Shareholder activism

How to Navigate Shareholder Activism for Constructive Outcomes

Shareholder activism involves investors taking public stands seeking to influence company strategy, governance or social policies. Activist tactics range from voicing opinions at shareholder meetings through to proxy contests or litigation. For directors, constructive engagement balanced with upholding duties presents the optimal pathway for resolving activist situations.

Drivers of Shareholder Activism

Common drivers spurring activist shareholders include:

• Dissatisfaction with poor company performance and loss of shareholder value.
• Activists may push for strategy changes or divestments.
• Excessive executive compensation relative to average employee pay or company underperformance. Activists spotlight pay inequity.
• Lack of board independence, diversity or director skills. Activists push for refreshed board composition.
• Failure to address material environmental, social or governance (ESG) risks. Activists demand increased sustainability.
• Perceived unethical conduct like safety breaches, misconduct or lack of transparency. Activists condemn unethical behavior.
• Desire for higher dividend payouts or increased share buybacks. Activists lobby for increased capital returns.
• Takeover or restructuring situations. Activists argue for enhanced shareholder value extraction.

Dissatisfaction with the status quo often underlies activism.

What Are Some Common Forms of Shareholder Activism?

Activist shareholders utilise various techniques to exert influence:

• Proposing shareholder resolutions addressing desired changes to put to shareholder votes at annual general meetings. Resolutions passing with majority support apply board pressure.
• Public criticism through media and social media campaigns against boards, executives or company actions. Adverse publicity impacts reputation.
• Direct engagement such as letters, calls or meetings urging board and management to adopt proposed actions.
• Proxy battles waging campaigns to unseat existing directors and elect new board candidates sympathetic to the activist cause.
• Shareholder litigation alleging breaches of law or duties by the company or its directors. Lawsuits can disrupt operations substantially even if ultimately unsuccessful.
• Takeover bids or proposals aimed at acquiring control to implement desired changes.

Activist aggression often intensifies when initial attempts at engagement prove unpersuasive.

What Are Some Potential Benefits of Shareholder Activism?

While disruptive, constructive shareholder activism can catalyse useful improvements like replacing underperforming directors, accelerating strategic pivots, enhancing risk management, increasing transparency through improved disclosures, upgrading executive incentive schemes, embedding sustainability into strategy, and elevating customer and employee focused-values in decisions. Channeling activism effectively can accelerate governance and strategic enhancements.

What Are Some Risks and Challenges of Shareholder Activism?

While there may be some opportunities that arise, boards should safeguard against activism risks including:

• Short-termism, prioritizing immediate shareholder returns over long-term health.
• Distraction of management from executing strategy by activist-driven disruption.
• Disenfranchising responsible long-term institutional investors.Forcing divestments or financial engineering destroying lasting value.
• Eroding vital board independence and objectivity.
• Enabling “wolf pack” activists collaborating to pursue self-interests over company needs.
• Pressuring boards into unwise concessions solely to avoid public criticism.

Directors act as stewards for total stakeholders, not just vocal minority interests.

How to Respond Constructively to Activism?

Effective board responses to activism involve listening openly to understand motivations and rationally assessing activist proposals on merits. Directors should demonstrate a willingness to engage responsively, explaining courteously where proposals would conflict with broader duties. 

It is cruicial for directors to distinguish between considering all shareholders equally versus acquiescing to singular demands, and when implementing enhancements, doing so incrementally and aligned to corporate objectives.

Blending diplomacy, transparency and determination safeguards independence while extracting benefits, and it is often judicious to avoid costly proxy battles or litigation where possible through engagement. 

The Pivotal Role of the Board Chair

The Chair plays a crucial leadership role guiding boards through activism situations given their position managing board operations and culture. Wise Chairs:

• Set expectations that boards engage openly and professionally amid activism.
• Continually assess board performance and composition to identify legitimate vulnerability points activists may exploit.
• Cultivate a boardroom culture valuing constructive dissent and diversity of thought, which builds confidence to withstand external pressure.
• Serve as lead spokesperson reinforcing rational over reactive stances.
• Facilitate independent director discussions in camera excluding any conflicted members to shape consensus free of bias.
• Coordinate responses ensuring directors maintain a united front once decisions are reached.

A steady, resilient Chair sets the tone enabling boards to satisfy rather than succumb to activism.

Conclusion

Increasingly vocal shareholders will continue exerting activist pressure on boards. While activism introduces short-term complexity, boards embracing dialogue and selectively adopting improvements aligned to corporate objectives transform disruption into opportunities to elevate governance, strategy and sustainability.