Shareholder activism is a person acquiring a small stake in a company. It allows the activist to use the equity in their name to pressure the management. The goal is to force the administration to take action. However, this process can be complicated and expensive.
Getting a handle on shareholder activism and corporate defense practices is a must-have for directors and other corporate executives who may face a company becoming an activist target. Whether the target is a company engaged in ESG (environmental, social, and governance) practices or simply a company with a history of activist shareholder activity, defending against such action is critical. Thankfully, attorneys specializing in shareholder activism and corporate defense practices are ready to help boards protect their companies and avoid becoming targets.
Short-term activism can jeopardize a firm’s robustness
Activist shareholders take stakes in firms and push management for share buybacks and other changes. These changes can increase the firm’s and other shareholders’ share prices. However, these short-term gains can jeopardize a firm’s robustness.
Several studies have shown that activist campaigns are ineffective in raising firm value. The reason for this is dispersed ownership, making measuring the impact difficult. It also carries execution risks. Nevertheless, studies have shown that successful engagements tend to improve the ESG performance of target firms.
Short-term shareholder activism has spread across many industries and regions. Short-term campaigns may need to consider the impact on employees. They may also need to account for the broader organizational effects. It can lead to managers diverging from the interests of shareholders. These effects can be challenging to assess and cannot be addressed through contracts.
In recent years, shareholder activism has grown in sophistication. Some activists have reached out to hedge funds. These hedge funds may employ highly incentivized managers and have an advantage over other institutional investors. They also know their investment horizon. They are not constrained by regulatory obstacles and can obtain concentrated positions.
Litigation is the last step
Activists use a variety of tactics to pressure management to take the right actions. They could demand that a corporation withdraws from politically sensitive regions, threaten legal action, or request that the company modify its internal culture or business strategy.
While no company is immune from activist campaigns, smaller companies are increasingly targeted. High-profile campaigns show that institutional investors support an activist agenda. In 2013, 68 percent of proxy fights saw an activist win a seat on a company’s board.
As a rule, litigation is the last step in the shareholder activism process. In many cases, the process will begin with a negotiation between the activist and company executives. However, failed negotiations can lead to other forms of shareholder activism.
Among other things, an activist may seek to add designees to a target company’s board. In addition, an activist may call for greater accountability for environmental degradation, a more supportive workforce, or a better distribution of profit.
Aside from these basic demands, an activist may ask for greater oversight of the company’s political operations or the environment. If these requests are not satisfied, an activist can file a class action lawsuit against the company.
A company should first identify significant shareholders in preparing for an activist campaign. Then, it should clearly articulate its long-term strategic vision. It is also essential to communicate with investors throughout the year. As a part of this effort, a company should highlight the flaws in activist thinking.
As the name implies, an activist is an investor who believes that a company’s management is performing poorly. The investor may focus more on the near-term value of a company rather than on the long-term value of a combined company. To justify its claim, an activist must demonstrate that it is the logical and sensible thing to do.
Ultimately, the best way to prepare for an activist campaign is to understand your markets. It will allow you to prepare in advance and benchmark against your peers.
The most important part of an activist campaign is recognizing the need to engage with investors. While a company’s management team is responsible for day-to-day operations, shareholders can drive change within a publicly traded corporation.
Social and environmental activism
Activist pressure on companies has increased, not just through shareholder proposals. Regulatory complaints and litigation are driving a new wave of pressure on companies. And large institutional investors are using their activism toolkit to try to address these issues.
Environmental and social activism has been a part of many markets worldwide, but it is now becoming more mainstream. This trend is expected to continue. And it may even bring other innovations to shareholder activism.
These programs help a business become more appealing to investors and lower the cost of financing. They can also help create a line of defense against activist campaigns. But public companies need to improve their ESG disclosures and ratings continuously. They should also take steps to prevent becoming an ESG laggards.
Some activists are targeting firms that are relative laggards in their ESG performance. In this case, their actions may be motivated by non-governmental organizations or other groups looking to influence a firm’s operations. They can also use ESG scores to identify weaknesses. And, in some cases, they can rely on alleged duties of care to claim to greenwash.
Another type of activist is focused on values. It is the kind of activism that uses many tactics to build financial value in a company. They can include divestment from politically sensitive areas and may demand greater accountability for environmental degradation or more significant support for workers’ rights.
