In recent years, many large companies have been subject to shareholder activism, which has been a very visible part of the global markets and continues to evolve. Shareholder activists have been making news for their attempts to challenge some of the largest corporations in the world.

In the past, activists were seen in a very negative light; they were often thought of as people who would take over a company for their own benefit without regard for anyone else's interests. Now, however, it is a lot more complex. It is no longer as simple to consider activism as an immediate threat, but rather a more varied phenomenon.

What is a Shareholder Activist?

A shareholder activist is a shareholder who uses their stake in a publicly-traded company to exert pressure on management to take a certain approach. Since obtaining a controlling interest through a takeover is a costly process, shareholder activists instead leverage a relatively small stake of less than 10% of the outstanding shares to initiate a campaign.

A shareholder activist targets companies that have high costs, are mismanaged, or present the opportunity of becoming profitable if they are taken private.

How Does Shareholder Activism Work?

The shareholder activist can employ multiple strategies to achieve their aims, ranging from contentious to collaborative approaches, such as public campaigns, proxy contests, litigations, and negotiations with management.

The strategies used by activists differ depending on their aims, but can include:

  • Buying shares in a company.
  • Privately approaching a company to voice their concerns.
  • Using publicity to voice their concerns.
  • Going to other shareholders to voice their concerns.
  • Calling for a general meeting.
  • Threatening and/or taking legal action. 

Unsuspecting companies often first become aware of the fact that they have been targeted by an activist shareholder when it is too late and they have already been approached.

Why Do Shareholder Activists Exist?

Shareholders may become active in trying to influence the company's decisions in order to increase the value of their stocks, or because they disagree with how the company is being managed. Different types of activism exist with the main aim of pushing corporations to adjust their operations and policies.

The main goals of a shareholder activist can be placed into two categories: financial reasons and non-financial reasons.

Financial reasons can include:

  • Concerns over the returns to shareholders.
  • To increase the stock price by having the company be taken over.
  • To boost the worth of the company by selling off any non-essential operations.
  • To increase shareholder value by adapting the plans for the company.

Non-financial reasons can include:

  • Dissatisfaction with the company's overall direction and its strategy in achieving its objectives.
  • A lack of focus on ESG matters.
  • Poor governance within the company. 

Each shareholder activist has their own objectives. Nevertheless, it is evident that corporations that have attracted activist involvement often experience similar problems.

What Do Shareholder Activists Look For In A Company?

The way a company is managed can point to further problems within the organisation, which can significantly reduce its worth. Issues that prompt shareholder activism may include: 

  • Board structure and composition, as companies that make it difficult for their shareholders to remove directors who are not meeting expectations or make changes to Boards that lack diversity may be subject to criticism.
  • Shareholder rights or the lack thereof within a company.
  • Executive compensation, as shareholders may target businesses with questionable compensation policies.
  • Monetary and material weakness.
  • Lack of attention to ESG matters.

It can be difficult to anticipate when a shareholder looking to take action will target a certain business, and what their intentions are. However, there are certain signs that may point to a company being in the sights of activist investors.

A beginning sign of an issue can be a significant number of votes being cast against a resolution at a general meeting. Another sign might be increasing levels of lending activity and stock borrowing in the company's shares. Negative press coverage and publicity are a key indicator that a shareholder activist could make their move. Ahead of general meetings, if there is unusual trading activity in the company's shares it suggests potential activism.

What You Can Do To Prevent Shareholder Activism

Failing to give investors the attention they deserve can have serious repercussions. If a company fails to take action on a concern raised by a shareholder, this could potentially lead to a shareholder proposal or even a campaign. As such, it is wise for a company to listen to its shareholders, evaluate their arguments, and act accordingly.

Leaders need to be aware of how their business is being run and how successful it is. This involves evaluating the company's success objectively. Examining the conditions that might attract activist attention could be beneficial for Boards of directors. It is important to seek advice from external sources such as industry professionals, financial advisers, or people who are not affiliated with the company in order to get a better idea of how the company is perceived by potential activists.

It is essential for the board to be aware of any large investments made by activists in the company or its rivals, as well as any activism trends that may affect the corporation in the future. Additionally, directors must stay informed of the perspectives of the company's most considerable shareholders.

Once a company has discovered areas of potential interest to shareholder activists, engaging in dialogue with other investors on these topics can help to prepare for, or even stop, an activist campaign. Openness about the company's weaknesses and strategic decisions can help shape the shareholder's opinion of the matter, showing that the Board is taking its role seriously. 

Even before an activist has approached the company, some businesses may find it beneficial to get directors involved in conversations with major stakeholders. If activists do target the company, the directors will already have established credibility with other shareholders, making them more competent representatives of the company's stance.

ESG matters are especially important to address in this plan, as there is an increasing interest in this area and therefore this will be particularly focused on by shareholder activists.

One way to make sure your company is on top of their ESG goals and standards is to invest in ESG reporting tools that streamline your data collection process.

Convene ESG is an ESG data management and reporting platform, designed to help you reduce the challenges of ESG data gathering, performance tracking and reporting so your company can move towards net zero.

With Convene ESG, you can be sure that your ESG report building runs smoothly, so you can instead focus on developing your plans and strategies to prevent shareholder activism. 

Additionally Convene’s Award Winning Board portal software allows your executive teams to communicate effectively and efficiently in Board meetings, so you can make sure your organisation is running as smoothly as possible to avoid shareholder activism. 

Convene now comes fully integrated with Microsoft Teams, ensuring that your meeting process is even more seamless and you can achieve good corporate governance.

To discover how your company can benefit from Convene, find out more about our software here, or book a free demo today.

Lottie Wright

Written by Lottie Wright

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