Activist Investing And ESG: A Conversation With Dianne McKeever

Last month I sat down with Dianne McKeever, the Co-founder and CIO of Ides Capital, an impact activist investor. We met one morning at a Le Pain Quotidien in midtown Manhattan. She ordered the chamomile tea and I had the iced tea lemonade. Neither one of us had anything to eat. The bill was $10.44 which she insisted on paying saying, “I am the local.” Being the gentleman I am, I demurred.

Eccles: Dianne, thanks for taking the time to meet with me. Let’s start by talking about your childhood.

McKeever: I grew up in Indianapolis, Indiana and graduated from Brebeuf Jesuit Preparatory School where I had a pretty well-rounded experience—speech team, cheerleading, and a serious violin student. I grew up in a family that operated and owned a small consumer chemical manufacturing business, so I spent a lot of time meandering around factory floors and playing with adding machines.

Eccles: Wow, that’s quite an All-American story! What did you do after graduating from high school?

McKeever: I attended NYU and pursued dual degrees in Chemistry and Chemical Engineering. However, a short-lived engineering internship (that sent me down NYC manhole covers, no less) confirmed what I had long-known: I wanted to pursue an investment career, having had some early exposure to the Berkshire Hathaway letters. I was fortunate to meet Barington Capital Founder Jim Mitarotonda and his partner Ron Gross who were launching a value investing fund with an activist strategy. I joined as Barington’s first analyst and, eventually, youngest partner. So, my bio is short and sweet. I’ve exclusively been an activist investor focused on value investment opportunities within the small and mid-capitalization space.

Eccles: So, from the Midwest to the East Coast and becoming an activist investor, no less. You certainly came to adulthood in a pretty rough and tumble world. I’m guessing when you were a little girl you wouldn’t have imagined you’d end up where you are today.

McKeever: Well, it might seem so, but actually a bit to the contrary. My parents were born and raised in NYC, and I apparently announced that I would be moving to New York myself when I was five years old—a statement that played on repeat until I did in fact move. As for activism, I can say that there isn’t anyone who knows me that is surprised by my chosen profession, though we didn’t have the precise terminology for the role!

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Eccles: And didn’t you get a law degree from Fordham along the way? What was that all about?

McKeever: That’s correct and was motivated by my desire to be as informed as possible about all things corporate governance and, more broadly, ESG. I wanted to develop an expertise in materially beneficial change for a company’s broad base of stakeholders—customers, employees, suppliers, communities and, of course, shareholders.

Eccles: Why did you decide to start Ides and where does the name come from?

McKeever: The word “Ides” has a very famous—one could say Shakespearean—reference that works well for shareholder activism. The initial inspiration, however, came from a statement attributed to Cicero: “The Ides changed everything.” In reading more about that statement, I learned that the Ides (i.e., the monthly new moon) was understood to be a prognosticator for change, so it is certainly an apt name for my strategy. I don’t buy stocks and sit on the sidelines. I engage with corporate stakeholders to drive positive, long-term, and value-enhancing change.

As for my decision to start Ides, I expect the impetus was the same impetus experienced by any entrepreneur who launches a new business. I saw the opportunity to build a better mousetrap.

Eccles: Good for you! Two questions. What is your strategy at Ides? What is your objective and how do you achieve it?

McKeever: Great questions and I’ll start with the latter. My objective at Ides is quite straightforward. I seek to protect and grow investor capital at superior rates of return over the long term. It’s that simple.

Eccles: But probably simpler to say than do, I expect. How do you decide which companies to invest in?

McKeever: Ides’ strategy is to invest in companies at a material discount to what we believe they are and can be worth. We then engage with those companies to enhance stakeholder outcomes and long-term shareholder value.

Eccles: That sounds like a polite Midwestern way of saying you’re an activist investor. Did I get that right?

McKeever: 100 percent! But, as I mentioned, I wanted to build a better mouse trap of activist investing. Ides does this by not only focusing on the traditional areas of improvement targeted by shareholder activists—namely operational, capital allocation, and strategic improvements—but adds a fourth pillar of engagement: The implementation of ESG and Sustainability best policies and practices. This means we have an overarching focus on the broad well-being of the company’s stakeholders who are so crucial to long-term value creation for shareholders. We’ve seen first-hand that when corporate stakeholders do well, shareholders do well too.

