Increasingly, companies are being challenged by shareholders seeking to influence change and exercise power over corporate activities, practices, and policies. Shareholder activists use their stake in the company to enact campaigns that can contribute to the overall company value or advocate for a social cause.
Giving shareholders a voice has proven to increase corporate efficiency and mitigate any practice that can hinder the company from achieving optimal value. Activism among shareholders also reinforces a high level of shareholder participation in corporate decision-making.
With a significant increase in shareholder activism in recent years, it is important that you keep abreast of the trends and how they are seen to play out in the coming years.
Shareholder Activism Trends You Should Know
The recent years have shown the rise of movement involving not just the shareholders but also the company’s relationship with the other stakeholders — the investors, employees, and the society. 2021 has seen a rebound in shareholder activism and may drive further in the next years.
M&A-Related Activism
Mergers and acquisition matters will continue to be an agenda item for shareholder activists in 2022. Harvard Law School noted that campaigns related to M&A activism were prevalent during the first half of 2021, consisting of 44% of activist movements initiated at large-cap companies.
Recent studies have shown that activism campaigns among M&A in recent years were motivated by any of these three factors: (1) a high returns sale transaction, (2) improved deal terms, or (3) termination of a deal. In simpler terms, investors can pressure a company to sell all or part of itself or to pursue better acquisition terms.
In 2021, Lazard reported that the most common M&A activism is opposition to already announced deals, with 19% of all activist campaigns attributed to this thesis. One well-known example of which is Third Point’s public opposition to United Technologies Corporation’s (UTC) proposed merger with Raytheon Company in 2019.
A year later, UTC and Raytheon Technologies completed their all-stock merger, which then forced Third Point LLC to be the second activist investor to sell its shares of UTC stock. While the staunch activist investor failed in their campaign, this campaign has further shown the ways the M&A activism landscape is ever-evolving.
SPACtivism
SPAC, or special purpose acquisition company, is a shell company formed strictly to raise capital through an initial public offering (IPO) to eventually acquire or merge with another company. Also known as “blank check companies” for their non-operating nature, SPACs are usually set up by influential investors who can convince people to invest in the unknown.
SPAC sponsors are given two years to find a suitable deal. Otherwise, the SPAC is liquidated and investors get their money back with accrued interest. When a SPAC has gone public successfully, either by merger or acquisition, it is then called a de-SPAC.
Both SPACs and de-SPACs can be targets of activists. As of September 2021, over 58% of active SPACs were trading below their $10 IPO offer price. With the 2-year deadline for these SPACs looming and stricter compliance regulations being enforced, stock prices may further decline. This, in turn, could serve as an opening for activist investors to buy shares below the IPO price.
Such was the case in 2020 when investors blocked the de-SPAC transaction and turned a quick profit through the forced liquidation of the SPACs. This will continue to thrive in the coming years as quick profits can easily attract investors.
ESG
The year 2021 saw a significant number of ESG campaigns with environmental issues and sustainability at their forefront. The most notable among recent ESG activist campaigns is Engine No. 1’s campaign seeking four board seats at ExxonMobil to pressure the latter to minimize their environmental impact.
Despite holding only 0.02% of the company’s shares, Engine No. 1’s remarkable feat was made possible with the aid of the three largest shareholders, namely BlackRock, Vanguard, and State Street.
Not only did this successful proxy fight make its way to Wall Street, but it also paved the way for Engine No.1’s creation of the Total Value Framework. The success of its activist campaign further asserted that a company’s overall performance is not solely financial, but can be measured by its environmental and social causes.
Given this trend, a rise in the number of shareholders and investors are pivoting towards companies with stronger ESG strategies. Consequently, current shareholders will continue to scrutinize companies that are not implementing sustainable practices in their operations.
Diversity
There has been an intensified urgency behind global efforts to diversify corporate boards and management as well. 2021 saw a record number of submissions in social proposals relating to racial equity and inclusivity in the workforce.
