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Activist investors have increasingly become significant players in corporate governance, wielding substantial influence over the policies and practices of publicly traded companies. This emerging force is characterised by its focus on driving strategic changes, enhancing shareholder value, and improving overall corporate accountability through various forms of intervention. Unlike traditional investors, who seek steady returns and prefer a passive role, activist investors actively engage with management and boards to address perceived inefficiencies, governance deficiencies, or strategic missteps. Their involvement often sparks profound shifts in corporate governance structures and practices, reshaping how companies operate and align with shareholder interests.
Activist investors employ various tactics to effect change, including proposing board member candidates, advocating for strategic shifts, and demanding changes in executive compensation or operational policies. Their strategies can lead to significant transformations, such as enhanced transparency, improved financial performance, and more robust risk management practices. Notable instances include campaigns by prominent activist firms like Elliott Management, Carl Icahn Enterprises, and Third Point, which have pushed for major overhauls in companies like Twitter, Xerox, and Nestlé, respectively.
A combination of legal, financial, and strategic mechanisms underpins the role of activist investors in shaping corporate governance. Legally, they leverage shareholder rights and regulatory frameworks to press their agendas. Financially, they use their substantial stakes in companies to amplify their influence and leverage, often employing public campaigns to rally other shareholders and stakeholders to their cause. However, it's their strategic approach that sets them apart. Their strategy involves thorough analysis and targeted proposals to address specific areas of concern within the company's governance or operational framework, ensuring their influence is felt most effectively.
As corporate governance continues to evolve in response to global market dynamics and regulatory changes, the impact of activist investors remains a crucial area of study. Their involvement often highlights underlying issues within corporate structures and practices, driving both immediate reforms and long-term strategic shifts. This dynamic interplay between activist investors and corporate boards underscores the growing importance of shareholder activism in modern corporate governance and its role in fostering more accountable and responsive business practices.
The global wave of shareholder activism
In global investing, ESG factors have taken centre stage, profoundly changing how firms function and evaluate investments. The rise in ESG popularity is more than simply a fad; it reflects a deeper movement towards sustainability and corporate responsibility. This transition is accelerated by shareholder activism, a potent tool for investors to influence a company's operations and policy. Historically, shareholder activism has been used by investors to demand change to maximise financial gains. However, when paired with ESG principles, it becomes a strategic force pushing for ethical behaviours, environmental stewardship and social justice in business.
This new wave of activism is concerned not just with guaranteeing ethical corporate conduct, but also with ensuring sustainable, long-term growth. Investors are becoming increasingly aware that firms with strong ESG policies tend to have reduced risks and potentially greater returns, making them more appealing investment opportunities. As a result, both individual and institutional investors are using their power to encourage firms to adopt more sustainable and socially responsible business strategies. This blog investigates how ESG-focused shareholder activism, with its positive impact, is altering the future of corporate governance, emphasising the long-term, sustainable link between ethical investing and shareholder wealth generation. The convergence of ESG and shareholder activism heralds a new age in which investment returns and corporate responsibility coexist, encouraging firms to adopt policies that benefit society, the environment and investors alike.
Use of Shareholder Activism
As shareholder activism has progressed, the total capital deployed and the number of campaigns mounted have increased. According to the Harvard Law School Forum on Corporate Governance, 2018 was a record year for shareholder activists. The year saw the deployment of approximately $65 billion in capital, with a rise in the number of investors from 110 in 2017 to 130 in 2018 and a rise in the number of initiated campaigns to 250.
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These figures indicate a "modest" increase from the previous year, another record-breaking achievement. Additionally, shareholder activists are conducting campaigns that extend beyond national borders. The report also reported that 60% of campaigns were directed at U.S. companies, 25% at European companies, and 10% at Asian Pacific companies.
Investigating the Concept of Shareholder Activism in Corporate Governance
Investors who obtain substantial ownership interests in publicly traded companies, typically at least 5%, to advocate for change are known as activist shareholders. Their objective is to implement reforms that they believe will enhance shareholder value. Common changes that activist shareholders advocate for include the divestment of underperforming business units, the increase of dividends and share buybacks, the reduction of costs, and the alteration of companies' strategic direction or leadership.
Activist shareholders play a critical role in corporate governance by ensuring that company management is accountable to shareholders. They possess the financial incentive and authority to contest decisions that they perceive as not completely aligning with their interests. Their involvement can result in significant changes, such as replacing board members or imposing a company sale.
