2023 looks to be another challenging year for many companies, with the potential for continued supply chain disruption, inflation, rising interest rates and lagging stock prices. These factors create a ripe environment for shareholder activism, which has seen outsized growth in recent years due to its success in generating returns along with valuable publicity for activist funds and their investors.
Expanding Activist Universe
As the macro landscape continues to shift, so too does the activist playbook. No longer is activism solely the domain of hedge funds with agendas centered on maximizing financial returns. Traditional long-term investors are increasingly employing activist strategies, former founders and individual investors holding de minimis stakes are seeking Board seats, a host of new ESG funds are pressuring companies to adopt their climate or social agendas, while even newer anti-ESG funds are demanding companies retract their ESG commitments and focus only on shareholder value creation. With even controlled companies facing attacks, no company is truly safe.
Universal Proxy Card Democratizes Voting
Adding to the potential pressure, the SEC’s new Universal Proxy rules allow shareholders to vote for director nominees from separate slates on a single card. By further democratizing the director election process and significantly reducing the costs for activists to wage a proxy contest – as they will no longer need to mail their proxy card repeatedly to all shareholders – the SEC has paved the way for emerging activists to launch publicity- oriented campaigns. Traditional economic activists may also benefit from shareholders’ newfound ability to mix- and-match board candidates, applying new tactics to gain advantage in fights and potentially pressure companies into settling.
Potential Vulnerability on Multiple Fronts
More than ever, companies should conduct a thorough and candid self-evaluation of their vulnerabilities and preparedness before an activist builds a position and launches a campaign. This should include an assessment of financial performance based on Total Shareholder Return (TSR) relative to peers, revenue growth, margin profile, among other metrics; management credibility in meeting or exceeding guidance targets and their track record of value creation; corporate governance practices, including the composition, tenure and diversity of the board; and issues related to environmental and social causes, including labor issues. All of this should be grounded in research and direct feedback from shareholders, analysts, employees, customers and other stakeholders. In the face of potential agitation from activists, FGS Global is helping clients prepare in advance for a range of potential attacks, while also supporting companies who are actively engaging with an activist – helping boards, management and communications teams develop and execute communications strategies that meet their objectives and lead to positive outcomes.
How Companies Need to Prepare
Identifying vulnerabilities, refining their investment thesis and developing key messaging
Creating/updating activist preparedness plans (also known as “breaktheglass” plans) for use if an activist engages with a company and/or launches a public campaign for change, or a third party makes an unsolicited offer
Reinforcing director capabilities – evaluate and edit biographies in proxy statements and on corporate websites to ensure they directly link directors’ skills and experiences to the business and how they contribute to value creation and/or risk mitigation
Sharpening ESG narratives and ensuring they’re consistent with the company’s mission, vision and values and disseminated to key stakeholders
Preparing and coaching management and directors for shareholder and proxy advisor meetings as well as media engagements to ensure they can speak compellingly about the issues at hand
Developing comprehensive media and IR strategies to further amplify the company’s corporate narrative, reach new shareholders and preempt potential activist attacks
There has been a sea of change in shareholder activism, and as we head into the 2023 proxy season, companies that act decisively and plan diligently will be well-equipped to defend themselves and avoid the cost, distraction and reputational impact of a protracted proxy contest.