At first glance, the latest data on activist investors make no sense.
On one hand, there's never been more capital deployed by sharp-elbowed fund managers in their battles against public companies.
A global survey by investment bank Lazard Ltd. found activist funds committed US$62-billion to their campaigns in 2017, twice the capital deployed in 2016. Their targets included corporate icons such as Procter & Gamble Co., Nestlé SA and Credit Suisse Group AG, along with successful contests that replaced the boards of directors at two significant Canadian companies, Liquor Stores N.A. Ltd. and Granite Real Estate Investment Trust.
Yet, on the other hand, the number of activist campaigns that actually played out in the form of traditional proxy contests declined steadily over the past five years in Canada.
Activist activity peaked at 27 public battles for control of boards in 2012. Since then, the number of proxy contests fought in this country has declined steadily.
There were just eight such campaigns during 2017, including the showdowns at Liquor Stores and Granite REIT, the same number seen the previous year, according to a report from law firm Fasken Martineau DuMoulin LLP.
How can activists be putting far more capital to work yet be engaged in far fewer proxy fights?
The answer reflects growing sophistication on the part of both corporate boards and activists, along with steadily increasing support for fund managers who are willing to fight for what they perceive as a better way of doing business.
Rather than engage in messy, expensive and potentially embarrassing public showdowns in the form of proxy battles, boards and activists are resolving their differences quietly and quickly.
Toronto-based Fasken partner Aaron Atkinson said: "Given the potential tremendous costs and lost management time associated with a formal proxy contest, we think both management and activists have incentive to reach a settlement as early in the process as possible."
In the past, both boards and activists were guilty of overestimating the strength of their hand with shareholders. After a number of relatively high-profile battles, "the market is maturing in Canada," said Walied Soliman, chair of Norton Rose Fulbright Canada and co-chair of the law firm's Canadian special situations team.
"There is a clear understanding of the rules of engagement," Mr. Soliman said.
"Realistic boards and agitators understand their chances and leverage up front. This results in more realistic settlement dialogues."
Last year, more often than not, the activists won the day, achieving all or most of what they demand from public companies. The bankers and lawyers who work with these fund managers expect that trend to continue.
Mr. Atkinson said: "Our studies show that no company, regardless of size, is immune from shareholder activism."
Boards are increasingly willing to meet the demands of activists because they realize that institutional money managers, including so-called passive investors such as index funds, are likely to support campaigns for change in the boardroom, according to Lazard managing director Jim Rossman, who runs the New York-based investment bank's shareholder advisory team.
We may need a new name for what we've long labelled passive investors. Mr. Rossman pointed out that over the past year, the three largest index fund managers – Vanguard Group Inc., BlackRock Inc. and State Street Corp. – showed they are willing to back activists. And with 18.5 per cent of the S&P 500 index in the hands of the three largest index fund managers alone, passive investors now wield enormous influence.
"The expanding influence of BlackRock, State Street and Vanguard continued to be felt across the governance landscape, from public statements by the firms' CEOs on investment stewardship principles to more aggressive stances taken on gender diversity and climate risk," Mr. Rossman said in a report. "Index funds showed an increased willingness to support dissidents in complex and consequential proxy contests."
Activists are expanding their playbooks as they put more capital to work. Mr. Rossman said traditional dissident campaigns that push for the sale of a company, or restructuring that sees the spinning out of businesses, were augmented last year by activists who targeted mergers and acquisitions. In these situations, the activists' goal was to either scuttle deals that were poorly received by investors, or sweeten the terms of the transactions.
The same dynamic is playing out in Canada, with pension plans, mutual funds and other institutional money managers stepping up to back activist campaigns.
Norton Rose's Mr. Soliman said: "Increasingly, non-activist funds are working in the background with activists to advance their agendas."
That was certainly the case last year, when "institutional activists came off the sidelines, and were rewarded for doing so," said Fasken's Mr. Atkinson. He said: "2017 marked the comeback of institutional and financial dissidents, with such dissidents achieving full or partial success in all but one of the five contests they launched."