Eccles: Okay, there is a lot to dig into there, but I want to circle back to your investors, who are typically referred to as the limited partners in a fund. Who are they and how do they evaluate you?

McKeever: Ides’ investors include high-profile value investors, leaders in sustainable and impact investing, former partners in other activist funds, and even directors who I met quite literally across the table during prior activist engagements. We also invest on behalf of high net worth individuals and institutions. We are evaluated based on the returns we generate. I’m pleased to say that since inception, we’ve outperformed our activist peers by more than 40 percent.

Eccles: So returning to your strategy. For the most part, the words “ESG” and “Sustainability” in the context of activist investing are still considered somewhat odd bedfellows. How do you make sense of this?

McKeever: Bob, this really boils down to three key takeaways that hit my radar early on in my career, factors that underscored the opportunity to launch Ides and persist to this day.

First, as a woman, I am a diverse activist which was not common when I started my career and, unfortunately, that remains true today. To point, I was thrilled to learn that your daughter is a partner in a fixed income hedge fund. I am always excited to connect with other diverse investors and allocators and would love to meet her one day.

The lack of diversity extends to companies I invest in. Diversity was and remains a big challenge at small and mid-cap companies. Each time I’ve served as a public company director, I’ve been the first diversifying fiduciary in the boardroom. So I’ve had ample opportunity to witness the importance of diversity from the standpoint of value creation. Differentiated points of view and life experiences broaden not only conversations but opportunities, as well.

On the flip side, a lack of diversity is a recipe for groupthink which can create a host of substantial risks. Perhaps unsurprisingly, a lack of diversity is often a leading indicator of other issues within a company. As my Irish farming-family grandparents always used to say, “There is never just one mouse.” In other words, you don’t have a problem; you have problems. Plural.

Eccles: This makes obvious sense, although you know this new and growing “anti-Woke” movement which I’ve written about before, is all up and arms about diversity. But let’s leave this aside for now. Please tell me about the second factor.

McKeever: The second factor comes directly from the many meetings I’ve had with best-in-class operators, an important part of my investment diligence process. As an activist investor, I’m engaging with corporate stakeholders and disseminating public platforms for change. I have to be extremely well informed and one of the best ways to ensure that I am is to have in-depth conversations with operators to understand precisely what drove their success.

One question I always ask is “What were the key decisions that set you on your path to success?” I can tell you the overwhelming majority of answers sound something like this: “Treating my employees well; they are why I am sitting here today.” “Making sure our company is a valued and respected member of our community.” “Ensuring that each team member has a portion of their pay that either is or behaves just like equity.” These operators largely are not calling what they do ESG, but that is exactly what it is.

Eccles: This also makes sense. Too bad the “anti-Woke” crowd wants to twist the meaning of ESG and sustainability to create a false narrative for them to attack. But, again, I’ll let this go. Please tell me about your third factor.

McKeever: As an investor and an involved member of groups including the Council of Institutional Investors, I’ve always had an interest in understanding what institutional investors have seen work well within companies. In the early 2000s, I noticed that many of these investors were building in-house corporate governance practices.

I found that to be totally fascinating. Within our own concentrated portfolio, I have a front-row seat to see how incredibly effective robust corporate governance is in ensuring good outcomes. At the same time, I’m also witnessing the biggest institutional investors with exceptionally diversified portfolios ascribe tremendous value to strong governance across their thousands of investments. Moreover, they are dedicating significant resources to these internal investment stewardship centers, i.e., they are putting their money where their mouth is. Nothing feels more powerful to me than the “coincidence” of two very different types of investors arriving at similar conclusions about the importance—the real value—of ESG best policies and practices.

Eccles: We’re in a moment where there is tremendous capital flowing into ESG and yet there is also significant push-back. What do you make of that?

McKeever: True and that is happening for a number of reasons, the vast majority of which sit outside of the work I do at Ides. As a starting point, I don’t screen for good or bad ESG companies, which is the approach of the vast majority of ESG investors today. I invest in strong, quality businesses with attractive valuations that have opportunities to improve across a wide range of attributes, including ESG, and I then engage with companies to create material, value-enhancing change. My focus on ESG elevates my dialogue with corporate stakeholders and ensures, far more often than not, a constructive, efficient engagement across the spectrum of improvement opportunities. Critically, my engagements tend to be front-loaded with ESG enhancements because strong corporate cultures create solid foundations for operational and strategic execution which, in turn, drives long-term shareholder value creation.