At IBM, shareholder and investor support for the diversity proposal that calls for reporting on the effectiveness of workforce diversity, equity, and inclusion (DEI) climbed to as high as 94%. However, not all companies are as progressive-thinking as IBM, which makes them more vulnerable to diversity campaigns from activist investors. In the future, activists are seen to be more committed to nominating more diverse candidates to the board and criticizing boards that fail to achieve diversity targets and regulations set in place.
The rise in proposals supporting diversity and representation in the boardroom in recent years signals a positive momentum for this movement. Companies can expect this trend to continue, and even intensify, in the coming years.
Universal Proxy Cards
In the last quarter of 2021, the U.S. Securities and Exchange Commission adopted amendments to the proxy voting rules to empower shareholders to elect directors through the proxy process, similar to how they would vote in person at a shareholder meeting. Prior to this amendment, shareholders voting by proxy in elections were asked to vote using the company proxy card or the activist proxy card.
Rather than selecting only between the company and the activist slate, shareholders who are voting in proxy can elect any nominee director, whether dissident or not, through the universal proxy card. This places all shareholders, no matter the manner of voting, on equal footing. It further implies that all nominees from completing slates have equal opportunities to be elected to the board. Indeed, this rule will help achieve shareholder democracy, and thereby reinforce the diversification of the boardroom.
The impact of using a universal proxy card remains unclear, with the final rule amendment only applicable to shareholder meetings and contested elections after August 31, 2022. However, with the strides in institutional investor voting in recent years, it is most sensible to expect a greater number of dissident shareholders to demand board representation in the years to come.
What can boards do to respond to shareholder activism?
There is an ever-pressing need for boards to respond to the different activism campaigns, whether your company is being directly targeted or not. Here are actions your board can take on to address the above-mentioned shareholder activism trends.
Ensure M&A activities are governance- and risk-compliant
Any plan of merger and acquisition must be implemented with due diligence. You can better assess the risks and potential gains of such transactions if your company adopts a more robust due diligence process. It is also recommended to review transaction alternatives related to mergers and acquisitions. This leads to a more effective integration that highly benefits your company.
Report on ESG risks, impact, and efforts
Investors and shareholders have now set their eyes on the developing field of ESG and are now demanding companies to report on their ESG performance. ESG reports or disclosures are vital in maintaining transparency about the company’s sustainable impact, strategies, and operations. This would also reveal what initiatives generate sustainable returns and minimize financial risks.
While sustainability reports have been made mandatory for some countries, it is encouraged to discuss during annual general meetings all matters concerning ESG. This is to address investment firms that are strong ESG activists.
Adhere to board DEI best practices
The best way to curtail any diversity-related activist attack is by adhering to best practices and regulations set in place by regulating authorities. This can prevent racial inequality and diversity issues among shareholder activists. Ensure that you comply with the EEO-1 reporting and other boardroom diversity regulations specific to your state.
Assess the shift in activist approach in elections
The expected shift in contested elections following SEC’s amendment to the universal proxy rule is met by many speculations as to its impact on activism campaigns. Many shareholder activism advisers like Gottfried see a drastic change in the activism landscape, while others argue that this might open increased engagement between management and shareholders.
Although the outcome of this shift is yet to be known, one thing is clear: putting a premium on an inclusive shareholder engagement in AGMs is one of the best steps to ensure that all perspectives are considered among the shareholders, activists or not.
Address Shareholder Activism in Virtual AGMs
Ensure communication of boards and shareholder activists during virtual or hybrid AGMs with ConveneAGM, the trusted AGM solution by large and small companies worldwide. The end-to-end platform offers real-time webcasts of the AGM that allows for no-communication to shareholders. Moreover, ConveneAGM provides live voting and live Q&A that fosters open, two-way communication — allowing shareholder activists and the board to discuss issues before voting.
With such features, ConveneAGM can help companies to conduct annual general meetings that are compliant and immersive in virtual or hybrid formats. Schedule a demo of ConveneAGM today!