Types of Shareholder Activism
The primary categories of activist shareholders include:
Hedge funds have emerged as the most prominent activist investors. Bill Ackman's Pershing Square and Carl Icahn's Icahn Enterprises are notable examples. Activist investing has been implemented by private equity firms, including TPG, Bain Capital, and KKR, as an alternative strategy. Asset managers such as BlackRock, Vanguard, and State Street, who hold substantial ownership positions, exercise significant influence as activist shareholders. Company insiders, including directors, executives, and founders with substantial interests, may exert pressure on boards to implement change as activist shareholders.
Although they are not always regarded favourably, activist hedge funds are typically the most aggressive in their efforts to effect change. They employ proxy contests, media campaigns, and shareholder proposals to influence other investors to follow their stance.
Establishing the Agenda: The Significance and Objectives of Shareholder Activism
Activist shareholders frequently pursue modifications that are intended to:
Enhance financial returns by increasing dividends, conducting share buybacks, divesting assets, or employing alternative strategies. Influence a company's strategic trajectory by, for example, refocusing the business model or investigating growth opportunities. Implement corporate governance reforms, such as replacing underperforming directors or modifying executive compensation.
Shareholder activism is a critical governance mechanism that facilitates reform for the benefit of all shareholders by ensuring that company leadership is held accountable and assisting in the unlocking of value. Nevertheless, some contend that certain activist investors prioritise short-term profits over long-term development. In general, shareholder activism has significantly influenced the agenda of numerous significant public corporations.
What is the concept of shareholder activism?
Shareholder activism is the practice of shareholders utilising their ownership rights to influence a company's business activities and policies. Activist shareholders pursue this for two primary reasons:
To address perceived management errors or weak decisions
To advocate for substantial modifications to the organisation's strategy and policies
Shareholders possess specific rights and powers, including the ability to vote, as company proprietors. Activist investors can exert pressure on companies to implement changes by utilising these rights:
Purchasing substantial shares of the company to obtain voting rights Presenting shareholder proposals and employing proxy ballots Nominating new board members who are per their aims Critiquing the leadership and strategy of a company in public Threatening legal action or hostile takeovers
The primary argument favouring shareholder activism is that it fosters good corporate governance and provides accountability and supervision for management. Nevertheless, critics contend it can take the company's resources and attention away from its long-term objectives.
In general, shareholder activism presents both hazards and opportunities for the companies that are the subject of the activism. It can be a disruptive force for change, contingent upon the specific situation, whether for the better or the worse. The effect on long-term shareholder value is frequently debated and uncertain.
1. The Definition of ESG and Shareholder Activism
The sustainability and ethical impact of an investment in a business are assessed using ESG criteria, encompassing the fundamental components. These factors evaluate an organisation's capacity to mitigate environmental stewardship, social responsibility, and leadership integrity hazards. Conversely, shareholder activism entails investors employing their ownership interests in a company to influence its policies and conduct to effect positive change. This form of activism is concerned with aligning company practices with broader social, environmental, and governance objectives and the influence of financial outcomes. The activism of shareholders is becoming increasingly important in encouraging companies to adopt more accountability, transparency, and responsibility in their operations as they emphasise ESG metrics more. This dynamic interplay between shareholder activism and ESG criteria, both profoundly rooted in societal values, underscores a burgeoning trend in which investment decisions are intricately linked to long-term societal impacts and ethical considerations.
2. The Historical Context of ESG and Activism
In recent decades, incorporating ESG criteria into corporate strategies has evolved from a niche interest to a mainstream imperative. Shareholder activism has substantially influenced this evolution, which has compelled companies to adopt a more transparent and accountable approach to their operations. The primary emphasis of activism has been on financial metrics in the past; however, the increasing awareness of climate change, social inequalities, and corporate governance issues has shifted the focus to sustainable and ethical business practices. Shareholder activists have been at the forefront of this movement, utilising their investments to enforce changes that promote ethical behaviour and enhance long-term shareholder value. These changes indicate a more comprehensive comprehension that sustainable business practices are essential for long-term profitability and risk management, leading to increased investors incorporating ESG factors into their investment decisions.
