By Sabrina Escobar

Activist investors are on the prowl, and consumer companies may soon find themselves in the crosshairs. Many activists look to earn fat returns by unlocking shareholder value, while others aim to change corporate behavior for political, social, or other reasons.

The past three years were the busiest on record for shareholder activism, with an average of 236 activist campaigns a year, compared with a prior three-year high of 223 campaigns annually from 2017 to 2019, according to a recent Barclays study.

Much of the action in the past three years was centered on the consumer-discretionary sector, with well known companies such as Macy's, Starbucks, V.F. Corp, and Mattel all coming under attack by activist investors. Activism took a variety of forms, from high-profile proxy fights to shareholder proposals to "nonconfrontational" engagement with company boards.

The 2025 proxy season could see even more activity, from both institutional shareholders pushing for better financial performance and issue-focused individuals and advocacy groups proposing changes to ESG, or environmental, social, and governance policies.

Consumer-facing companies are ripe for activism for several reasons. Changing consumer behavior in the wake of the Covid-19 pandemic has hurt many companies' performance, sharpening the difference between the sector's winners and losers. The companies' widespread name recognition among consumers also makes them inviting targets for groups looking to garner attention, either for themselves or their causes.

The coming proxy season could force targeted companies to navigate increased financial pressure or enhanced reputational risk. That could mean more volatility in their shares, but also the potential for gains if positive changes are imposed or otherwise take hold.

Meet the Agitators...

Institutional activists such as hedge funds and other investment firms are often drawn to companies in sectors in flux or prone to disruption, says Christopher Couvelier, a managing director in Lazard's Capital Markets Advisory group, focusing on activism preparedness and defense.

That describes the consumer-discretionary space in the past five years. The pandemic ushered in new consumption patterns, such as an increased preference for online shopping and mobile ordering at restaurants. It also created challenges, including staffing shortages, fluctuations in consumer demand, and supply-chain snafus that have yet to be untangled.

"All of these have put a lot of pressure on these businesses, and their performance is going to come under the scrutiny of activists," says Robert Marese, president of MacKenzie Partners, a proxy campaign advisor.

Other factors could also lead to stepped-up activist activity this year and next. For one, Wall Street hopes the Trump administration will ease regulations on mergers and acquisitions sometime later this year, after several years of government hostility to deals. That could give activists renewed confidence to agitate for more mergers, sales, and spin offs, particularly if private-equity firms come back to the table.

Private equity transactions have been in a slump for much of the past two years as higher interest rates increased financing costs. While there are many unknowns in the deal-making market, rates could fall this year, depending on the pace of inflation. As conditions improve, private-equity firms could jump back into activism, Couvelier says.

If conditions improve, he expects to see more activists approach companies after having discussed a buyout with financial sponsors. He also expects more to team up with private-equity investors on transactions, much as the activist firm Arkhouse Management and asset manager Brigade Capital Management tried to take Macy's private last year.

"The return of financial sponsors...could be a game-changer," Couvelier says. "They are sitting on massive heaps of dry powder and we know they've maintained their dialogue with activists even while they've been sitting on the sidelines."

...And the Advocates

While the push to improve financial results continues, much of the shareholder activism this proxy season is expected to come in the form of proposals from advocacy groups and individuals urging companies to take a stance on issues, including those tied to ESG principles.

ESG advocates have long agitated for companies to become more eco-friendly, change compensation, benefit structures, and workplace conditions, or push for a more diverse workforce.

In recent years, the anti-ESG movement has adopted similar tactics, Jon Solorzano, a partner at the law firm Vinson and Elkins who focuses on ESG advising, said in a recent interview with Barron's. The broader political backlash against diversity, equity, and inclusion $(DEI)$ initiatives may incentivize more groups to launch campaigns to rescind diversity efforts -- or seek to protect them.

Anti-DEI proposals doubled to 30 in the 2024 proxy season from 2023's tally, according to a Harvard Law School study. Pro-DEI proposals submitted by shareholders decreased to 42 in 2024 from 90 in 2023.

Starbucks, Walgreens, Apple, PepsiCo, Coca-Cola, and Kroger were some of the companies on the receiving end of anti-DEI activism last year. "What gets clicks? It's a name that you've heard of, and so that's going to drive a lot of the targets," Solorzano said.

Investment Impact

Activist investor campaigns can often be a boon to shareholders in the short term, academics and analysts have found. But the longer-term impact is mixed. A 2023 Goldman Sachs study of more than 2,100 shareholder campaigns suggested the median stock targeted by activist investors outperformed its sector by three percentage points the week after a campaign launch, but "excess returns were short-lived and typically turned negative after six months."

The effects of issue-driven activism are less clear. Shareholder proposals have historically carried few financial implications; most fail to garner the necessary support for the motion to pass, and companies aren't bound to implement the proposals.

But so long as DEI remains a divisive issue among consumers, management responses to these proposals may have more lasting implications. Consumer-facing companies have unique reputational risks, and perceptions across their stakeholder base are likely to inform management's advice and votes.

Deciding whom to disappoint was a calculation Costco Wholesale recently weighed when it defended its DEI policies in its annual proxy statement. The board asked shareholders to vote against a proposal asking the company to evaluate business risks tied to the diversity initiatives. The response sparked boycotts from some conservative factions as well as so-called "buycotts" from DEI supporters.

Ultimately, Costco's store visits and sales didn't suffer much. The company posted a strong quarter and grew same-store sales at a fast clip in both January and February.

That said, few companies' business models rival Costco's in its ability to weather such a storm. The retailer's wholesale membership model and low prices have helped it develop a cultlike following that may be cushioning any blowback.

Other retail management teams might face a more difficult balancing act in determining how to satisfy shareholders without alienating shoppers. As for investors, they will have to decide whether activist-provoked shake-ups represent a buying opportunity -- or a reason to steer clear.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 16, 2025 01:00 ET (05:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.