'National Security' Possible Next Target for Activists

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00:00Give us the lay of the land here, this idea of national security being the next line of attack

00:04for activist investors. What does that look like? Yeah, I spoke to James about this. Essentially,

00:09it's economic security is the new national security frontier. And what we're seeing is

00:14potentially anyone who has operation in politically risky regions or supply chains that are too

00:22reliant on certain countries could see an activist come in and say, these are things that you have

00:28to preemptively look at as a company. Either it's good corporate hygiene or preparing yourself for

00:35the eventual risks that could come. So James, this is something that you wrote about and you're

00:42talking to clients about. Has anyone taken you up on this? So this may be a new idea, but the fact

00:48pattern is not really new. And we have seen this movie played out in the ESG era where either it's

00:56a socially minded activist just advocating for social cause from a moral and impact perspective,

01:02or in the later stage of ESG campaigns, folks start to link more closely the financial performance

01:09of a company to ESG related themes. So what we're seeing is perhaps not yet this has played out,

01:17but certainly the conditions start to coalesce in a way that would allow an activist shareholder

01:23to take a viewpoint. Is this a case where you are encouraging activist investors to

01:28push management to de-risk a situation in advance? We certainly wouldn't want that to happen to any

01:36company. We're just spotting the potential, right, kind of the scenarios that as you see,

01:43the hypotheticals that as you see more and more, maybe stock price of a particular company is linked

01:49to a national interest or the lack thereof. It could give activist investors ideas and they act

01:56pretty much like private equity funds. They take an ownership hat on very actively, and that could be

02:01the next platform that they run a campaign on. James, do you think there are any particular sectors

02:07that are particularly, you know, regarded as national security that we should look at or that you think

02:14activists would be looking at as well? Yeah, I think less of a sector. I think about companies that,

02:21of course, in the globalized era, you have an integrated global platform. You set up your company

02:27that way, right? It's a global business. As the world moves to more of a tribalism, one has to wonder

02:34if that original setup still works. So in my mind, it's probably less about sector-specific issues.

02:40It's probably more about how the company was set up in, I'll just say, the prior era of the world

02:46versus does that still work in today's geopolitical realities.

02:51Can companies get ahead of this on their own? I think about what happened with Intel and some

02:54concerns being raised about that CEO's connections to Chinese companies and how the CEO, Le Poutin,

03:00went to the White House, spoke with the president, and afterwards, the U.S. took a stake,

03:04an equity stake in Intel. Is that the kind of thing that could result preemptively?

03:09Because we're looking at this from this point of view?

03:13So that's a great point, because like ESG, national security maps on a number of operational

03:19levers of a company and a number of topics in the boardroom, including CEO candidates,

03:25composition of the board, and all the other operational decisions, maybe even capital allocation.

03:32Do you build your own capacity? Do you verticalize your own supply chain?

03:36Or do you still rely on third parties? So I definitely see kind of a broad-ranging impact

03:42on this type of issue, just given it now impacts a number of board-level topics.

03:48So Scarlett brought up this Intel example. So eventually Trump changed his mind about

03:53Le Poutin, and he was put in as CEO. And if you were an activist, I know you don't advise activists,

03:59but if you were an activist, how much of this potentially Trump changing his mind on issues that

04:04would actually play into their activist thesis?

04:07I think for an activist campaign to be successful, it looks at primarily two things. First,

04:14is it feasible for me to garner other shareholders' support? Because for an activist,

04:20at most I may have X percentage of ownership. I do not carry the vote. So for the campaign to be

04:27successful, it has to resonate with large institutional investors who has a similar concern.

04:34So I can certainly see, of course, in the ESG era, the stewardship policies of some of the

04:41institutional investors look at long-term investment returns, not just in the five years, but

04:4620, 30, or 50 years in light of the climate change, et cetera. Conceivably, of course, you may say,

04:54hey, the same stewardship mentality, you may say, no, it's not a physical climate, it is the

05:00geopolitical climate. And how do we position the company in a way that best capture the capital

05:06appreciation opportunity in the long term?

05:09If national security is now going to be the next line of attack for activist investors,

05:13does this pretty much put a halt to cross-border M&A, foreign companies buying stakes in U.S.

05:20companies? It could. But it depends. As I said earlier, I don't think we're moving to a world

05:30where each country can stand on its own. But rather, I do see countries moving in blocks. So you may see

05:38kind of countries in the same block actually investing more across them or between them.

05:44So that may offset kind of a decline of cross-border M&A, I'll just say, between the blocks.

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