Proxy season is right around the corner, with annual general meetings (AGMs) starting as early as this month. AGMs are the time that shareholders can get a word in with the company, not by shouting and screaming, but rather by filing a proxy statement to the SEC.
Proxy season is prime time for activist investors, or investors who wish to see change in a company they hold shares in. And, in recent years, companies are working more to “defend against activist campaigns,” according to law firm Sullivan & Cromwell.
Last year, 199 proxy campaigns were launched in the US, a 8% increase from 2021 but in line with the 203 activist campaigns in 2019, according to the Harvard Law School Forum on Corporate Governance.
David Hunker, EY’s Americas shareholder activism defense leader, told CFO Brew that he advises companies to think like activists as proxy season approaches, which means taking some steps back—because when an activist shows up and makes public comments, they’re making their argument not only to the management or board, they’re making that argument to the shareholders as well, Hunker said.
Mark DesJardine, associate professor of business administration at the Tuck School of Business at Dartmouth College, said even certain word choices used by executives can tip off investors to a company’s priorities, or be added to aid existing campaigns, based on research he did last year.
“Shareholders are looking for cues of when CEOs are really paying attention to them, or when are they are just going off on their own way,” DesJardine told CFO Brew, adding that heavy usage of “I” or “my” as well as “independence” and “control” can suggest to astute investors that management might not be focused on larger interests.
“If a CEO is off course, then a lot more is on the line for shareholders; a lot more can go wrong for shareholders,” DesJardine said. So the most discerning shareholders will closely look for all data points—besides the obvious financial ones, such as Capex and firm performance—to try to gauge leadership’s thinking and capabilities in the market environment.
Public campaigns: It used to be fairly common for a company to find out there was an activist when the investor filed a proxy statement, Hunker said, but now activists rarely announce publicly before approaching the company, although it can be a small window of time between the two events.
Activists have worked hard to “rebrand themselves,” Hunker said, from the days of the more traditional ’80s activist investors who were often referred to as “corporate raiders.” Instead of going public as the first step, activists will almost always attempt to work with the company first, Hunker said, it helps their argument with other shareholders as they are able to show that they have tried to work with the company.
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Hunker said he reminds companies that the pressure is only temporary. That’s not to say it can’t get messy; Hunker said that activists with financial resources will often hire research firms to find information on a company, offering former employees compensation to chat to provide further context.
Focus on ESG: Over the past few years, themes that fall under ESG, or environmental, social and governance, have gained significant attention as investors encourage companies to focus on things such as carbon emissions and wider social impact.
Some activists may be seeking change though a particular process, such as ISS’s proxy filing urging Starbucks to review their employment policies, others may be aiming for further representation, such as board seats. An example of a significant change due to activist investor ESG action happened at ExxonMobil, when activist investor and hedge fund Engine No. 1 won three board seats with the aim of encouraging the firm to invest in cleaner energy.
Last year, a new type of ESG activist—the anti- ESG investor—emerged: Vivek Ramaswamy, founder of Strive Asset Management, launched a firm to rival those of dominant proxy advisors ISS and Glass Lewis to advocate for investors seeking to dissuade dialogue on these topics.
More options for all? In an SEC change from last year, investors are now able to choose, and vote on, a list of directors, versus the previous system which offered only two options. Essentially, the options grew from only A or B to A, B, C, D, E, F, and G.
“As a result of the universal proxy, there is a much greater emphasis on board composition, notably nominee expertise and skills,” Joan Conley, Nasdaq’s senior advisor on corporate governance and ESG programs told CFO Brew. “[Boards are] spending time looking at the skill set for the future, and ensuring that the skills that they’ve identified are aligned with a corporate strategy, and thus that the director nominees are aligned with a corporate strategy.”
“Activism is theater and politics,” Hunker said, adding that activists are focused on how they tell the story to resonate with other shareholders. “One of the things that I hear from clients a lot, when an activist does show up is…[Companies say ‘Activists’] ideas, they wouldn’t actually work, that wouldn’t actually get to fruition. You couldn’t actually sell the company in this environment.’”—KT