Increased shareholder activism makes it essential that organizations and directors understand the latest shareholder activism trends.
Shareholder activism is a critical corporate governance topic – more so in the UK than the US historically, but the US is catching up fast. Activist shareholders are becoming ever-more vocal on topics from mergers and acquisitions (M&A) to climate risk; in response, organizations need to be prepared and keep pace with the latest trends in activism.
What Is Shareholder Activism?
A shareholder activist is a shareholder who uses their stake in a company to exert influence on management to act in a certain way. Often, activism relates to a business’s ethical stance and questions of integrity. Increasingly, it is driven by an organization’s performance on environmental, social and governance (ESG) matters.
What issues are driving shareholder activism? In 2022, several factors are impacting shareholder activism trends.
Shareholder Activism Trends in 2022
- Activism is likely to increase in 2022 following a slower couple of years. The number of new shareholder activism campaigns declined sharply in the spring and summer of 2020 – unsurprisingly as the world faced the Covid-19 pandemic, with lockdowns and restrictions. In 2021, this began to rebound and we can expect this momentum to continue during 2022.
- M&A remains the biggest driver of shareholder activism. Harvard Law School found that M&A-related activist campaigns made up 44% of the total movements initiated at large-cap companies during the first half of 2021. This follows a similar pattern over recent years, so it seems sensible to expect the same in 2022.
- ESG is an essential focus for shareholder activists. Standard & Poor’s found that shareholder activism in this area increased in 2021 and that the “trend is set to pick up speed during the 2022 proxy season.” Corporate leaders are facing pressure to “strengthen their ESG skills and integrate sustainability into their policy and planning strategies” – in other words, to take a holistic and integrated approach to ESG risk management. Poor ESG performance has been recognized as one of the main criteria set to “mark companies as possible targets” for activist shareholders.
- Environmental and social proposals are receiving more support. Not only is ESG a growing focus for shareholder activists, the wider shareholders increasingly endorse their recommendations. are increasingly endorsed by the wider shareholders. Nearly 20% of the social and political proposals voted on in 2021 received majority shareholder support, up from approximately 10% in 2020. The figure was approximately 38% for environmental proposals, compared to about 21% in 2020.
- More shareholder activism is focusing on racial equity reporting and workforce diversity. 2021 saw a record number of submissions relating to both issues.
- Shareholder activists and private equity firms are joining forces. A convergence of shareholder activism and activist funds has seen private equity investors taking stakes in public companies and driving change in areas like corporate governance reform, as was seen in the case of Mountain Vantage Advisers (NMV) and Virtusa. Law firm Shearman & Sterling expect “some continued cooperation between activists and private equity” in 2022.
- Activist success rates are improving. Based on our research, boards would be wise to plan for a settlement or activist success, rather than a withdrawal or activist defeat, when it comes to future ESG campaigns.
How Should Boards and Leaders Respond to Shareholder Activism?
With so many shareholder activism trends evident as we start 2022, what should companies and their boards be doing to respond?
- Make an honest appraisal of your organization’s governance. Activism is on the rise, and any company that falls short – whether on sustainability, societal issues, business ethics, compensation practices or governance – will be in the firing line. If you want to improve on any of these, you need to understand where you are under-performing by capturing accurate and comprehensive data.
- Get to grips with ESG performance. Companies’ records on environmental, social and governance issues are becoming more transparent as disclosure requirements become more stringent. With so much shareholder activism centered around ESG considerations, it’s essential to understand your ESG risks, measuring your performance and put in place policies and ESG strategies to address them.
- Consider M&A through an activist lens. Merger and acquisition activity is a prime target for shareholder activists; ensure your due diligence is on point so any activity fits with your wider governance, risk and compliance standards.
- Up your game on diversity, equity and inclusion (DEI). DEI is an important aspect of ESG, and as we’ve seen, this mirrors the focus on racial equality and diversity issues among shareholder activists. Ensure you comply with requirements like EEO-1 reporting as well as best practices on diversity and inclusion and – importantly – act proactively to address any shortcomings.
- Don’t be complacent. More activist campaigns are succeeding. If you’re in the crosshairs of shareholder activists, don’t imagine that you will come out on top. Their concerns may be valid; indeed, activist action has tended to improve governance fundamentals in the companies targeted.
- Be proactive on governance, risk and compliance. While improved governance may be the outcome – the “silver lining” – for any company targeted by shareholder activism trends, it’s far better to take proactive action and avoid being the subject of an activist campaign. Take steps to address your governance, risk and compliance (GRC) performance before you become a target.
Keep a Step Ahead of 2022’s Shareholder Activism Trends
Shareholder activism is focused, persistent and growing, as our summary of shareholder activism trends shows. If you want to keep a step ahead, the best way is through “activist-ready” governance, risk and compliance strategies that pre-empt the shortcomings shareholder activists pounce on. Your approach should be built on robust methods, unimpeachable data and keen oversight.
Knowing where to focus these strategies can be a challenge, as shareholder and consumer priorities shift and new risks come into play. To read more on the future of ESG, you can read our blog on navigating the road ahead. And for the latest insight on governance, risk, compliance and ESG trends, you can sign up for the Diligent newsletter. It provides company leaders with up-to-the-minute thinking, designed to position you to proactively for any new shareholder activism trends.