Wharton@Work

March 2024 | Finance

Shareholder Activism Trends: What Leaders Need to Know

What’s one of the top concerns keeping business leaders up at night? An increasingly realistic fear is being targeted by a small group of investors wielding immense power, challenging management teams, and pushing for sweeping organizational changes. While shareholder activism isn’t new, their targets and tactics, and a key regulatory reform, are reshaping their efforts and widening their reach. To effectively counter those efforts, and get a better night’s sleep, leaders need a solid understanding of activists and how they operate today.

Wharton Finance professor and senior director of the Harris Family Alternative Investments Program Kevin Kaiser says leaders must grasp that being a relatively high-performing, large company doesn’t mean they won’t be a target. While activist investors used to focus primarily on underperforming or distressed organizations, seeking to grow shareholder value through efforts to change leadership, sell assets, or restructure, there has been a notable shift in strategy. “If there is a perception that shareholder returns could be better, you could be at risk,” says Kaiser. “Activists may see an opportunity to make strategic changes that they believe could create greater value. Consider that Salesforce, Alphabet, and Disney were all targets in 2023.”

Settlements over Proxy Fights

Another important trend is the decline in the U.S. of proxy fights (in which shareholders are asked to vote for or against activists’ choice of board members). It’s more likely now that you can settle with activists instead of battling it out. Kaiser says activists are “still winning many board seats — 2023 was a record year worldwide — but the percentage won through proxy contests in the U.S. is relatively low. U.S. companies are choosing to grant some board seats, make changes to their strategy or governance, or address other activist concerns rather than involving their shareholders. In Europe, though, the percentage of board seats won through proxy fights was very high.”

In the Shareholder Activism: Activating Change for Value Creation program, Kaiser explains that a growing number of North American companies are realizing that activists have a “reasonable likelihood of success. I expect we’ll hear about more and more settlements in the next few months, ahead of their May or June annual general meetings.”

Legislative Developments

When organizations don’t settle with activists, the new SEC rules regarding use of universal proxy cards mean activists can have their nominees for the board of directors included in the company’s proxy materials. The new laws around this are intended to enhance shareholder rights and corporate governance by providing shareholders with a means to influence board composition and corporate decision making. In addition to federal rules, there are differences by state in how shareholder votes can drive impact, including on the percentage of shares owned and the amount of time those shares have been owned before a shareholder group can nominate directors.

“Previously, the dissidents [activists] would have their own proxy statement, so shareholders would get one statement from the company and one from the dissidents,” says Kaiser. “If shareholders submitted both, the last one received would be the one that was counted. But now the rules have changed. Universal proxy access took effect on January 31, 2022, which allows shareholders to vote for a mix of management and dissident nominees on a single proxy card in a contested election.” The rule affects all non-exempt director election contests with the exception of those involving registered investment companies and business development companies.

Kaiser says the new rule is likely why settlements have gone up in the U.S. but not in Europe. But because the universal proxy card is so new, it’s “unclear who benefits at this point. In the Shareholder Activism: Activating Change for Value Creation program, we discuss the impact of the universal proxy card and what it means for both sides.” Because participants typically represent organizations, activists, and those who work with and advise them, it promises to be a robust discussion.

Changes in ESG-Related Activism

In 2021, 20 percent of all activist campaigns focused on environmental, social, and governance issues. That number represents the peak of a trend that grew over the previous decade. The most notable example is Engine No. 1’s successful 2021 campaign against Exxon Mobil, in which the investors placed three new directors on the board who advocated for better climate disclosures and a more sustainable business strategy.

Kaiser says such campaigns are now on the decline, but is careful to separate the G from the E and S. “The E and S activism that rose quickly has now started to fall just as quickly, because it became clear that asking the board and management to make changes that don’t create value for the company is essentially asking them to violate their fiduciary duty of care and loyalty. You can’t push board members to take actions that can erode value. When the E or S activist campaigns align with creating value for the company, then there is no problem. When not aligned, then the G type of activism becomes more important. The G activism is there to ensure the board and management are doing their duty of care and loyalty to enforce the alignment with value creation. Shareholder Activism is primarily focused on the G type of activism. That is the job of the board, and when they're not doing it, they’re going to attract activists.”

Countering Activists Takes Expertise and Diligence

When a company is targeted by shareholder activists, they need the people responsible for countering them to better understand their adversaries. Kaiser says when lawyers are invited into his classroom, they tell program participants that the activists aren't prepared and don't have a deep understanding of the company. But when an activist describes what they do and how they operate, “every single person in all of my classes — the executives, the MBAs, and the undergrads — see that, in at least some cases, it is the people inside the targeted company who don't understand what they're doing.”

“If they did understand activists,” he continues, “they wouldn't be so dismissive of them. They'd realize that some activists have spent months, and sometimes years, doing their research. They've talked to customers, to suppliers, to former employees. The reality is the company and their lawyers are often unaware of the quality of the activists’ work, which means they have a hard time effectively countering them. The activists have access to much of the same data, but in many cases, they have analyzed it differently and come to very different conclusions than those of the company leaders. It would be really useful for those leaders, before they say that the activist is wrong, to figure out how the activist is doing what they're doing. That's what we are teaching.”