Article Frankfurter Allgemeine Zeitung

Be a Hedge Fund and Do Good Things?

With one of the last updates of their iOS operating system Apple introduced the Screen Time Control. This feature gives users an overview of how much time they spend on their iPhones. Surprisingly, the app is the result of a campaign, led by the hedge fund Jana together with the pension fund California State Teacher’s retirement System Fund. Under the title “Think differently about our kids”, the campaign called for attention regarding the use of smartphones. Apples reaction to this is Screen Time Control.

Jana is known as aggressive, New York based hedge fund, but since when do hedge funds campaign for sociopolitical goals? Actually, so called ESG (environmental, social and governance) campaigns of hedge funds are no exception any more. In recent times, CtW Investment Group forced Amazon to establish the “Rooney Rule”. According to this rule, companies have to consider a female candidate for new management positions. Trillium Asset Management put pressure on Nike to care more about gender diversity. 

Hedge funds pursue ESG campaigns not for noble motives. The campaigns are a response to the fact that index funds or institutional investors hold more and more shares of companies. The three biggest index funds manage more than 20 percent of the value in the American stock market index S&P 500 and are in over 90 percent of all cases the biggest shareholders of American blue-chip companies. Without the support from these shareholder groups, activists cannot win any of their traditional campaigns.

However, index funds have a different investment strategy than hedge funds.  As “permanent capital”, they cannot react to strengths or weaknesses in the ongoing business operations, but focus on a sustainable company development. Recently Blackrock stressed in a public letter that companies, which are successful over the long-term, have to make their contributions to society. 

Why do activists who are interested in short-term profits support ESG topics? In essence, it is about lobbyism. Hedge funds want to attract index funds and other long-term customers. That is why they include ESG topics more and more frequently in their campaigns. With quite some success: since 2012, 30 percent of all index funds in the US have voted for the activist side in a proxy fight - with rising tendency. In Germany, this development is not as strong as in the US. In the US, activists can present shareholder proposals for the implementation of certain management measures. If there is a majority for these proposals in the general meeting, this might not be binding for the board, but a “no” can have serious consequences for the individual members. Because in the US every board member is elected annually, in most cases, the members have to fear deselection and therefore the loss of their jobs if the shareholders are unhappy. Consultants on share voting rights like ISS and Glass Lewis regularly advice the shareholders not to vote for the confirmation of the board, if they have not implemented a majority decision. 

There is no such leverage in Germany. Shareholders can put pressure on the management via public campaigns, but the general meeting cannot make any decisions on the hiring policy or the alteration of a product. Nevertheless, also German companies will not be able to escape the claims for sustainable corporate culture in the end. German publicly listed companies have in parts the same shareholders as US companies. Campaigns, which were successful in the US are modified and conducted here too. Would Berthold Beitz have split up his company under pressure from shareholders? No. But now it happened. If sustainability is supported as a side effect, this is not bad at all.  

The authors are partners with Kirkland & Ellis.