Investor Activists Want a Bite at the Apple

posted by Marsha Vande Berg on February 20, 2018 - 12:02pm

California teachers have teamed up with an East Coast activist hedge fund to petition Apple Inc. to step up its game and give parents the tools and choices they need to ensure smartphones don’t damage children’s health. Together, CalSTRS and JANA Partners are turning an old adage on its ear about gifting shiny apples to teachers.

At the same time, the campaign that was initiated by a Jan. 6 public letter from these unlikely bedfellows – a pension fund that manages the retirement assets of California’s public school teachers and an otherwise slash-and-burn activist hedge fund -- may prove to be a game-changer. All CalSTRS and JANA need do is successfully link their case for Apple’s engagement on behalf of the health of America’s youth to an upside of the company’s publicly traded stock.

First they have to convince the world’s most valuable company and its directors to task an expert committee with oversight of reliable and sound research of the health effects of I-phone and I-pad use and misuse; develop even more critical tools and options to help parents control their children’s usage; and educate the public on the implications of having too much of an otherwise good thing. 

After parents, who cares more about this topic? It has to be teachers who experience almost daily students with what a formal Apple executive calls “incredibly addictive” smartphones. More than ten years after the I-Phone’s release, the evidence points to “unintentional negative consequences” for at least some of the most frequent young users, the open letter says.

What’s more, targeting Apple with the mantle of social responsibility is taking place amid a seething backlash against big tech growth for months both here and in Europe.  By and large, Apple has been little, if affected at all by the backlash of tech regulatory and legal scrutiny. “As one of the most innovative companies in the history of technology, Apple can play a defining role in signaling to the industry that paying special attention to the health and development of the next generation is both good business and the right thing to do,” the open letter says.

In a statement, Apple defended its technology policy for children, saying it “has always looked out for kids”. Since 2008, the I-phone’s software allows parents to control children’s access to content. It also has new features in the works to make the tools it offers more robust. “We take this responsibility very seriously, and we are committed to meeting and exceeding our customers’ expectations, especially when it comes to protecting kids.”

Precisely because Apple takes seriously its responsibility to both consumers, young and old, as well as shareholders serves as a pointer to why a petition on behalf of a hot-button, high profile issue such as children’s health may well succeed.  CalSTRS, a $194 billion fund as of October 2017, is one of an increasing number of institutional investors whose actions support a belief that a company’s economic performance and stock market valuation can be dependent on a specific ESG (environmental, social or governance) issue inherent in its business model and thus critical to any investment assessment involving the company.

JANA Partners, an $8.5 billion fund as of June 30, 2017, has to believe it can make the case that the upside and the downside of Apple stock is dependent at least in part on how effectively it incorporates safety measures on behalf of children’s health in its business proposition.  ”Companies have a role to play in helping to address these issues,” Barry Rosenstein, JANA Partners managing partner, said at the time of the letter’s release.

What’s more it has announced it is forming the $1.7 billion JANA Impact Capital to apply its Apple strategy to investments in other companies that “are good bets but could do better for the world,” according to statement announcing the fund. To help it, the hedge fund has named to its board superstar musician Sting and his wife, Trudie Styler, an actress, film producer and director, Dominican Sister Patricia A. Daly, celebrated for her decades-long work on corporate responsibility, including as co-founder of Campaign ExxonMobil, and Robert G. Eccles, a widely recognized expert on sustainable strategies and currently visiting professor of management at Oxford University’s Said Business School.

Two realities are at play. Hedge funds are experiencing outflows of funds from big dollar investors interested in focusing on a target company’s capital allocation issues, like dividends and share buybacks, by way of mergers, carve-outs and spinoffs. While a few hedge funds made large profits for investors in 2017, most failed to outperform the S&P 500, according to S&P 500 research and Hedge Fund Research Inc. (HFRI) Activist Index. They need new funders as well as new strategies.

At the same time, at least some hedge funds have begun to think more long-term like institutional investors and operationally, hence their interest in backing up their investments with directorships on company boards.  From there, it can be a relatively quick step in the direction of activism that targets corporate behavior and bringing companies strategically in line with the interests of various and representative stakeholders.

Another major activist hedge fund, Trian Fund Management, with $12.5 billion in assets as of June 30, 2017, is focusing together with Blue Harbour Group LP, on social and environmental benefits plus financial performance in its portfolio companies.

Meanwhile, Value Act Capital, a San Francisco-based fund with $15 billion in assets, launched in January its ValueAct Spring Fund with a $100 million funding target to focus on environmental and social goals for the companies it invests in. According to Bloomberg, it has already invested in AES and the company’s transition to cleaner energy use. To support its interests, ValueAct’s founder, Jeff Ubben will join the AES board to help guide the switch.

These changes within the spheres of activism and investment are not taking place in a vacuum. The World Economic Forum is promoting “The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth”.  A collective of 50 US-based institutional investors and global asset managers together with several of their international counterparts – with trillions in assets in US equity markets – has formed the Stewardship Group, together compiling a framework for corporate governance improvements they are advocating.

Meanwhile, the world’s three largest index fund managers, BlackRock, State Street and Vanguard, are strong and convincing proponents of ESG policy positions as part of investment strategies.  In a Jan. 12 letter to corporate managers, BlackRock CEO Larry Fink seized the bully pulpit to stress that companies need to demonstrate “corporate purpose” and emphasize the intertwining of interest in long-term returns and alignment with representative stakeholders.

Funds, ranging from CalSTRS and JANA to Trian and ValueAct help tell the story of an accelerating push on behalf of sustainability. But so do the numbers.

The Washington DC-based sustainability advocacy group, US SIF Foundation, writes in its 2016 Trends Report that US-domiciled assets engaged in sustainable, responsible and impact (SRI) strategies grew 33 percent over the two prior years and showed a 14-fold increase since 1995. SRI investing now accounts for more than one out of every five dollars under professional management in the United States.

This translates into $8.72 trillion in assets under management using SRI strategies at the start of 2016 – or a 33 percent increase since 2014.

“It’s like Nixon going to China,” says Eccles, the Harvard/Oxford University professor and new advisory director of JANA’s Impact Capital Fund. “If the hard-nosed activist hedge fund community thinks ESG is important, what more is there to say to convert skeptical managers, investors and policy makers?

“This is a game changer,” he wrote in a Jan. 16 Harvard Business review article.

 But if it’s not a game-changer and the CalSTRS/JANA petition falls short of convincing Apple to get on board with the stepped up appeal of child safety issues in the face of smartphone usage, then public school teachers may indeed be left with little more than shiny apples to show for their efforts.