3. The Influence of ESG on Corporate Valuation
Reflecting the reduced risks and improved operational efficiencies these practices bring, companies with robust ESG practices frequently command higher valuation multiples. Shareholder activists acknowledge the intrinsic value of ESG adherence, which can enhance market positioning, strengthen brand reputation, and mitigate potential regulatory penalties. To guarantee stability and profitability for the long term, activists advocate for ESG-focused reforms. This influence is particularly important in sectors where environmental hazards or social responsibilities are significant, such as energy, manufacturing, or consumer products. These companies can take advantage of reduced costs and enhanced efficiencies by adopting more sustainable practices, which aligns them with the increasing demands for responsibility from consumers and regulators. This proactive approach, motivated by ESG-focused shareholder activism, emphasises a strategic alignment between financial performance and ethical practices.
4. Environmental Activism and Climate Change
A substantial shift in prioritising environmental issues within the corporate world has made climate change a central focus of shareholder activism. Activists are employing their power to encourage companies to adopt more sustainable environmental practices, including reducing greenhouse gas emissions, improving energy efficiency, and transitioning to renewable energy sources. These demands are motivated by acknowledging that environmental stewardship mitigates the negative consequences of climate change and is consistent with consumer preferences and regulatory trends that can impact a company's financial performance. Shareholders can contribute substantially to global sustainability initiatives and improve a company's competitiveness and market reputation by advocating for robust environmental policies. Investors are progressively employing their capital to ensure positive environmental outcomes and economic returns, as evidenced by this form of activism.
5. Governance and Social Concerns
Shareholder activism is increasingly addressing social concerns within corporations, particularly emphasising issues such as community engagement, equitable labour practices, and diversity and inclusion. These social dimensions of ESG are acquiring prominence as shareholders recognise the substantial contribution that robust social policies make to a company's success and reputation. Promoting diversity in the workforce and leadership allows companies to access various talents and perspectives, resulting in improved decision-making and innovation. In the same vein, equitable labour practices guarantee a workforce that is both productive and motivated, while active community engagement can fortify consumer trust and brand loyalty. Activists encourage companies to implement these procedures to comply with ethical standards and improve operational efficiency and profitability. This transition to integrating social governance into corporate strategy indicates a more comprehensive comprehension that sustainable and equitable business practices are essential for the generation of long-term value.
6. The Function of Institutional Investors
Shareholder activism has become critical to institutional investors' promotion of ESG principles, including pension funds, insurance companies, and mutual funds. Due to their considerable investment portfolios and the volume of shares they control, these large stakeholders have substantial influence. They are becoming more proactive in encouraging companies to implement sustainable and ethical practices, as they recognise that these factors are essential for long-term profitability and risk management. To effectuate change, institutional investors frequently engage in dialogue with company management, propose resolutions at shareholder meetings, and vote on ESG-related matters. Their activism is bolstered by the conviction that organisations with robust ESG credentials are more adept at addressing future obstacles, such as regulatory changes and changes in consumer preferences. This strategic influence indicates a more generalised trend towards sustainability within the investment community, underscoring the necessity of reconciling financial objectives with environmental and societal obligations.
7. The Impact of Proxy Advisors
Proxy advisors are instrumental in developing corporate governance by advising shareholders on how to vote on various corporate issues, including those associated with ESG. These advisors, including Glass Lewis and Institutional Shareholder Services (ISS), influence shareholder decisions by analysing corporate behaviours and policies at annual meetings. The increasing recognition of the financial and reputational hazards associated with poor environmental, social, and governance practices is reflected in the growing consideration of a company's adherence to ESG principles. By advising institutional investors and other shareholders on the advantages of supporting ESG resolutions, proxy advisors can influence substantial ballots to promote greater corporate responsibility. Their recommendations frequently result in more sustainable business practices, motivating companies to prioritise ESG as a strategic advantage and a compliance requirement. Consequently, the connection between shareholder value and ethical business operations is further reinforced.
8. Success Stories of ESG Activism
The substantial influence that shareholders can have on a company's sustainability practices is underscored by success stories of ESG activism. For instance, in response to activist investors' pressure, numerous corporations have implemented more sustainable resources and substantially diminished their carbon emissions. Companies frequently implement stricter environmental policies and invest in green technologies as a consequence of shareholder resolutions that directly address environmental concerns. In addition, activism has led to improvements in social areas, including improved labour conditions and improved diversity practices, which contribute to a more inclusive and equitable work environment. These changes serve to reduce the likelihood of regulatory penalties and reputational harm, as well as to attract a broader range of investors and consumers who are interested in ethical practices. The growing alignment between ethical initiatives and business success is underscored by the success of these activist initiatives, which demonstrate the power of ESG-focused shareholder influence in generating tangible improvements in corporate conduct.
