Anyone who has been in the corporate environment for some time can tell you that shareholder activism isn’t a new concept.
In the past decade, there have been many instances of executive-shareholder battles gone public, including:
- Investor Dan Loeb exposing Yahoo CEO Scott Thompson’s resume discrepancy back in 2012, and Thompson resigning as a result
- Hedge fund Marcato Capital winning three spots in a 2017 proxy contest in an effort to remove Sally Smith as the CEO of Buffalo Wild Wings
- Billionaire investor Carl Ichan looking to remove the CEO of Illumina Inc. in 2023 for making an acquisition without seeking regulatory approval
Shareholders certainly have a right to raise concerns when something has gone awry with the board or CEO. However, today’s activist shareholders aren’t always seeking true accountability. Some are looking for ways to force corporate executives and boards to do things their way.
While some activists seek to use the power of persuasion by submitting proposals or requesting meetings, others use aggressive tactics like launching campaigns against certain members or trying to replace them through a proxy contest.
No matter the reason for the onslaught or the method of activism, shareholder activists often wield a lot of power and influence, and directors must be prepared to deal with it.
Understanding Who Shareholder Activists Are and What They Want
Taking a proactive stance in dealing with shareholder activists requires deep knowledge of who these people are and what they are likely looking for. Generally, there are four types of shareholder activists:
- Institutional Investors: Hold a large portion of shares and look for long-term value
- Hedge Funds: Look for untapped value in poor management or missed opportunities to increase revenue
- Advocacy Organizations: Look to persuade companies to take a stance on a particular social issue
- Retail Investors: Focus on ensuring good governance from the board of directors
Knowing who is invested in the company and may become an activist shareholder helps boards balance competing interests to proactively prevent issues before they arise.
Dealing With the Risk Factors That Attract Activist Engagement
Another part of taking a proactive approach to shareholder activism is understanding what might motivate these shareholders.
First, it’s important to realize that all shareholders want one thing: positive financial returns. Consequently, many activist shareholders get fired up when they see what they believe is poor financial management or performance.
For example, hedge fund managers may worry when they see a business they’re heavily invested in passing up on opportunities to expand market share and revenue.
If they believe a different set of board members might be needed for the company to tap into unrealized value, they may be inclined to start pushing for new directors.
Additionally, shareholders might feel they need to take action when they perceive governance problems in the boardroom.
This might include underperforming directors being allowed to stay too long, boards denying shareholders the ability to call special meetings, or executives being paid too much while displaying subpar performance.
Activists can also be motivated by environmental and social issues. These might include the company failing to follow health and safety standards, not disclosing climate policies and risks, or being on the “wrong” side of the diversity, equity, and inclusion conversation.
Finally, some activists may raise their voices when they feel they’re not being heard. Remember that shareholders have invested their money in the company, and in exchange, they should be granted some say in how the company is run. If the board isn’t responding to concerns, directors could be inviting trouble into the mix.
How to Become More Proactive About Shareholder Communication: 3 Steps
The board should get ahead of shareholder activism by creating an engagement plan for proactive communication. To do that, it’s important for boards to:
- Get to know shareholders and understand their main concerns.
- Find a way to talk to these shareholders about their strategic decision-making process and the reasoning behind the company’s choices. In some cases, this alone can help shareholders see an issue differently and instill confidence that the board is doing what is necessary to maintain good governance practices.
- Be forthcoming about the company’s vulnerabilities in the areas that shareholders care about most. For example, you may wish to disclose what the organization’s climate goals are, what has been done to achieve them, where the board sees room for improvement, and what is being done to make things better. This shows shareholders that the company is actively working on the issue and gives them a way to hold the company accountable for following through on the plan.
Nominating Directors With Activist Campaign Experience
Dealing with shareholder activists is serious business. Depending on their resources and level of influence, these shareholders may have the power to replace entire boards and bring down CEOs. With enough persistence, they can often create significant disruption as they seek to change how the company is run.
Because shareholder activism has risen in recent years, boards can definitely benefit from having experienced directors who understand how to strategically balance activist demands with doing what is best for the company. These directors should have experience forging deep relationships with shareholders, working with them to build consensus, and avoiding costly and time-consuming proxy contests.
Ensuring that the nomination committee prioritizes this expertise can save corporations from a world of trouble. It can also help the entire board learn to navigate the changing landscape of shareholder activism and keep upheaval at bay.
When It Comes to Shareholder Activism, Preparedness Is Key
Directors can’t afford to wait and deal with shareholder activism as it comes. These days, boards must be proactive about handling this phenomenon. Often, this means understanding who your shareholders are and what they want.
It also means ensuring a foundation of good governance practices. While the board won’t please every shareholder, it’s important to ensure that decisions are weighed carefully and always made in accordance with the law and in the best interests of the organization and its stakeholders.
In the end, governing well, communicating proactively, and forging deep relationships with investors can go a long way in helping boards find a way to appease shareholders while continuing to move the company forward.
