Shareholder activism is set to spike across Europe in 2022. While the most activity globally comes from US hedge funds, activist investors are still making their presence felt in Europe, expressing their discontent with underperforming companies.
With its potential to destabilize and disrupt the boardroom, shareholder activism must be carefully managed with a proactive, rather than reactive, approach. And that approach starts with building a better relationship between the board and shareholders.
WHY Unhealthy shareholder relations must be avoided at all costs
The relationship between a company and its shareholders can be as complex as a marriage. When it is done right, harmony reigns. On the other hand, a poor shareholder relationship could result in your board losing time to non-stop disputes and challenges. Given the complexity and sensitivity of this relationship, it is easy to see how boards fall foul of their shareholders and vice versa.
From the board member’s point of view, the shareholder has power and influence that exceeds their position – getting a vote in the company’s decision-making, goals, and future without actually getting their hands dirty in day-to-day operations. From the shareholder’s perspective, board members can be obstructive, inflexible, and motivated by self-interest.
A spirit of mutual animosity isn’t a great foundation for board and shareholder relations. There may be periods of peace and stability, but if there isn’t a solid foundation to start with, the cracks will widen over time – ultimately threatening the company’s profitability.
The most successful companies know that shareholder relations should be more than an afterthought. Like any good relationship, it takes work to build that base of respect, communication, and shared values.
Shareholder activism is on the rise
The past decade has seen a steep rise in shareholder activism, in part due to a growing recognition of the influence corporate shareholders can have on corporate governance. The shareholders of today aren’t content to sit back and collect dividends, they’re looking to make a difference and have their say.
This shareholder empowerment can manifest in a number of different ways, from low-key proposals to aggressive tactics, and uses all the tools at a shareholder’s disposal – withholding votes, organizing voting blocs, and forcing through changes by ousting certain board members and other means.
How to maintain a strong relationship with shareholders
Communicate effectively and often
Regular and respectful communication helps build a consensus on the company’s direction and highlights areas of alignment on which you can develop deeper linkages.
But communication needs to be more than a quarterly call, annual reports, or a biannual conference. An effective engagement strategy involves direct dialogue between senior management and stakeholders, making sure that both know there’s an always-open channel through which they can share their thoughts.
The board should also set a schedule, carving out time that’s solely dedicated to hearing shareholder concerns and feedback. The best time to set this in motion is after the annual general meeting, a natural moment of stocktaking and evaluation.
Board portals can be an invaluable tool for brokering better communications. Sharing clear documents, agendas, contact details, and tasks from one central and secure hub ensures efficient back and forth between all stakeholders.
Engagement strategies don’t have to involve every single board member or shareholder as that could easily spiral into chaotic communication. Instead, it’s helpful to select a few ambassadors to act as a bridge between the two groups. This will look different for every company but could include senior management, general counsel, corporate secretaries and large institutionalised stakeholders.
Strong leadership from this small but select group can help to quickly resolve conflict and keep communications streamlined.
Recognize your roles
Board members serve the company, while shareholders have ownership of the company. Given this, it seems that their interests would naturally align, but it’s unfortunately not that black and white in practice. A board member may find themselves catering to a particular shareholder or group of shareholders rather than contemplating the mission of the firm as a whole. Shareholders can unduly influence board members out of their own self-interest.
Making sure all members are on the same page about their role and responsibilities can help clarify shared goals and guard against any malpractice. Sometimes all it takes is a reminder that although your duties may differ, you’re both on the same side.
Find common ground
It is easy to focus on the flashpoints, such as compensation or ESG concerns, but equally important is locating crucial areas of common ground. In an ideal world, both investors and management have shared values that naturally evolve into shared goals. The more of those you can find, create and develop, the more solid the foundation of the organization.
The more a company focuses on leadership and communication at the board level, the more scope there is for drilling down into those shared values. Maintaining excellent shareholder relations should be top-of-mind for any board as the world emerges from the pandemic. Building a solid foundation of trust, shared values, and clear communication with shareholders is key to driving business growth in the recovery economy.