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E-MailPaul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on his PwC memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).
For many people, proxy fights are almost synonymous with shareholder activism. But we view them as just one point on an activism continuum that also includes investors’ engagement with companies whose shares they hold, shareholder proposals, and more. Whenever an investor leverages their rights and privileges as an owner to influence a company’s practices or strategy, that’s shareholder activism.
Increasingly, investors of all kinds are using the full spectrum of activist tools to weigh in on environmental, social, and governance (ESG) issues. Indeed, it’s likely 2021 will be remembered as the year that ESG became a key part of shareholder activists’ strategies.
A handful of newly-launched ESG-focused activist firms and their high-profile proxy contests are a big part of the reason why. In addition, large institutional investors have reported that they’re engaging with companies around climate risk disclosures, D&I, and other ESG topics with much greater frequency. Some have said they increasingly chose to vote against directors at companies they felt weren’t handling these matters appropriately. And the number of shareholder proposals focused on environmental and social matters that received majority support reached a record high during the 2021 proxy season.
What connects all these activities—from engagement to proxy contests—is how they demonstrate many shareholders’ conviction that good performance on ESG-related matters builds value, while poor performance destroys it. Obviously, companies and their boards can’t afford to take those views lightly. It’s more important than ever for directors to take a holistic view of shareholder activism and to understand their role in navigating the challenges it may pose.
In our recent publication, The corporate director’s guide to shareholder activism, we provide some guidance for boards on how to assess their vulnerability and prepare for and react to activist overtures. Here are some of our recommendations:
Get proactive
Assess common triggers for activist engagement, such as those related to financial performance, executive compensation, and governance practices, with a critical eye. Don’t forget to add ESG to the list. Know your largest shareholders’ engagement priorities and proxy voting policies, and keep an eye out for potential activists building up stakes. Have a plan to engage shareholders around any potential problem areas you identify—and don’t wait until activists are knocking at the door.
Be open to listening
Activists frequently have interesting insights that shouldn’t be dismissed out of hand. Hedge funds usually do extensive homework before they approach a company and may have uncovered issues management and the board aren’t keen to face. An institutional investor’s shareholder proposal may provide an opening to align with best practices.
Respond effectively
When activist campaigns go public, there often isn’t much upside for a company in trading blows in the media. But it can make sense to respond to private overtures from investors. Either way, companies should consider how they’ll address issues activists raise with other investors to retain their support. Remain open to finding common ground with the activist if doing so seems likely to produce a better outcome overall.
