From Engine No. 1’s campaign against ExxonMobil to the Investment Association’s pending “amber warnings” about ethnic diversity, 2021 marked a landmark year in the evolving area of shareholder activism. Large, influential investor groups made their voices heard on environmental, social and governance (ESG) issues, often with a sharpened focus and emboldened action.
What’s happening — and why? What can boards expect — and how can they better prepare for the future?
To better understand current practices and trends, Diligent worked with the Diligent CGI research team to analyze 726 companies targeted by investor activists from January 1, 2020 through September 6, 2021. These companies represented multiple nations and industry sectors.
We looked at board diversity, director skill sets, executive compensation and other governance fundamentals, as well as company performance. We then compared these findings to an earlier study, in which we examined the activities of activist investors in 2020 and the characteristics of the companies they targeted. Finally, we conducted a deep dive into three companies that were the targets of successful, high-profile activist campaigns over the past year.
Highlights followed from our findings.
Activist campaigns are becoming more successful
When activist groups filed a lawsuit against Royal Dutch Shell in 2019 on behalf of 17,200 Dutch citizens, few people could have imagined the May 2021 outcome: a court ruling that the oil giant cut its carbon emissions by 45%, rather than 20%, by 2030. A first-of-its-kind case, it marked a real turning point in the battle between climate activists and oil giants, finding that Shell’s existing carbon mitigation strategy was “not concrete and is full of conditions ... that's not enough.”
Based on our research, boards would be wise to anticipate a settlement or activist success, rather than a withdrawal or activist defeat, from ESG campaigns in the future. Though the number of activist campaigns decreased between2020 and2021, 13% of the campaigns in 2021 (1 in 8) were successful, relative to 11% of 2020 (1 in 9), signaling a shift in attitudesregarding corporate commitments to ESG.
The world has reached a turning point in terms of ESG issues and expectations. As CNBC wrote in its reporting of the Shell news: “The landmark ruling comes at a time when the world’s largest corporate emitters are under immense pressure to set short-, medium- and long-term emissions targets that are consistent with the Paris Agreement. The climate accord is widely recognized as critically important to avoid an irreversible climate crisis.”
In short, shareholders are losing patience with insufficient progress towards environmental benchmarks, particularly as climate change strategy has been shown to positively impact business results. And investors are more serious than ever about holding corporations accountable in areas like climate change and the environment.
Activists target companies with lagging governance practices
Is a board equipped to oversee their company’s actions in pivotal areas such as climate, cybersecurity, digital transformation and diversity, equity and inclusion (DEI)? Are they the right fit for the company’s industry, stage of growth or future strategy in terms of their previous board experience, C-suite roles and expertise?
To answer this question, activists are looking to director independence, board composition and board skill sets — and they’re taking action when the findings don’t meet their expectations.
Our research found that investors scrutinized companies that had a low level of director independence — such as a combined chair-CEO role or high levels of director entrenchment — and whose boards lacked specific skill sets.
For example, among the activist-targeted companies we examined in 2021, only 11% possessed a compliance background. Only 19% possessed technology expertise.
Activists recognize the necessity of such skill sets, given recent incidents like the ransomware attack against Colonial Pipeline and the cyberattack against Microsoft Exchange — all on top of the four-fold rise in cyber risk seen during the pandemic.
With the heightened focus on ESG issues, sustainability has also become one of the most desired skills for board members — and activists are taking note of its absence in the boardroom. Directors with an ESG background accounted for only 1% of board members among the activist-targeted companies in our research.
What can boards take away from these findings? Given the current activism landscape, boards should prioritize director assessment and refreshment in the year ahead and build their recruitment efforts and candidate pipelines accordingly. A review of board structure, director independence and governance practices may also be in order.
The full board should think about what its composition should look like two, three or four years from now, and create a plan to get there. The 2021 PwC Annual Corporate Directors Survey
Keeping a close eye on compensation practices
Another area to evaluate is executive compensation. In previous years, companies could routinely count on receiving shareholder support of 90% or greater on most compensation policies.
Times have changed, to say the least. Shareholders today don’t respond positively to actions like those of Norwegian Cruise Line, which proposed increasing its CEO’s pay from $17.8 million to $36.4 million during the COVID-19 pandemic as the tourism industry floundered.
The SEC’s 2011 Say on Pay (SOP) requirements have become a popular channel through which investors can express concern about compensation practices. We used data from Diligent CGI and 2021 proxy season trends in the S&P 500 to examine compensation proposals related to SOP. Approximately 18% fewer SOP-related resolutions received strong investor support (over 90% shareholders in favor) in 2021 versus 2020 — a historic low.
Activist action tends to improve governance fundamentals
It’s doubtful that Chevron, Exxon and Shell would wish to repeat the events of 2021, with the three giants now facing exponentially increased carbon reduction targets, a radically expanded scope of climate change efforts and activists joining the board. But a silver lining exists to this unprecedented year of ESG activism.
Post-activism, the gender balance of all three boards improved. The diversity of their director skill sets increased while average director tenure and age both decreased. Furthermore, executive compensation fell, commensurate with a decrease in total shareholder return (TSR).
As shareholders increasingly view attention to ESG criteria as a link to business performance and resilience, all of these trends serve to strengthen these companies’ positions against further ESG activism in the future.
Diligent can get your board activist-ready for 2022. Learn more about our ESG solutions.