobel laureate Herbert Simon observed, “a wealth of information creates a poverty of attention”, and it’s important for the success of campaigns that activists increase the attention other investors apply to the information they seek to share, their concerns and the research they present - their ‘voice'. How they choose to go about maximising this attention is a different matter.
Here’s a chart, formatted like project management Gantt charts, showing when (as of 20 Oct 2021) activist campaigns could most effectively leverage the views and expectations of institutional investors, and amplify the ‘voice’ of activists across FTSE100 constituent companies during Nov 2021. Each row is an individual FTSE100 company, but the identifiers have been withheld and they are sorted by the complexity of the campaign. For simplicity, we haven’t shown the other side of the coin (the counter-activist objective, how campaigns could amplify, strengthen and reinforce executive management and board influence and legitimacy with investors), nor have we provided full campaigns details - which data and which type of investors / funds / portfolios to target.
This is where it gets interesting: the chart hasn’t been generated by activist investors or analysts. The chart has been generated by Irithmics AI which has learnt to recognise and classify patterns in how institutional investors’ views and expectations affect their decision to allocate and reallocate portfolio capital and risk. Irithmics AI uses the dynamics and evolution of these patterns to anticipate how data and information influence the choices of investors, and designs campaigns which are optimised to present data and information most salient to investors' allocation decisions at that time.
The chart shows Irithmics AI’s time plan for maximising the influence of activists’ voices with other shareholders and investors, expressing concerns and criticisms of companies, their management and boards, governance and shareholder value. Irithmics AI has optimised these plans to systematically weaken and erode the influence of a company (its management and board) over investors’ decisions to allocate portfolio capital and risk.
This is essentially what the activists are attempting to achieve with GSK shareholders – weaken the influence the company has with investors, drawing their attention to deficiencies and inadequacies in the company's (and its management's) development of shareholder value. With Irithmics AI’s analysis of how data and information affect the choices of shareholders, this campaign could be timed for maximum impact and greater attention of other shareholders.
Can you spot GSK in the chart?
While activist investor campaigns have traditionally focused on shareholder value, stock price and dividend yields, the voice of environmental and social concerns are increasingly joining their cousins of leadership and governance. The chart above, and Irithmics AI behind its generation, can equally be applied to social movement protestors, calling for greater corporate action and responsibility for climate change, biodiversity loss, waste and pollution.
It seems appropriate Fortune Magazine titled their Feb 2020 article, “Click here to oust the board” as they described our AI activist research and technology as a “tool that could make virtually any investor an activist investor”.
Climate change isn’t the only reason it’s going to get choppy at the top of that corporate ladder.
P.S. In case you’re wondering, it takes just over eight mins for Irithmics AI to analyse all FTSE100 constituent companies, identifying these optimised shareholder and non-shareholder activist (or counter-activist) campaigns. In a little over two hours, Irithmics AI has done this for FTSE100, S&P500, EuroSTOXX 600 and ASX100 constituent companies. Irithmics AI does this everyday.
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