May 27, 2021 - Economy & Business

The shareholders strike back

Illustration of a group of business peoples' raised fists at the bottom of an image with a justice gavel above them.
Illustration: Rae Cook/Axios

Shareholders of public companies aren't nearly as passive as some stock market observers would have you believe. They're causing seismic shifts at household names like AT&T and Exxon.

Why it matters: In general, managers of big public companies have never had it so good. The inexorable rise of passive investing, along with an increasing number of companies going public with dual-class share structures, has generally entrenched the power of CEOs. But shareholders can still wield significant power.

The big picture: Historically, tensions between shareholders and managers have been caricatured as a fight between short-termists who care only about quarterly earnings pops, stymieing executives trying to invest in a long-term vision.

  • The reality, as revealed over the past couple of weeks, is that shareholders have long-term visions, too — and those visions are often more clear-eyed than the ones found in the executive suite.

Driving the news: Exxon shareholders delivered a major blow against the company's management this week, installing new board members who take climate change seriously.

  • What they're saying: "This is doubtless a day Exxon’s management would rather forget," writes Bloomberg's Liam Denning, "but it is a good day for the company."
  • Of note: Chevron shareholders, too, voted against management and in favor of greater emissions reductions.
  • Our thought bubble, from Axios' Ben Geman: The question of whether mainstream finance wants more climate action from oil majors has been definitively answered. 

Context: Shareholders aren't just embracing the global green-investing thesis, they also have the world's governments at their backs. The Dutch government ordered Shell this week to get significantly more aggressive in terms of oil production cuts, in a move that presages further such rulings from other governments both inside and outside the EU.

  • The long-term vision here belongs to the shareholders who see both the necessity and the inevitability of the coming energy transition. That's worth remembering, the next time a CEO tries to paint activists as being interested only in short-term gains.
How shareholders shattered AT&T's media dreams
TV in binoculars
Illustration: Eniola Odetunde/Axios

The embarrassing volte-face from AT&T last week, when it spun off a company it had recently spent $107 billion acquiring, was also due in large part to shareholder pressure.

  • What they're saying: When AT&T CEO John Stankey was asked why he was changing his mind about owning Time Warner, he talked about how "we need the equity to line up with the right shareholder base that wants to take that ride."
  • Translated into English, he was saying that AT&T's shareholders know what they want from the company — and what they want isn't massive bets on content. Instead, it's a focus on the company's core connectivity and telecommunications businesses.

By the numbers: AT&T trades at a modest 9.4 times the coming year's earnings — in line with rival Verizon, trading at 11 times earnings. Streaming giants Disney and Netflix, by contrast, are trading at 42.9 and 43.6 times next year's earnings, respectively.

  • Stankey likely knows that in order for Warner Media's streaming ambitions to be realized, it will need to execute a high-growth strategy culminating in hundreds of millions of subscribers.
  • That kind of strategy is expensive, and worries shareholders who want to go back to the days of being able to cash regular and reliable dividend checks.

The big picture: AT&T's core connectivity business has enviable margins, but it has limited growth potential and requires enormous continued investment as America transitions to 5G.

  • Shareholder returns are boosted in large part by financial engineering — borrowing against predictable future cash flows. Borrowing even further to support a risky media business doesn't sit well with either shareholders or lenders, especially when synergies are largely nonexistent.

The bottom line: Index funds notwithstanding, not all shareholders are equal. The biggest media companies — Netflix and Disney — attract investors seeking high risk and high return. The logic of the deal to spin off Warner Media to Discovery is that the spun-off company will be able to find a similar shareholder base.

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