Shareholder activists: Barbarians in the boardroom or capitalism’s unlikely heroes?

Activist investors have been called many things over the past decade, from barbarians in the boardroom to capitalism’s unlikely heroes. More often than not, they’ve been considered a threat.

Back in the day, activist investing was limited to small hedge funds pouring over ‘sum of the parts’ valuation metrics and recommending companies increase the size of their annual share repurchases, but by modern standards, this now seems almost parochial.

Today, companies face a wider array of demands from their investors, reflecting concern for the preservation of both shareholder and stakeholder value. As Diligent’s Modern Governance Summit 2022 in Austin heard last month, activist campaigns are much more reflective of the world in which companies operate, and investors expect boards and management teams to hear them out.

Editor-in-Chief of Diligent’s Insightia News and Data Product Josh Black recently led a panel discussion on shareholder and stakeholder ESG activism. Joined by Research Director at FCLT Global Veena Ramani, Managing Associate Shareholder Activism of Sidley Austin’s Loren Braswell and Senior Analyst at Glass Lewis Mark Grothe, Mr Black discussed recent trends in shareholder activism, including some of the highest profile ESG campaigns of the past two years.

A more holistic shareholder supremacy

‘There are many different types of investors who use these tactics, and there are many possible outcomes,’ noted Ms Ramani, in reference to the broad adoption of activist tactics.

‘Long-term investors also use activist tactics too,’ she said. ‘Activism, particularly when long-term investors are involved, represents a failure of engagement… Long-term investors participate in activist campaigns only when they’re not being heard by the company.’

Ms Braswell agreed that the idea of prioritising shareholders’ interests was being approached more holistically with the rise of ESG investing.

‘There should be a symbiotic relationship between shareholders and stakeholders, particularly with an ESG issue,’ she told the panel. ‘The long-term health of a company is really tied in with stakeholders.’

Back in 2019, the decision by the Business Roundtable – a committee of CEOs – to put stakeholder-value on par with that of shareholders was considered contentious. But since then, investors have interwoven issues such as climate change, diversity, equity and inclusion (DE&I), and human capital management with economic narratives.

Furthermore, the intertwining of ESG and economic factors is key to winning support from Glass Lewis, one of the research bodies that support the institutional investors charged with deciding who wins a proxy contest.

‘When those factors are driven by each other and make a difference in terms of long-term value, that’s when you get a good ESG campaign,’ said Mr Grothe, who works on Glass Lewis’s activism desk.

What’s coming next?

Mr Grothe explained that Glass Lewis’s framework starts with the question: ‘Has there been a compelling case for change?’ That stymies several single-issue ESG campaigns, because when overall company performance and board oversight is up to scratch, the proxy adviser won’t recommend for change just because an ESG demand seems like an improvement.

That will remain the case even with the introduction of the universal proxy card, a mandatory change that will require companies to list activist nominees on their own proxy ballots, and vice versa. Previously, each side had to file its own card, and unless they attended the meeting, investors could only vote for one side’s candidates.

Insightia reporting suggests the change is making proxy contests slightly more attractive to ESG-focused activists, and Ms Braswell agreed that the new rule is likely to lead to more fights next year. ‘One of the biggest deterrents in the past has been the cost of soliciting votes,’ she said. ‘That’s no longer the case.’

But that doesn’t necessarily mean results will improve.

‘Single-issue ESG activism won’t get a lot of support,’ said Mr Grothe.

In a tight contest, the ability to choose a greater mixture of candidates might lead to some subtle differences in the recommendations.

For more information and insight, read the latest reports from Insightia here.