Eric Knight: ‘American-style activism does not work in Europe’

As head of Knight Vinke Asset Management, Eric Knight advocates a ‘high-impact’ investment approach based on dialogue rather than confrontation. He calls for corporate governance that serves the long term, supported by large institutional investors and sovereign wealth funds.

Knight Vinke Asset Management is based in Zurich and Monaco — how does this geographical location influence your investment strategy and your relationships with local players (institutions, companies, high net worth individuals)?

Ours is a long-term strategy, supported by investors whose primary focus is to invest for the benefit of future generations. As a consequence, our partners are for the most part family offices and sovereign wealth funds (SWFs) that have a similar perspective. Monaco is not only home to many large and influential family offices … is also unique within the SWF community in having a Head of State who is so passionately supportive of environmental initiatives that “move the dial”.   

Your approach is decidedly different from aggressive American-style activism. In your opinion, what are the most effective levers for positively influencing the governance of large European companies?

We think of ourselves as “high impact investors” rather than “activists” and recognise that most large cap public companies tend to ignore their shareholders when they set their strategies. Parties whose views are most influential often include government, regulators, unions, rating agencies – as well as the Board and Management. Our business model involves engaging with all these stakeholders (as well as the shareholders) with a view to building as broad as possible a consensus. This approach is not only more effective than the U.S model of shareholder activism — which relies on controlling votes at shareholders’ meetings. It is also less confrontational.

You have often mentioned the lack of “true owners” in certain listed companies. Is this phenomenon more pronounced in Europe than elsewhere, and why?

The weak sense of “ownership” displayed by shareholders in the context of publicly traded companies is a global problem that has significantly deteriorated due to the growing share of passive asset managers.   

What role do you attribute to other institutional shareholders today in supporting your initiatives? Have you observed a change in their receptiveness to “constructive” activism?

Institutional investors play a key role in our approach to corporate governance … but this does not involve asking them to vote for or against any proposals at shareholders’ meetings. Many institutional investors – SWFs in particular – are true long-term investors and are therefore open to discussing our ideas and proposals in private. Sometimes they will discuss the points we raise when speaking to the Board and sometimes we will ask other stakeholders to do so instead …  every situation is different.  A large part of the success we have had in promoting our agenda may be attributed to the forensic analysis and industry reports that we regularly publish and/or share with other investors and stakeholders.

With increasing pressure on ESG criteria, governance (the ‘G’) is sometimes overshadowed by environmental or social issues. How can it be repositioned as a key driver of sustainable performance?

The “E” and “S” in ESG have become more prevalent but neither can have much of an impact without effective governance (“G”). The importance of governance is not declining: if anything, it has increased.

Which types of companies do you consider most promising for your approach today: sectors, geographies, market situations?

We have a strong preference for large infrastructure assets with long lives and have justifiably avoided investing in photovoltaic panels, wind turbines, batteries etc – i.e. manufacturing businesses dominated by the Chinese.  We have also avoided investing in renewable power generation in the United States, for obvious reasons.

The two infrastructure sectors that we find most appealing from an investment perspective are (1) offshore wind in the North Sea, and (2) subsea transmission cables. The quantity of electricity that can potentially be generated in the North Sea alone amounts to 50,000 TWh per annum. This is equivalent to 80 million barrels of oil per day — or more than the fossil fuel production of OPEC, Russia and the U.S. combined. The scope for economies of scale in offshore wind is immense … and with economies of scale the cost of offshore wind can be reduced by 50% or more. This makes offshore wind potentially the most competitive form of energy in Northern Europe. Equally important, however, is the fact that offshore wind farms can be inter-connected using subsea cables laid on the sea-bed. This opens the door for offshore wind farms to produce electricity on demand and without interruption – wind speeds being uncorrelated once the distance between two wind farms reaches 600 km — with no need for gas-fired generation or batteries to bridge the gap when the wind is not blowing. Oil majors such as Shell and BP that have turned their backs on renewables, and offshore wind in particular, will come to regret this.

After more than 20 years of applying this method, what do you consider to be the most emblematic case of value creation through gentle restructuring and dialogue with stakeholders?

The project which best illustrates our approach is E.On, which disposed of its fossil fuel and hydro power generation businesses at our suggestion to become the regulated grid specialist that is so highly regarded by the markets today.