Shareholder Activism and the Board of Directors

Audit Committees: The Standing Pillar of Corporate Governance | BoardBookit

A challenge facing board members today is deciding to what extent they should engage with shareholders, particularly activist shareholders. Some believe that the board has a responsibility to engage with shareholders as their representative, while others posit that the board should rely on management to engage with shareholders. For either course of action, it is essential to establish clear guidelines regarding how and when the board of directors engages with shareholders and how shareholder activism can affect those interactions. 

How Shareholder Activism is Shaping the Board

The era of stakeholder governance and corporations with a purpose beyond profits is taking hold, with corporate directors expected to answer to more constituencies and shoulder a more significant burden than ever before. At the same time, investors—both in the US and abroad—continue to expect corporations to deliver superior financial performance over both the short and long term.

This convergence of purpose and performance will shape not only discussions in the boardroom but also the complexion of shareholder activism. As the nature of the activist threat has evolved, it has created additional obstacles for directors to navigate. But at the same time, this environment has created additional opportunities for boards to level the activist playing field and lead investors and other stakeholders into this new era.

Activists are filling a governance void that afflicts today’s public companies. Boards and management are beginning to take a closer look at themselves in regards to activist agendas. A shift of a more forward focus is resulting from this internal reflection and scrutiny. In this sense, activism can be a good thing. By keeping corporate management in the mindset of considering the future impacts of their actions, positive change can become easier to manage. The marked difference between the board member and shareholder activist agendas, however, is the period on which they focus. While a board has their priority on long-term goals, the activism campaigns tend to focus on short-term performance and return on investment. That’s where a balance must be struck to ensure both parties are satisfied.

Examples of Shareholder Activism

Investopedia shares a few examples to expound upon the impact of shareholder activism. Some of these investors take on specific causes such as Bill Ackman and his public relations campaign against the company Herbalife. Others are more focused on the broader issues facing organizations. 

In contrast with Mr. Ackman, many hedge funds have been recently pushing for change, related to their partners’ environmental, social, and governance (ESG) concerns. Trian Partners, Blue Harbour, Red Mountain Capital, and ValueAct are among the top funds, which have prioritized ESG in various forms. Some of these funds experience pressure from their investors, who endeavor to demonstrate their commitment to corporate social responsibility through their investments. This responsibility can take the form of environmental concerns such as climate change or governance concerns such as board room diversity.

Engaging With Activist Shareholders

When deciding to engage with shareholders, the director chosen for the job should be an independent director rather than an executive director to add objectivity to the discussion and insulate management. Often if a shareholder is approaching the board, it is likely due to some form of dissatisfaction with the organization’s performance or the handling of specific issues. 

The board should be open to not only listening to shareholders but also to collecting input from them to understand what is on investors’ minds. That said, some investors will have activist agendas from the outset, and others may develop activist tendencies if it’s in their interest and, usually, in the interest of the company. The board has a duty to see that the company is prepared for activists and responds to them effectively.

For future investment situations, having an understanding of how to engage with potential activist investors will make the process smoother. The ability to objectively consider the activist’s ideas and not only identify areas of consensus but also to be able to demonstrate to other investors that management and the board are aligned with long-term shareholder value will strengthen the board’s position for future engagements. 

Connect Board Members and Shareholders with BoardBookit

BoardBookit makes connecting and sharing information with board members and shareholders a breeze. The unlimited user model ensures that the bill won’t increase if organizations opt to organize engagements with shareholders within the board portal. Keeping the meeting documents organized and the information secure, BoardBookit allows for transparency and collaboration at all levels. Start a conversation today! 

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2020-08-12T14:06:36-04:00