Case Studies
An activist investor in action
Activist investor pressure doesn’t work all the time, However, at the Chicago-based fintech firm Envestnet, it did. Below is an example of an activist investor in action.
Following sustained pressure from an activist investor, the company announced significant changes to its board of directors.
It also announced it was changing its election processes to align with investor demands – and industry norms.
What are the details?
Bowing to activist investor pressure, Envestnet has added three new directors to its board. They are longtime banking expert Barbara Turner, veteran board member Wendy Lane, and Lauren Taylor Wolfe, co-founder of investment firm Impactive Capital.
Reuters reported that the company has also committed to changing the process by which directors are elected. Previously, only three directors faced re-election each year.
Now, and in keeping with common US practice, all directors at Envestnet face re-election each yearly cycle.
Who are the leading players?
- Envestnet. The company specialises in providing wealth management software to the investment community. Formed in 1999, its products no longer enjoy a strong reputation among target audiences.
- Impactive Capital. This firm is the activist investor that has pushed for changes at Envestnet. It owned a 7.5% stake in the company at the time.
Anything else?
Despite success in the last fourteen years, Envestnet’s fortunes have been less than ideal recently.
- Its share price has tumbled nearly 30% in the past year.
- Its long-standing CEO and co-founder Jud Bergman died in a 2019 car accident, creating a severe leadership shock.
- It has been accused of corporate governance paralysis – not changing its practices even though the industry and regulations change around it.
- Impactive Capital has been heaping pressure on the company to adapt for almost two years. In the past, such efforts failed. This time, it’s different.
What does Impactive Capital want, and is it warranted?
Impactive wants the above concerns addressed, directors paid less, and the company’s share price to make a u-turn.
In these kinds of cases, there’s rarely a definitive answer as to who’s right and wrong. Both parties will claim the other simply doesn’t want to cooperate.
This time, however, Impactive has a point.
Envestnet has lost nearly a third of its value, underperformed compared to competitors, and entertained governance practices long considered unrepresentative and outdated, all the while paying directors an average of just over half a million dollars per year.
A company with those traits can’t claim to be the victim of an over-zealous investor.
So Impactive has made a difference; what does this show?
It shows us an excellent example of activist success.
Like most activists, Impactive owned less than 10% of the company it was trying to change. But the change happened regardless. Here again, as with many activist cases, it followed a period of intense pressure on senior leadership.
Activism has been on the rise in recent years for reasons like this. Companies are held to more rigid standards, and investors will always seek to turn those standards into new kinds of success.
Did Envestnet put up a fight?
Not really. It allowed itself to remain paralysed at the governance level, so any fight it could have mounted would have been small.
Last November, CNBC analyst Kenneth Squire called out “one of the worst activist defence campaigns I have ever seen” and predicted a settlement that largely resembles the one announced this week.
In other words, the writing has been on the wall for some time.
In summary
No matter their percentage stake in a business, activist investors stand a real chance of winning if a company’s record raises serious questions.
Despite its success, Envestnet stumbled into a corporate slump and took minimal action to correct it in the eyes of concerned shareholders. This often gives the activist the upper hand.