Navigating shareholder activism

Keith Fenner  at Diligent shares an overview of shareholder activism and its impact on organisations, and discusses the state of it today, exploring why it’s on the decline in Europe 

A shareholder activist is a shareholder who uses their stake in a company to exert influence on management to act in a certain way. It’s a way to provoke change in an organisation and increasingly, it is driven by performance on ESG matters. 

What is the current state of European shareholder activism?

When activist investor, JANA Partners pressed for smartphone manufacturers to offer more resources for parents to effectively manage children’s devices, this was a prime global example of where shareholder activism has positively affected a social issue.

Although globally shareholder activism has reached a four-year high, with nearly one thousand companies having been subjected to campaigns last year, Diligent’s latest research shows European shareholder activism has continued its steady decline. There were 156 campaigns launched in Europe and the U.K., displaying a 23.9% decrease compared to 2022 and the lowest level seen in five years.  

However, the number of board seats activists secured held steady at 36 in 2023 compared to 38 in 2022, indicating that despite the drop in campaigns, activists are continuing to push for board representation in Europe.  

What are the tactics used by activists?

Depending on the shareholder objective, activists may choose less aggressive tactics such as shareholder engagements and proposals to more aggressive techniques, such as “vote no” campaigns or proxy contests. 

Shareholder engagements involve a request to meet with management and / or the board to discuss the shareholder’s concerns about the company, while shareholder proposals involve a non-binding resolution asking the company to pursue a course of action that appears on the proxy statement for shareholders to vote on. 

However, “vote no” campaigns seek to persuade shareholders to vote against a member of a company’s board or to withhold support on say-on-pay or other matters, and proxy contests involve an attempt to replace some or all of a company’s board with directors nominated by the shareholder activist.

What are the red flags from companies that lure activists?

From corporate earnings policies to preparedness for rising costs and slowing economic growth - activists are looking for how companies will weather these storms.

Shareholders are increasingly subjecting outsized executive compensation packages and mispriced mergers and acquisitions to enhanced scrutiny. In a world of deep valuation gaps, rising interest rates and empty office buildings, activists seek evidence that companies have robust policies and practices established for managing risk effectively.

How should boards and leaders respond to shareholder activism? 

Boards and leaders need to make an honest appraisal of their governance structure. With global activism on the rise, any company that falls short – whether on sustainability, societal issues, business ethics, compensation practices or governance – will be in the firing line.

They must also prioritise ESG performance. With so much shareholder activism centred around ESG considerations, it’s essential to understand your ESG risks, as well as to measure your performance and put in place policies and ESG strategies to address them. They should also ensure DEI is up to scratch, as this is an important aspect of ESG, and as we’ve seen, this mirrors the focus on racial equality and diversity issues among shareholder activists. 

More activist campaigns are succeeding. If you’re in the crosshairs of shareholder activists, don’t imagine that you will come out on top. Their concerns may be valid; indeed, activist action has tended to improve governance fundamentals in the companies targeted.

How can shareholder activism drive better corporate governance?

Shareholder activism ensures strong governance, while also encouraging an increase in value for shareholders. Good corporate governance takes for granted that boards will continuously work towards board compositions to support the necessary skills and experience that will net long-term success for the company.

Looking across the pond, Diligent’s research shows in the US 41% of directors say shareholder activism has created more awareness for the need for good governance. 

The principle of good corporate governance also places a heavy focus on the fiduciary responsibilities of board directors in managing the corporation’s assets. Among other things, shareholders are seeking information about the board’s approach to environmental, social and governance issues, but also on their investment style and principles.

Shareholder activism is an effective way to scrutinise boards to ultimately achieve stronger corporate governance. 

Keith Fenner is SVP and GM at Diligent

Main image courtesy of iStockPhoto.com and PeopleImages