With that point clear, I think that the current pushback is a healthy process for a maturing strategy. On the one hand, there is a tremendous amount of ESG greenwashing going on today. Some ESG funds have vague investment strategies that provide investors with no clarity around their standards nor substantiation of their use of ESG within their investment processes. ESG integration can be done well or done poorly. The former leads to superior returns, the latter creates substantial risk for investors. On the other hand, there are also those who claim that ESG is meaningless or, worse, a detractor to value creation. These critics largely boil down to opportunists capitalizing on a highly-charged debate and those whose businesses stand to lose via displacement by superior business models that are not only more sustainable but more profitable, too.

Eccles: So, then, is ESG doomed or is it here to stay?

McKeever: ESG within investing and at issuers themselves is here to stay, although it is going to evolve and that is a healthy process, albeit one that doesn’t really touch Ides’ work. Much of the current discourse is noise. As one example, this “here to stay” reality is reflected in the fact that insurers price climate change and other ESG risks into their premiums. So that ship has sailed.

Eccles: I know you’ve got to leave soon, but could you please give me an example of one of your investments before you go?

McKeever: Sure. Arcosa is an investment we’ve held for more than three years. Like many Ides’ investments, Arcosa is a conglomerate business model. Conglomerates are fertile ground for Ides because they are harder to value and almost invariably present an opportunity to streamline the corporate structure and, in turn, simplify capital allocation decision-making.

Arcosa was a well-run company with high quality businesses when it hit our radar and, nevertheless, since initiating our position, Arcosa has undergone an incredible transformation through the most constructive of engagements. Ides is focused on broad-based value-creating enhancement and so our engagement with Arcosa has been centered around material ESG improvements, capital allocation, and corporate strategy and structure. We are gratified that Arcosa’s management team has successfully undertaken value-improving change across each major opportunity outlined by Ides in our initial letter to the Board. Commensurately, Arcosa’s shareholders have been rewarded with returns of more than 60 percent since our initial buy-in, outperforming the Russell 2000 by approximately 40 percent.

Eccles: This all sounds good but where does ESG fit into what you’ve done?

McKeever: At the outset of our investment, we encouraged Arcosa to initiate sustainability reporting, a practice that commenced shortly thereafter. Disclosure is important to investors and holds management’s feet to the fire. Through this transparency, in the “E” dimension we’ve seen Arcosa reduce its water management intensity and greenhouse gas emissions. We’ve further seen many “S” improvements including improved workplace safety through a 60 percent reduction in incident rates as well as an enhanced diversity and inclusion practice. These diversity improvements were mirrored within the boardroom, contributing to the “G” dimension, which was further enhanced through the de-staggering of the board.

Eccles: You often say that strong ESG and culture enables strong operational and strategic execution, so let’s turn to the more traditional areas of activist engagement.

McKeever: Certainly. While Arcosa nonetheless remains a conglomerate structure, we are pleased that the company recently divested its transportation segment. This streamlining sale means Arcosa will now exclusively allocate capital to its two “crown jewel” business segments which, in broad terms, comprise wind tower components and construction aggregates, a segment that has undergone a profound sustainability and strategic transformation.

Over Ides’ hold period, Arcosa has become the leading domestic producer in recycled construction aggregates—a move that has created a genuine win-win-win for customers, employees, and the environment. Arcosa sends portable crushers to demolition sites to repurpose materials, thereby eliminating the need for a water and land-intensive quarry and diminishing the product headed to landfills. Arcosa’s recycled aggregates business provides its customers with a comparable product at the same or better price and at the same or better profit margin for the company. Our investment in Arcosa in many ways represents the epitome of an Ides investment—a constructive engagement with a strong strategic and sustainability performer that garners commensurate outsized rewards for stakeholders and shareholders, including us!

Eccles: Thanks. That makes your investment strategy very tangible to a non-investor like me.

I’ve really enjoyed this conversation and learned a lot. Your investment strategy certainly puts to bed this false narrative that somehow ESG is bad for returns. You also challenge the prevailing view that activist investors are bad guys (and they are mostly guys). Good luck with Ides and I hope we’ll have a chance to get together again.

McKeever: I enjoyed the conversation as well, Bob, and would be delighted to do so. The investor in me paid for tea, but next time I expect a return on my investment in the form of lunch. You’re buying!