The Growing Popularity of Shareholder Activism
The growing popularity of shareholder activism has made institutional and opportunistic investors eager to take a stand. It’s not only the size of a company that makes them a target of activism, though. Activists often rely on environmental, social, and governance (ESG) issues to spur action.
Environmental and social impacts of companies
It’s essential to understand the different types of shareholder activism. While there’s no surefire way to prevent these types of activities, you can do a few things to mitigate their risks. The topic of shareholder activism is an important one. But the debate over whether activism is a positive or negative thing is still controversial. While some argue for empowering shareholders, others warn against making them too powerful. Various cultural, normative, and environmental contexts also impact the benefits and costs of activism. Some of these contexts may affect the short-term effects of activism, while other factors can have longer-term consequences. Recent scholarly output on shareholder activism has increased considerably. However, the nature of this research needs to be clarified. Prior studies tend to model activism by examining the presence or absence of “shareholder activism” or “non-shareholder activism.” In addition, these studies typically do not investigate the emotional implications of such activity. One method for assessing the dynamics of shareholder activism is to explore its relationship with environmental and social impacts on companies. To do so, researchers can use longitudinal analyses that study how shareholder activism changes over time. For example, one group of researchers has studied the effect of the Carbon Disclosure Project on shareholder activism. They found that firms targeted by environmental shareholder proposals are more likely to participate in the project. This result is powerful for firms that do not have a high ex-ante ESG score.
ESG activism is a powerful lever for opportunistic shareholders
One of the most powerful levers available to opportunistic shareholders is ESG activism. Activist groups push for laws to mandate compliance with ESG goals, and they can also give awards to companies that adopt public or private ESG frameworks. In return, these groups can receive press coverage. However, such a campaign could put a firm at risk. Attempts to pass new regulations are slow and often controversial. In the meantime, firms can take steps to implement their ESG policies. Some companies focus on corporate governance, environmental stewardship, executive compensation, and more. While ESG advocates argue that today’s policymakers must consider social, environmental, and governance issues, these goals’ definitions are somewhat ambiguous. Many are not universally accepted, and some may be threatening investor rights. As a result, there is an ongoing debate about whether ESG should be mandated or voluntary. The discussion has focused on the cost of implementation and how to achieve specific goals. Some critics of the market economy argue that for-profit corporations should engage in activism. They point to the long history of the practice in academia and the business world.
Discarding underperforming sections of the business
In the corporate world, shareholder activism is a force to be reckoned with. As a result, companies are often forced to make structural changes, like restructuring their real estate holdings. It’s worth exploring the various types of shareholder activism and the associated tactics. The best way to tackle these challenges is to arm yourself with the necessary knowledge. One of the best methods of minimizing risks is to anticipate an activist’s every move. This includes drafting a tactical plan and identifying key management figures. Also, it’s crucial to locate the best options for external advisors. The company may dismiss any activist request as a waste of time and energy, but this doesn’t mean an activist is necessarily the wrong person. Despite this, they may have a good idea. A small stake in less than ten percent of outstanding shares can be enough to launch a successful campaign.
Mitigating shareholder activism risks
If you are planning to respond to shareholder activism, it is essential to have a tactical plan in place. This should include details on how the response team will be activated and the roles of external advisers. It should also outline the rules of engagement and escalation guidelines. These methods can be expensive, however. Prominent market participants and hedge funds are more likely to use high-cost strategies. In the event of an activist, management is often the lead in responding. However, boards should take an active role in preparing the company for the possibility of an activist attack.
Institutional investors are keen to support activism
The number of institutional investors keen to support shareholder activism is growing. They want to help companies make the right decisions for their shareholders. Institutional investors are a powerful force in the corporate landscape. Their clients place their savings with them to get higher returns. But they also have a fiduciary duty to achieve their clients’ objectives. They turn to activism when they do not see the long-term value in a company’s governance practices. Hedge funds account for most activist activity. However, other shareholders are turning to activists for a variety of reasons. Investors who are dissatisfied with a company’s management practices can use proxy activism as a way to draw attention to their concerns. Typically, a proxy fight is expensive, and the activists’ tools influence the costs to exert influence. For example, a proxy fight may require travel expenses. Often, these are covered by an advisory fee. If the company does not want to make changes, it is often difficult for institutional investors to convince them. The goal of activism is to get the company to change. A new CEO or board of directors is sometimes enough. Alternatively, shareholders can use their votes to oust an audit committee member. In a perfect world, institutions never have to intervene in corporate governance. Nonetheless, the emergence of activism has increased the chances of governance concerns.
