How To Build A Shareholder Activism Defence That Lasts

The history of shareholder activism spans a century. In 1926, Benjamin Graham bought 2,000 shares in Northern Pipeline in the US in order to rally fellow investors and persuade the company to return the capital it held in bond investments to shareholders. Although activism may have calmed as issuers battled the adverse effects of the COVID-19 pandemic, there are signs that shareholder pressure is returning, and this is why you need a robust shareholder activism defence.

In 2022, there were 235 activist campaigns worldwide, 36% up from 2021 and the highest total since 2018. In Europe, activists targeted 60 companies, the most ever in a calendar year. 

This article discusses the importance of long-term shareholder activism defence, the types of activists that might target your business and an action plan to protect the company against these campaigns. 

Importance of a long-term defence strategy

The old adage states that prevention is better than cure, and this applies to shareholder activism. It is better to avoid any potential campaign happening at all than to have to publicly fight it after investors have mobilised.

If groups of investors have reached the point where they feel their only option is to launch an activism campaign, it suggests there is discontent which has festered and that the issuer has done little to seek a solution or compromise. This can damage the issuer’s ability to attract or maintain investment and suggests there are failings in the organisation’s investor relations and engagement strategy.

A long-term defence strategy helps to maintain a positive relationship with shareholders, as well as avoiding targeted activism campaigns. 

Types of shareholder activists 

How to create a defence against activist shareholders

Identify potential shareholder activists 

One of the first methods of identifying activists is to use shareholder analysis to understand exactly who is invested in the company. Check for matches against renowned activists. Some investors have a reputation for targeting businesses and, although it doesn’t mean that they will definitely launch a campaign against yours, you can engage them now to avert activism in the future. 

Through your investor relations outreach, you can often identify shareholders who could become activists. Look at who is taking an increased interest in earnings calls and downloading company documents. Listen to the feedback you receive from investors and consider whether the company is doing enough to assuage fears or address issues that they raise. If not, these investors could become the next activists, targeting your company. 

Although it might not always be possible to identify every activist, especially before they invest, there are some strategies you can put in place to help you work out where activism may initiate. 

Analysing activism trends allows you to compare your strategy with peers who have suffered activism and understand whether you are also in danger of being targeted.  

Recognise activist tactics and strategies

Just as there are numerous different types of activism with different goals, there are also different tactics and strategies they can emply to achieve their aims. 

Some shareholders will begin by simply engaging with the IRO or board members and trying to persuade them to make the changes they want to see in the business. If they feel ignored or do not like the response they receive, they can then step up their campaign. Others will begin aggressively in order to make their point. 

Other forms of activist strategy include: 

• Shareholder proposals including their demands on which other investors can vote. Activists who choose this route will usually canvas the opinions of other investors and gain an understanding of whether it is likely to pass or not before they make the proposal. 
• A “vote no” campaign involves communicating with other shareholders to encourage them to vote against the issuer on executive pay, the election of directors and other matters. Even if the activist does not succeed, gaining a significant “no” vote can be damaging to the issuer and show that there is dissent from its shareholding base. 
• Proxy contests are aggressive activist tactics aimed at replacing board members with directors whom the activist nominates. These can become major public events, with the activist attempting to round up support for the move. This often leads to companies settling with activists to offer them some influence on the board or some other compromise. 

Iron out your equity story

Your equity story is “the most important thread that must run through all the exit materials”, according to McKinsey. It provides transparency over your performance and history, as well as showing investors what separates you from your peers and why yours is a more valuable investment. 

Preparing a coherent and detailed equity story can be reassuring for shareholders, as they can understand your past achievements and how they can translate into future performance. It details your strategy clearly and that ensures that those parties who do invest can understand whether that fits with their strategy before they buy stock. 

Having a robust equity story ensures you get the right investors to fit your business and that your business is the right fit for them. When they invest with clarity, they are less likely to be discontent with the decisions you make and the direction of travel. Therefore, there is less chance of encountering shareholders who are at ideological odds with the business and who might be tempted to launch an activism campaign. 

Demonstrate transparency and accountability 

As an extension of the equity story, being open and honest in all communications with shareholders can ease the concerns of potential activists. By displaying transparency and accountability in relation to decision-making, performance and in shareholder engagement, issuers can prevent misunderstandings and show that there are no further, hidden problems for investors to be concerned about.

An issuer that invites feedback and is shown to take responsibility for issues, as well as a determination to make good on them reduces the need for activism, as it shows that the organisation is agile and willing to adjust its strategy rather than stick with a course of action no matter what direction it takes it. 

Another aspect of transparency and accountability is maintaining an open dialogue with shareholders from the IRO and investor relations team. Discontent can spread in a vacuum of information, so maintaining engagement is essential. Building this relationship means, if there is bad news to share, investors are more likely to listen to the company’s explanation and route map for mitigation and less likely to take drastic activist action. 

Address shareholder concerns

If shareholders address the IRO or executives about concerns that they have, it could be the first step on the road to activism. This is your opportunity to prevent these queries from developing into a campaign.

Even if the company does not plan to act on the concerns of the shareholder in the manner in which they desire, the IR team should show understanding of their worries and communicate why the company is taking a different course of action, explaining why the shareholder need not be concerned. 

When investors feel heard, they understand that their opinions are valued by the company and are more likely to work with the company to find solutions than battle against it with an activist campaign. 

FAQs

What triggers shareholder activism?

Shareholder activism can be triggered by a variety of factors, including perceived poor corporate performance, governance issues, executive compensation, lack of transparency and ESG concerns. Other triggers may involve strategic disagreements, such as the direction of the company, mergers and acquisitions or asset divestitures.

How does shareholder activism impact a company’s stock price?

The impact of shareholder activism on a company’s stock price can vary widely. In some cases, activist demands can lead to operational or strategic changes that increase the company’s value, boosting the stock price. In other situations, activism can create uncertainty, disruption or reputational damage that negatively affects the stock price.

What role do proxy advisory firms play in shareholder activism?

Proxy advisory firms provide guidance to shareholders on how to vote on various issues presented at shareholder meetings. Their recommendations can significantly influence voting outcomes. Therefore, they play a crucial role in the context of shareholder activism, especially when activists propose resolutions for a vote.

What are some of the pitfalls to avoid when building a lasting defence?

Companies should avoid being reactive instead of proactive, waiting until an activist threat emerges before taking action. Other pitfalls include not engaging with shareholders regularly and transparently, ignoring the concerns raised by activists, neglecting to review and improve corporate governance, and failing to develop a comprehensive and adaptable defence strategy.

How should companies adjust their defence strategies as activist tactics evolve?

Companies should continually monitor the landscape of shareholder activism to stay abreast of new trends, tactics and strategies. This might involve adjusting communication methods, updating governance policies or bringing in specialised advisory support. The key is maintaining a flexible and responsive defence strategy that can be adapted to the changing environment.

How can companies balance shareholder concerns with business objectives?

Balancing shareholder concerns with business objectives requires open communication and understanding. Companies should engage shareholders to understand their concerns and explain the company’s strategic objectives. When conflicts arise, a balanced approach might involve modifying business strategies to address shareholder concerns while still achieving corporate objectives or demonstrating to shareholders how the existing strategies serve their long-term interests.