9. Obstacles and Criticisms
The approach is confronted with numerous challenges and criticisms, despite the increasing prominence and successes of ESG activism. One significant concern is the potential for conflicts with short-term financial objectives, as activists may advocate for changes that enhance ESG metrics but could have a detrimental effect on short-term profitability. This can result in conflicts with company management and other shareholders who prioritise immediate financial gains. Furthermore, the implementation of unified strategies can be impeded by the diluted focusses and inconsistent ESG priorities that can result from the diverse interests of shareholders. The risk of "greenwashing," in which companies superficially adopt ESG policies without substantive implementation to placate activist pressures, is also a concern among critics. These obstacles underscore the intricate equilibrium between the preservation of strong financial performance and the promotion of sustainable practices, underscoring the necessity of a strategic approach to ESG activism that is consistent with long-term economic and ethical objectives.
10. Prospective Developments in ESG Activism
The scope and impact of ESG activism are expected to expand in the future as more investors recognise its critical role in value creation and risk mitigation. Shareholders are now equipped with more accurate information and improved tools to evaluate ESG performance and enforce accountability as a result of technological advancements and increased data availability. Additionally, the proliferation of digital platforms and social media has enabled activists to mobilise rapidly and effectively, thereby expanding their influence over corporate policies. With the increasing public awareness and regulatory demands regarding sustainability, companies will be under increasing pressure to comply with ESG standards. This trend is expected to motivate a greater number of institutional and retail investors to actively influence corporate behaviours by employing ESG-focused strategies. In the future, ESG activism will persist in its efforts to encourage companies to adopt more responsible practices and to redefine shareholder engagement in order to drive systemic changes across industries.
Three Trends to Watch for Shareholder Activism in 2024.
The corporate shareholder activism sector is on the brink of substantial transformations and obstacles. The corporate landscape has been significantly influenced by activist shareholders, who have advocated for reforms and directed companies towards improved governance and profitability.
They anticipate the emergence of three significant activism trends in 2024, each of which will have significant implications for corporations and investors.
Activists will make more frequent calls to sell companies.
An increase in activist demands for the sale or divestment of companies is one of the most significant trends we expect to see in 2024. While shareholder activism has historically been associated with requests for modifications to corporate strategies, governance, or capital allocation, there is a trend towards more assertive demands for the ultimate sale of companies. Activists are becoming more inclined to argue that the division or sale of specific subsidiaries or divisions would generate more excellent value for shareholders, as they are equipped with a comprehensive understanding of the industries they target and extensive financial analysis.
Additionally, the market for such divestitures may be stimulated by the increasing anticipation of disinflation, declining interest rates, and a favourable M&A environment. Companies will be required to respond strategically to these demands by meticulously assessing whether an activist-agitated sale or spin-off of assets is consistent with the interests of all shareholders.
Activists will identify more qualified and superior candidates for board positions.
In recent years, activists have exhibited an increasing ability to identify and nominate highly qualified candidates for board seats. This trend is anticipated to gain momentum in 2024 as activists endeavour to exert influence and guide companies in directions that they believe are more beneficial to shareholders.
Activists have historically believed that their capacity to influence change within a company is frequently contingent upon their inclusion on the board of directors. Consequently, and in the aftermath of the universal proxy card, which is now mandatory, they are becoming more discerning in their selection of director nominees. These candidates are anticipated to exhibit a propensity to challenge the status quo, advocate for shareholder interests, and possess extensive industry knowledge.
Activists are likely to prioritise the nomination of individuals with a strong commitment to best practices in corporate governance, diverse origins, and a demonstrated track record in order to secure the support of institutional investors and proxy advisory firms. This strategy fortifies their credibility and increases their likelihood of securing shareholder ballots.
As a result, organisations targeted by activist campaigns must be prepared to engage constructively with these nominees and critically evaluate their qualifications. This trend is expected to result in increased scrutiny of existing directors' performance and more competitive board elections.
