Can Shareholder Activism Open up for Better Corporate Governance?

In recent years, shareholders have become more active, flexing their muscles and pushing for change, within the companies they invest in. Shareholder activism is the trending, frequently used, word for these actions.

One of the latest publications from PwC’s corporate governance team covers the trend of shareholder activism. Financial, but also non-financial, activists pushing for ethical and corporate changes are now the craze. This, screaming from the top of their lungs and taking corporate business public, has proved to scare both management and boards. Though really, it can be a way to better corporate management.

Manage the shareholder activists

Another buzzword “in the now” is shareholder management. When and how should boards and executives start to communicate and meet with the investors?

To that question, there is no one right answer – no secret recipe. It all comes down to the balance of making everyone happy, from board members to stakeholders.

In the latest Annual Corporate Directors Survey from PwC nearly half of the surveyed board members said it is appropriate for directors (other than the CEO) to meet with investors directly. In the same survey, nearly 40% predict more activist campaigns in the coming year(s). Shareholder activism is here to stay, and plenty of directors get it.

Activists, the organization’s unlikely savior?

From a manager’s point of view, a shareholder activist is a bully who publicly expresses a personal dissatisfaction with management and openly disgraces them before demanding a change. True, in some cases the investors can be pretty vocal when pushing for change, but is it possible that others just push because it is necessary?

While a large investor should not boss a CEO around, there are also cases where a shareholder proposal might help. A few years back, The Economist analyzed and listed the 50 largest activist positions in America*. Often, profits and capital investment rose after an activism coup.

Activists are filling a governance void that afflicts today’s public companies. Boards and management are now forced to take a closer look at themselves. Hence they become more active when looking forward.

Activism can thus be a good thing. It keeps corporation management on its toes. The big difference between board member and shareholder activist agendas is the time period they focus on. While a board has its priority on long-term goals, the activism campaigns tend to focus on short-term performance and return on investment. That’s where a balance needs to be found.

Not all about the money

Activism is about driving change. When management isn’t maximizing the company’s potential, that’s normally when shareholders exercise their right to activism. Though it doesn’t have to be about profits, it can also be about the ethics of a corporation. Shareholders have realized that they, to some extent, are in power and can change the corporate governance purposes in non-financial ways too. The want for a corporation to be striving to place greater emphasis on corporate social responsibility.

In a recent public letter, two of Apple’s major shareholders requested that the company would focus more on-screen addiction amongst children. The tech corporation wasn’t late to answer, and acknowledge, their demands, promising to make their devices safer for kids. Their response was received with great appreciation and generated a lot of positive PR.

Engage, without going all-in

Though shareholders expressing their opinion is a possible way to improve, it can also be frustrating. When it comes to handling investors, either on a public or private level, there are always steps to be taken to minimize the outcome of unhappy shareholders. The best defense is having a strong board that understands and supports the long-term strategy while also knowing the importance of communicating it.

Before shutting down and dismissing matters as “unimportant distractions”, it is also important for a board to keep an open mind. No matter what is on the table, the board still has a fiduciary duty to stay objective while considering what is best for the shareholders.

Ways forward – simple social psychology

With investor involvement, there is of course the risk of oversharing and letting board matters fall out of the board’s hands. Though together with a reasonable strategy and appropriate limits, a balance can be found to meet excellent corporate governance, keeping all parties content.

To not divert the board with unnecessary distractions, here’s how to keep activism to its minimum:

  • Objectively consider shareholder/activist ideas

If there are ideas coming from the shareholders, then make sure they are considered and responded to in a constructive manner. Not only by the board but also by other major investors. The board might need them on their side in an event of a “vote no” campaign.

  • Engage with shareholders

By communicating the company’s current state and long-term plan, shareholders feel included and at ease. At times, that can be what it takes to keep activism on hold.

  • Don’t wait until there’s a crisis

One doesn’t feel treasured if someone only comes to them for crisis management. This is all basic social psychology, really. To be crass, stroking egos and making people feel involved goes a long way.

Any way boards choose to go forward, the key to success is communication and planning: Know what to address, and plan how to tackle coming demands.

Help for the future

As for 2018, the trend of shareholder activism will not go away. If anything, experts predict it will grow stronger. Learning how to keep it to a minimum or on a friendly level should therefore be on top of all board agendas.