Shareholder Activism: an Engagement Opportunity

The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

The recent surge in shareholder activism [1] continues to keep boards on alert heading into the 2015 proxy season. Some companies are taking proactive measures to prepare for potential activist investor campaigns, including engaging long-term institutional investors.

Based on what we’re hearing from long-term institutional investors, these efforts are worthwhile in that they foster constructive relationships and alignment with key shareholders.

The EY Center for Board Matters (the Center) recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. We also gained insights from investors, directors and other stakeholders through our proxy season dialogue dinners. [2]

This post is the second in a series of four posts based on insights gathered from those conversations and previewing the 2015 proxy season. The first post (available here) focused upon board composition. The upcoming two will focus on proxy statement disclosures, and the shareholder proposal landscape.

In addition to the Center’s investor outreach, the report draws on our tracking of governance trends and emerging developments through the Center’s proprietary corporate governance database. [3]

Key Findings

  • When companies engage with long-term institutional investors and demonstrate responsiveness to their concerns, those same investors are better positioned to support the company in an activist situation and may prove to be the company’s strongest allies.
  • Most of the investors we spoke with believe that whether activism is beneficial over the long term depends on the particular circumstances involved.
  • Some investors suggested that activists are incorporating governance changes as an afterthought to appeal to long-term institutional investors—not out of a genuine commitment to enhance corporate governance.

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Shareholder engagement may help companies when dealing with activists

Shareholder engagement offers companies a variety of benefits, including a better understanding of investor perspectives and the ability to have investor insights inform company decision-making. Based on what we heard from investors in our investor outreach, as well as from some directors and other stakeholders during our proxy season dialogue dinners, more companies are starting to realize that these benefits can also be of strategic importance when it comes to activism.

  • More companies are realizing that when company and long-term shareholder views are aligned, those shareholders can be a tremendous ally for the company in an activist situation, including actively reaching out to other shareholders to argue in support of management’s position. Such alignment may be reached through effective engagement.
  • When evaluating an activist campaign, many investors consider the company’s record of responsiveness to their concerns and will be less inclined to actively support a company that has ignored requests for dialogue.
  • Activism is an opportunity to engage both with long-term institutional investors and the activists themselves. A number of investors stressed that from the moment the company gets a call from an activist, the company should be consulting with its long-term shareholders and seeking their views on the situation. Engaging with activists allows the company to consider their credibility and appeal, as well as the merit of their ideas.

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Conclusion

In developing strategies to deal with activism, companies may consider developing an engagement program with key long-term shareholders to build relationships, demonstrate responsiveness and gain insight into shareholders’ evolving governance views.

It is important to connect with the right people: equity analysts and portfolio managers who are making investment decisions are often not the same individuals evaluating a company’s governance and making proxy voting decisions. Including CFOs in engagement conversations about governance and board performance may add useful perspectives that tie into overall company performance and strategy.

Endnotes

[1] In the context of this report, “shareholder activism” and “activists” refer to investment partnerships (hedge funds) that file 13D forms indicating their intent to influence management’s strategic, financial and/or operational decisions.
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[2] In February and March 2015, EY hosted dialogue dinners in Chicago and New York, bringing together institutional investors, board members, corporate secretaries and advisors to discuss key governance topics heading into the 2015 proxy season, including board composition and strategies for renewal.
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[3] Unless otherwise noted, all data is from EY’s corporate governance database, which covers more than 3,000 companies listed in the US. Data for 2015 is through 2 March. EY’s investor outreach conversations included asking specific and consistent questions to a broad spectrum of institutional investors, investor associations and advisors. Participants included asset managers, faith-based investors, labor funds, public funds, socially responsible investors, and investor associations and advisors. Investor views vary. All respondents are anonymous, and results are presented in aggregate.
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