How Boards Can Respond to Shareholder Activists
For some investors, it’s possible to love a company but reject its leadership. In fact, when companies experience a decline in prices, they may see a rise in shareholder activism, in which activist investors actively seek a change in the company’s leadership or advisory board. What should executive leaders know about shareholder activists?
What Shareholder Activism Looks Like
When shareholders are dissatisfied with a company’s performance, they may launch a campaign to alter its corporate structure. Shareholder activism isn’t always focused on financial performance. Sometimes, activists launch a campaign in response to regulatory issues or ethical lapses.
For a recent example, consider Carl Icahn’s campaign against the gene sequencing company Illumina. Initially, Icahn’s concerns focused on the acquisition of the cancer detection test company Grail.
But soon, he took aim at corporate leadership — accusing CEO Francis deSouza and Chair John Thompson of being personal friends rather than acting in the best interests of shareholders. Soon enough, shareholders joined Icahn’s campaign, voting out Chair Thompson and voting in Lieutenant Andrew Teno.
This story highlights the influence that shareholders truly have over corporate leadership. While activist investors aren’t seeking a sweeping corporate takeover, investors nonetheless wield powerful influence over board composition and corporate governance.
Understanding the Rise of Shareholder Activism
According to data published by Harvard University, shareholder activism is on the rise. Activists launched 148 campaigns against 120 different companies in 2022 alone, a 20% jump from the previous year.
Investing activism initially took a dip in 2023, with investors launching only 27 campaigns against 26 companies in the first quarter of the year, a 24% drop from the final quarter of 2022.
However, a changing regulatory environment and an evolving economic landscape will continue to be a hotbed of regulatory activity, and the 2022 trends will likely continue.
As with the story of Carl Icahn, activist shareholders are not universally motivated by pricing changes. Investors may be equally motivated by concerns over industry regulations and ethical considerations.
Regardless of the underlying reasons, executive leadership boards should understand the relationship they have with shareholders and be proactive in addressing shareholder concerns.
Responding to Shareholder Activists
Planning for the negative is never a bad thing. Every organization should have plans to address investors if things go sideways, especially when shareholders take such an active role in company decisions and governance.
How should corporate leaders respond to this type of investor activism? The following tips can help you play defense when investors go on the offensive.
Take a Proactive Stance
The best approach is to take a proactive stance with regard to company operations. The form this takes depends largely on your industry niche, but companies can focus on key areas such as:
- Ensuring board members understand the changing regulatory landscape
- Communicating your risk management strategies
- Updating shareholders on financial performance
- Practicing transparency regarding board composition and compensation
- Creating both short and long-term strategies that recognize a changing market
These steps won’t necessarily prevent activist concerns, but they at least make it clear to shareholders what your current policies are and how you might react to future crises and challenges.
Listen to Shareholders
Sometimes, shareholders simply need to feel heard. Take time to engage shareholders so that you might hear their concerns. Your investors may want to highlight reasons for your lagging performance. Making it a regular practice to engage with shareholders can create a culture of open dialogue and help you avoid confrontation in the future.
There’s a secondary benefit to regular shareholder engagement. In the past, companies had more time to make course corrections and demonstrate results. Now, results are reported every quarter, which limits the time companies have to right the ship.
When shareholders feel heard and understood, they may be more patient and give your company more time to address their concerns, though they still may expect some benchmarks along the way.
Diversify Your Strategies
Shareholders don’t always just want to hear your plan of attack. They also want to hear alternative strategies if your primary plan fails. After all, if companies can project future growth, they should also be able to project future losses.
For most companies, this overlaps with your risk management strategy. What will you do if you face an unexpected challenge?
These concerns are all the more important in an era of geopolitical unrest. Practice transparency with your shareholders regarding your risk mitigation approach, as well as your contingency plans, should your current strategy fall through.
Contingency plans can range anywhere from a new marketing approach, alternative sources of funding, or adjustments to your supply and distribution network. The larger point is to make shareholders aware of your plans, perhaps even for events the shareholders had not themselves considered.
Defend Your Board Members
While your primary posture should be one of transparency, there are times when it becomes necessary to go on the defensive. When shareholder activists question the skills or experience of your board members, it’s perfectly appropriate to defend that board member through a prepared statement.
This statement should make plain the board members’ skills, education, and prior experience in handling issues and their core areas of professional competency.
Highlight any relevant data demonstrating expertise in dealing with crisis situations or flagging company performance. That way, if activists insist on replacing a board member, they’ll be forced to demonstrate that a replacement has skills or competencies that exceed those of the existing member.
Will Shareholder Activism Continue?
By all objective measures, shareholder activism will likely continue throughout 2024, though the degree is yet to be determined. On the one hand, if the stock market experiences an upswing, the financial benefits may boost investor confidence.
On the other hand, concerns over changing regulations and the rise of AI may precipitate more activism moving forward.
The above strategies can strengthen the composition of your corporate leadership and help you prepare for the road ahead. And by forging stronger alliances between boards and shareholders, companies have a greater opportunity to thrive and flourish.
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