Activism: Mind the Governance

Luca Giacalone pens an article for the 21st anniversary issue of the Governance magazine. Luca’s article for this special issue focused on what boards need to do to lessen the likelihood of being the target of an activist investor.

Shareholder activism has evolved from a mostly US phenomenon to a global one, with numerous companies across the UK, Continental Europe, and Japan being subject to a growing number of investor demands, such as selling non-core assets or improving capital allocation. Moreover, as activist funds have continued to grow and their methods have become more widely accepted by traditional investors, companies of all sizes and in all geographies have become potential targets for activists.

Campaigns focused on ESG issues are also becoming more common, with some activists making them a core part of their campaigns with the aim of leveraging all of the target
company’s vulnerabilities. The latest example being the campaign at ExxonMobil initiated by newly formed ngine No 1, which is challenging the company’s slow transition away from fossil fuels.

This increased activism has often shown a lack of preparedness from boards, who find themselves unable to provide reassuring responses to the well-crafted arguments
presented by activists. In 2019 SquareWell Partners undertook a survey to better understand how asset managers evaluate activist situations. The respondents to the survey managed approximately $10.4trn in assets and the results highlighted the changing attitudes toward activism. Eighty-seven per cent of the surveyed asset managers considered activism to be a useful market force.

With the increased reach of activists and their ability to gather support from traditional investors, it is imperative for boards o conduct a continuous assessment of the vulnerabilities of the management teams they oversee. This is even more mportant given the current environment as shareholders will want to understand the lessons learned from the Covid-19 crisis, such as any gaps identified in the company’s risk and crisis management strategy and the board’s preparedness to respond. Boards are also expected to emerge with a better view on the quality of the management bench, the resiliency of the business, and what skills and experience might be missing in the boardroom. Board members are likely to be held accountable at companies that are perceived not to have taken the necessary measures to manage the crisis, including the protection of its workforce.

You can access the full article here (subscription required).