Activist investors of all stripes cultivate large institutions. From the largest hedge funds at megacap companies to the smallest ones at microcaps, an investor with at most a small percent of a company’s shares finds itself persuading asset managers and pension funds of the wisdom of its plan for a given company.

Even a luminary such as Nelson Peltz needed personally and repeatedly to pitch his ideas for DuPont to PMs and proxy departments at numerous mutual funds and pension funds. Long ago we suggested that contact with other shareholders remains the single most important step for an activist investor.

What do recent events reveal about how these institutional investors think about activist investors? Here, we divide these institutions into two groups:

1. ❖asset managers: mutual funds and others that invest on behalf of individuals, foundations, corporate treasuries, and many other similar investors
   

2. ❖pension funds: Taft-Hartley and other funds that invest on behalf of retirees from public- and private-sector employers.
   

Public statements and proxy contest votes indicate that activist investors still need to work hard to win support from these investors. Asset managers remain corporate, aligned with CEOs and BoDs. Pension funds don’t always trust activist investors, and question their motives. In the same spirit that we urge activist investors to not wait for ISS and Glass Lewis, investors should consider carefully how well they work with big institutional investors these days.

Meaningful Improvements Over the Years

A few years ago, institutional investors took a decidedly dim view of activist investors. Then, asset managers had almost nothing to do with activist investors. They feared losing access to company executives and to company assets, say in employee retirement plans. Even meeting with an activist might spoil their reputation.

Pension funds and activist hedge funds didn’t understand each other. Pension funds promoted corp gov improvements that didn’t interest hedge funds. Activist hedge funds with Wall Street PMs had little empathy for pension fund managers that represent retired laborers, clerks, and truckers.

Relations improved over the years. Asset managers and pension funds meet with and listen to activist investors. They vote in favor of an activist’s BoD nominees in egregious situations. Pension funds even allocate to activist hedge funds. Yet, conventional asset managers and almost all pension funds will not go as far as leading a proxy contest.

Still Far to Go

Recent events suggest that institutions and activists have more work to do.

Asset managers remain quite corporate in their thinking about activist investing. Letters that BlackRock and Vanguard, two emblematic asset managers, wrote to the CEOs of portfolio companies earlier this year illustrate this.

BlackRock CEO Larry Fink urges portfolio company CEOs to think about the long-term, and in the process reveals a bias to support management. He also gets some things wrong, writing:

1. It is critical ... to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners.
   

2. 
   

3. ... [We] engage actively with companies on the key governance factors ...
   

4. 
   

5. In our view, the board is management’s first line of defense against short-term pressures. Our starting point is to support management, particularly during periods where performance has deviated from the long-term trajectory.
   

Of course, directors owe duties of care and loyalty only to the corporation, and thus to all shareholders. This includes any investor or trader who owns shares on the record date, no matter  how long they hold their shares.

Note the emphasis on the pretense of engagement on corp gov, rather than on strategy, finances, and operations. BlackRock views the BoD as defenders of CEOs rather than shareholders, and supports management even when it underperforms. All betray BlackRock’s loyalties.

Vanguard CEO Bill McNabb writes a similar letter to portfolio company CEOs. He pushes some investor hot buttons in opposing poison pills, classified BoDs, and dual-class shares. He also emphasizes shareholder engagement:

1. We have no interest in telling companies how to run their businesses, but we have valuable governance insights to share with the board of directors.
   

He proposes that BoDs consider a “shareholder liaison committee”, which strikes us as a redundant sideshow. He emphasizes gentle engagement on corp gov, rather than serious discussion of strategy, finances, and operations. He lets CEOs off way too easily.

Not surprisingly, BlackRock and Vanguard supported DuPont management in the recent proxy contest with Trian. Interestingly, they (and many other similar asset managers) support incumbents in most proxy contests. A quick look at the 30 or so proxy contests that went to a full vote from July 1, 2013-June 30, 2014 (the most recent period for which asset managers report votes) shows that BlackRock, Vanguard, and several other similar funds mostly support management nominees. Sure, at some just plain awful companies (CommonWealth REIT, for example), they must support activist investors. But, in most other situations, if they don’t support the full management slate, they might vote for a single activist investor nominee.

Among pension funds, some of the earlier mistrust lingers. CalPERS, one of the leading pension funds, explains its vote for DuPont incumbent directors:

1. ...the Trian focus is relatively short-term, with proposed ... cost cutting which would reduce [R&D]. They also propose adding significant leverage ... which Moody’s considers may affect DuPont’s credit rating. The case for further disaggregation of the business is unclear. ... [T]he Board ... agreed its Fresh Start re-focus and cost cutting plan before Trian launched their campaign ... the company is delivering on this (spin-off of Chemours, cost-cutting, plus a multi-billion dollar share buy back). We also note that DuPont made efforts to settle this matter by offering a Board seat to one of the Trian nominees, and this was rejected.
   

In addition, DuPont evidently promised to consider (but only consider) a form of proxy access. This probably helped win CalPERS’ support. Other pension funds, such as CalSTRS, voted for Trian’s candidates.

In our travels we have also talked with a number of senior executives from pension funds. They question the motives of hedge fund activist investors. They wonder whether activists merely and opportunistically seek to strip cash and other liquid assets from troubled companies, rather than repairing them.

At most portfolio companies, activist investors need big institutional investors. Work diligently and carefully to overcome their long-standing biases and win their trust.