Shareholder activism

Financial advisory and asset management firm Lazard undertakes an annual review of global shareholder activism. Released earlier this month, the 2023 review saw a 7% increase globally, with Europe and Asia-Pacific (APAC) experiencing increases of 26% and 55% respectively against their five-year averages. In prior years, APAC activism was concentrated in Japan but 2023 saw activism dispersed across Japan, South Korea and Australia.

A key focus for activist shareholders was pushing for change – and not just of the board – cost cuts, management changes, strategic direction or simply the acceleration of changes already in train. And while historically activism was the domain of institutional investors, this year saw a record 77 first timers. Smaller investors, coalitions and “wolf packs” (multiple hedge funds swarming the same target) were increasing features of shareholder activism.

A group of Redditors (users of the website Reddit) shook up the market in 2021 making billions on the stock market by purchasing GameStop shares using fractional share-trading apps. This cost hedge fund investors US$12.5 billion. The film Dumb Money (released last year and available in New Zealand on Neon) tells the story of how shares in GameStop – a mall videogame store – inexplicably rose 1,915 per cent in a month, driven by an enthusiastic bunch of individual investors riling against “short sellers”, investors that are essentially gambling on a drop in share prices.

Starbucks is currently facing its own David vs Goliath challenge. The Strategic Organizing Center (SOC), a coalition of trade unions, including the Service Employees International Union that owns a small percentage of Starbucks shares, is battling Starbucks over workers’ conditions and pay agreements. The SOC has nominated three candidates for board roles at Starbucks claiming the current board’s labour practices are damaging reputation and employee relations, creating legal risk and impacting shareholder value.

Closer to home, AGL energy, Australia’s largest power producer, was dealt two major activist blows in 2022. First, the company was forced to scrap a demerger plan and then, at the AGM, after months of shareholder pressure against AGL’s response to climate change led by Grok Ventures (which holds an 11.3% shareholding), shareholders elected four activist-backed nominees to its board and rejected the executive pay plan. However, the climate transition action plan was accepted despite concerns that it wasn’t ambitious enough.

Activism isn’t new, but shareholder activism is on the increase and, in many guises, it has become a regular feature of the corporate landscape. Where shareholders may have historically sold their shares as a sign of disapproval, these days they are just as likely to join in (or lead) calls for action.

With the rise of social media “finfluencers” (financial influencers that do not have any financial background or qualifications and no accountability) and trading apps, the power of shareholder activism can no longer be underestimated. It is no longer just about the majority shareholders or the large hedge funds.

Shareholder activism isn’t a black swan, it is a risk that must be managed alongside any other corporate risk.

Considerations for boards

• Risk management – incorporate shareholder activism into your risk management processes and have plans in place to mitigate and respond to issues.
• Activism trends – monitor activism trends, be aware of laws and regulations relating to shareholder activism and engagement and anticipate potential issues that may result in activism. Keep abreast of changing stakeholder expectations and how these may impact your company.
• Monitor strategy – set and regularly monitor and adapt your strategic direction as needed to address issues that may attract shareholder attention.
• Long-term focus – institutional investors are normally long-term shareholders, so focus on long-term value creation, not just short-term returns.
• Shareholder engagement and responsiveness – listen to and understand the concerns of your shareholders and act proactively to address them.
• Transparency – be transparent and report on environmental (including climate), social and governance matters. Ensure that you communicate financial and non-financial results with consideration of the expectations of newer and younger investors and different audiences.
• Board evaluations – undertake regular board reviews and give consideration to the changing competencies and diversity required on the board as well as board structure. Companies that are seen to have, or keep, underperforming directors can draw the wrath of shareholders.