5 things boards can do to tackle the surge in shareholder activism 

The recent ousting of Starbucks' chief executive, Laxman Narasimhan, following pressure from an activist investor is just the latest example of a resurgent trend in shareholder activism.

Indeed, it’s fair to say shareholder activism has made a comeback with a vengeance over the past 18 months, reaching a level not seen since before the COVID-19 pandemic.

According to findings from the latest Diligent Market Intelligence Shareholder Activism Report, this resurgence was evidenced by a 4% increase in global activist campaigns in 2023, with 981 companies targeted — the highest number since 2019.

As the now ex-Starbucks CEO and notable other high-profile boardroom casualties can attest to, this is very much a trend that carried through in the first half of 2024, with 622 chief executives having announced their resignations in Q1 of this year alone (a 50% increase on the same period in 2023, which was already a record year for CEO exits). While not all of these departures came as a direct consequence of shareholder activism, many of them did, or were at least influenced by it. And notably, the increase in activism activity was not just in the traditional strongholds of the United States and Europe — as per Diligent Market Intelligence data — but also in Canada, which saw a 25% increase, and Asia, which saw a 13% increase. So, what’s behind this global shift? On the surface, economic factors including rising inflation and market volatility have led activists to look for value creation opportunities in different geographic areas, leading to the global resurgence in shareholder activism. But the trend goes deeper than just financial drivers.

Corporate governance under the spotlight

This new wave of activism is not just more of the same. It is also marked by significant changes in the nature of shareholder demands. The growing influence of environmental, social, and governance (ESG) considerations in particular is leading activists to focus on a wider range of issues.

For instance, scrutiny of executive compensation has intensified, with activists demanding increased transparency and accountability. In the U.S., for example, there was a 37% increase in remuneration-related demands in 2023 compared to the previous year. Institutional investors are now paying closer attention to severance pay disclosures and advocating for the adoption of clawback policies that align with industry standards, while activists are turning to shareholder proposals and proxy contests to drive corporate policy and practice changes.

These developments underscore the the mounting significance of ESG considerations in investment strategies and the imperative for companies to take proactive measures in addressing these issues to uphold shareholder trust and long-term value.

M&A activity in the crosshairs

Mergers and acquisitions (M&A) has been another area of focus for activists. U.S. companies faced a 20% increase in campaigns against M&A deals with a value of more than $100 million. About half of these campaigns achieved at least partial success, demonstrating the influence activists can have on corporate decisions.

Activists argue that companies should not pursue value-destructive M&A deals, particularly in the current market environment, and that companies should prioritize savings and shareholder returns.

Implications for corporate governance: 5 key takeaways for boards

The resurgence of shareholder activism and the changing nature of shareholder demands have profound implications for corporate governance. Companies and their board members must be prepared to address the concerns raised by activists and adopt sound governance practices to mitigate the risks associated with shareholder activism. Our key recommendations include:

• Establish transparent remuneration practices Provide clear and transparent disclosures regarding executive compensation, including severance pay and clawback policies. Align compensation with company performance and ensuring that it is justifiable to shareholders.
• Scrutinize M&A decisions Evaluate the merits of M&A transactions, considering their impact on shareholder value and long-term strategy. Prioritize deals that align with your organization’s core competencies and demonstrate a clear path to value creation.
• Engage with activists constructively Enable open lines of communication with activists and engaging in constructive dialogue. Listen to their concerns and consider their perspectives when making strategic decisions.
• Embrace the universal proxy thoughtfully Comprehend the implications of the universal proxy and devise strategies to effectively engage with shareholders. Consider adopting best practices for proxy voting and minority slate nominations.
• Leverage technology for stronger governance Use board management software to strengthen corporate governance practices and enhance transparency and accountability. By integrating purpose-built digital tools into the boardroom, companies can streamline board activities, ensure secure communication, and facilitate real-time access to critical information that helps you stay aligned with changing market conditions and stakeholder expectations, while ultimately enabling more informed decision-making.

Mitigating the risks of shareholder activism with Diligent Boards

Amid the growing influence of shareholder activism, it has become more important than ever for boards to manage associated risks swiftly, securely, and effectively. Market-leading board management software, Diligent Boards, can play a crucial role in this effort.

In particular, Diligent Boards’ built-in Compensation & Governance Intelligence tool empowers businesses to effectively address the concerns raised by activist investors and strengthen governance practices. The platform provides invaluable insights into shareholder voting behaviors, proxy advisor recommendations, and the broader landscape of activist engagement.

By leveraging this data, public companies can strategically position themselves ahead of annual general meetings (AGMs), ensuring their governance structures are fortified against potential activist campaigns. The tool also facilitates the monitoring of shareholder activism through timely email alerts and comprehensive profiles, enabling proactive management of investor relations.

Moreover, Compensation & Governance Intelligence aids in modeling and benchmarking pay-for-performance plans that align with recommendations from influential proxy advisors like Glass Lewis. This capability is essential for controlling the compensation narrative and addressing the increasing demands for clarity on environmental, social, and governance (ESG) criteria.

By providing access to standardized company bylaws, director skills assessments, and proxy voting recommendations, Diligent Boards helps you seamlessly identify and mitigate governance risks, ensuring that governance practices are robust and responsive to the ever-evolving challenges posed by shareholder activism.

Enhance governance oversight with insightful intelligence

Foster shareholder engagement while preemptively addressing compensation and ESG scrutiny. Request a demo of the Diligent One Platform today.