The growth of investor activism has had a considerable impact on the investment landscape. Shareholder activists have successfully pushed for changes in company boards of directors and forced companies to change course by reducing costs, changing objectives, or divesting core parts of the business. Since 2020, the pandemic, combined with building concerns about climate change and movements for social justice, has led to heightened investor focus on ESG issues such as diversity, equity and inclusion, sustainability. The recent Diligent Institute report, Activist Investors: Setting the Pace on ESG, looks at the impact of shareholder activism and the actions companies are taking to better prepare to face it.
Here are five highlights from the report, and what activist investors in EMEA are focusing on.
1.Number of activist investor campaigns falls, but their impact rises
Diligent research shows that although the overall number of shareholder activism campaigns fell slightly in 2021 compared to 2020, the number of ESG-related campaigns grew and they were more likely to be successful: one in eight shareholder activist campaigns were successful in 2021, compared to one in nine in 2020.
In Europe, companies in the financial sector were most likely to face activist campaigns (23% of all campaigns), followed by the industrial sector (16%) and the basic materials sector (11%). Nearly half (46%) of European activist investor campaigns targeted companies with large and mid-sized capitalisations. Although institutional investors are still the main source of activist campaigns, in 2020 the biggest source of capital in European activist campaigns was US hedge-fund activists, including Third Point Partners (USD 2.6B) and Elliott Management (USD 1.1B).
2. Activist investors target companies weak on governance fundamentals
Today’s governance standards require boards to be diverse, for board members to act independently, and for separation of the Chair and CEO roles. There is a strong perception among activist investors that linking the roles limits board accountability and leads to a lack of responsiveness to shareholder concerns. Through a review of 735 companies globally that engaged with activist investors on governance matters, Diligent research found that 30% had a combined Chair-CEO role.
France has seen considerable activism in this regard recently. In 2020, activist investors tried to gain majority control of board of the Lagardère Group, and while the effort was not successful, it did start the process of loosening Arnaud Lagardère’s grip on the company. This process culminated in June 2021, when the Lagardère Group was transformed into a public company, with Arnaud Lagardère as CEO. Similarly, in 2021, activist investors launched a campaign targeting Danone. This led to the removal of Danone’s Chair and CEO Emmanuel Faber, based on underperformance.
3. Activist investors focus on ESG
ESG concerns have moved to the forefront in recent years. Amid greater support for operational activism in key European markets (the U.K., France, Germany), ESG shareholder proposals are becoming more common. The importance of ESG concerns is witnessed by the IPO failure of U.K. food delivery app Deliveroo, whose share prices dropped 26% on the first day of trading, in part over concerns about labour practices and worker rights.
To minimise the impact of ESG activism, boards can develop an ESG strategy that directly addresses the risks facing their company. It is also essential that boards engage with shareholders. Having lines of communication in place prior to an activist attack can help boards successfully claim that they are acting positively in support of change, rather than merely reacting in response.
4. Low support for compensation policies linked to investor activism
The Diligent Institute’s recent report, Aligning Pay, People and Planet, evaluated the degree to which European companies include ESG KPIs in executive remuneration policies. The results were clear: the use of ESG-related metrics in compensation plans is increasing across Europe. Shareholder dissent towards executive compensation increased in the wake of the September 2020 implementation of the Shareholder Rights Directive II, which gave shareholders across Europe the right to vote on remuneration policies for the first time.
5. Companies can no longer ignore skills gaps in the boardroom
While compliance, technology, and sustainability are among the most valuable skills needed on boards, Diligent research shows that activist investors target companies whose boards lack these skills. In 2021, only 19% of the directors we surveyed had technology expertise, 11% had compliance expertise, and just 1.4% had skills in sustainability. Companies targeted by activist investors also had fewer board members with relevant industry experience, and nearly one-third had no board members with technology expertise.
In 2018, poor financial performance led activist investor Starboard to target the Israeli company Mellanox Technologies. Peter Feld, a managing member of Starboard, said that there were “significant opportunities to create value based on actions within the control of management and the board.” And in 2020, the uncertainties caused by the pandemic pushed European investors to take a critical view of boards’ abilities, and the results were startling: the number of director election proposals receiving more than 50% opposition from surged to 36, compared to eight in 2019.
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