2024 will be busier than 2023 due to factors 1 and 2
In comparison to 2023, 2024 will be a busier year for corporate shareholder activism due to increased demands for company sales and the nomination of highly qualified board candidates. With the backing of institutional investors who are becoming more receptive to their arguments and a burgeoning track record of success, activists are on the brink of becoming even more assertive in their campaigns.
This increased activism will pressure companies to engage with their shareholders, resolve potential vulnerabilities, and be more receptive to dialogue with agitating shareholders and reasonable demands for change. It will also motivate board directors to take a more proactive stance on shareholder engagement and governance practices to anticipate activist campaigns.
Furthermore, activists will be increasingly motivated to pursue opportunities for value creation due to robust corporate earnings and a generally favourable market environment, which is also characterised by robust economic indicators. Companies will be encouraged to reassess their strategic plans and operational efficiency as they encounter increased scrutiny and demands for change, which could result in improved long-term performance.
Every season is an activist season
This year is expected to be a critical year in corporate shareholder activism. As was the case last year, in 2024, each season will be an activist season.
The landscape may change as activists intensify their efforts to influence corporate strategies, nominate more qualified candidates for board seats, and call for material corporate transactions. It is not advisable to delay action until it is too late. Companies must be prepared to engage constructively with activists and prioritise shareholder interests to successfully navigate the changing landscape of shareholder activism.
Due to robust economic indicators and an increasingly competitive environment, 2024 is expected to surpass the level of activism observed in 2023, rendering it a year of significant importance for corporate governance and shareholder value.
Enhancing Effectiveness through Collaboration
1. Comprehensive Approach
Cross-sector collaboration ensures a more comprehensive approach to addressing corporate governance and ESG issues. By combining the financial leverage of activists with the expertise of NGOs and academics, these partnerships can tackle complex issues from multiple angles. This holistic approach leads to more effective and sustainable solutions.
2. Increased Credibility
Collaborations with respected NGOs and academic institutions enhance the credibility of activist campaigns. These partnerships provide a solid evidence base and add legitimacy to the demands being made, making it harder for companies to dismiss or ignore activist proposals.
3. Broader Reach and Impact
Collaborative efforts often extend the reach and impact of activist campaigns. By engaging with diverse stakeholders, activists can tap into broader networks, mobilize public support, and influence a wider range of corporate actors. This expanded influence can accelerate the adoption of best practices and drive systemic change.
4. Innovation and Best Practices
Partnerships often foster innovation and the development of best practices. The exchange of ideas and expertise between activists, NGOs, academics, and industry experts can lead to the creation of new frameworks, tools, and strategies for addressing ESG challenges. This collaborative innovation drives continuous improvement in corporate governance and sustainability.
5. Industry Coalitions and Partnerships
Industry coalitions, which bring together multiple stakeholders, including activist investors, corporations, and NGOs, can drive systemic changes across entire sectors. These coalitions often focus on specific issues, such as climate change or human rights, and work collectively to develop standards, best practices, and frameworks that guide corporate behaviour.
An example of such a coalition is the Climate Action 100+, a global initiative that involves over 700 investors working together to engage with the world's largest corporate greenhouse gas emitters. By pooling resources and aligning their efforts, these investors, climate-focused NGOs, and industry experts have successfully pushed companies to commit to net-zero emissions and enhance their climate-related disclosures.
6. Government and Regulatory Bodies
In some cases, activist investors collaborate with government agencies and regulatory bodies to influence policy changes and enforce stricter standards. These collaborations can help shape legislation and regulations that drive corporate compliance with ESG criteria.
For example, the engagement between activist investors and regulatory bodies in the European Union has led to the implementation of stricter corporate transparency requirements. These regulations mandate more detailed reporting on ESG performance, thereby increasing corporate accountability and supporting the goals of activist investors who seek to improve corporate governance and sustainability.
Conclusion
Shareholder activism is a dynamic force in corporate governance, reshaping how companies operate and align with shareholder interests. By actively engaging with management and boards, activist investors drive critical changes in governance policies, enhance transparency, and promote sustainability. The collaboration between activists, NGOs, academics, and regulatory bodies further amplifies their impact, leading to more informed and comprehensive reforms. As shareholder activism continues to evolve, its role in fostering accountable and responsive business practices becomes increasingly vital in shaping the future of corporate governance.
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