Why ESG is the next big thing for shareholder engagement
Investor activism is nothing new by any stretch of the imagination, having been personified by the siege antics of 1980s Wall Street caricatures. However, since then, there is growing evidence that shareholder activism has achieved acceptance as a legitimate investment strategy.
For years, corporate boards and management have faced the daunting challenge of responding to and fending off threats from shareholder activists. Typically, this describes the ‘corporate raider’ breed of investor who builds up a large equity stake and deploys high pressure tactics to trigger management or structural changes and gain board seats to shift corporate strategy – all with the sole purpose of driving up the share price of underperforming companies. And this trend shows no sign of abating.
In fact, according to Activist Insight’s 2018 Review, the number of companies publicly targeted hit record highs in the U.S, Canada, Japan, Australia, and the UK – with activist funds investing a record $65bn of fresh capital. And with Elliott’s and Starboard’s recent march on Ebay, as well as the well documented ongoing battle between Bramson and Barclays, all signs point towards further activist movement over the course of 2019.
The changing activist approach
But it’s not just the numbers that are changing. The tactics and objectives of activists are changing too. While once upon a time, activists revelled in an image of barbarian outlaws breaching the defences of corporate fortresses, today an activist may be just as likely to play the long game. They often now choose to apply soft pressure over a longer duration and coalesce with other advocates to turn up the heat, leading to some long-term focused asset managers aligning with their voice. As a result, we are increasingly seeing target companies opening dialogues and agreeing settlements on terms they may not have considered before.
Increasing external scrutiny
Today, Chief Executives and their inner circles are under scrutiny on an unprecedented scale, as they seek to reconcile their responsibilities of delivering both short and long-term shareholder return, whilst also being held to account more and more on issues that have wider societal significance. But an interesting trend is emerging, seeing the two converge to form a new kind of paradigm shift; investor activism on environmental, governance and social (ESG) issues.
Holding companies to account
Earlier this year activist investor group Arjuna Capital announced it was targeting a dozen financial and technology firms, including Facebook, Alphabet and Bank of America, with a shareholder proposal to act on the extent of their gender pay gaps. Similarly, last year the $5 billion hedge fund Jana Impact Capital joined forces with the California State Teachers’ Retirement System (CalSTRS), which has an estimated $2 billion in Apple equity, to campaign on concerns on the impact of smartphones on childhood development and calling on Apple to implement new parental control measures on their devices.
Cynics may argue that both were nothing more than publicity campaigns to garner support from other institutions who have expressed a socially conscious agenda, but there is no denying they tap into an activist mindset that is swelling in public consciousness who now wield new (and perhaps untapped) power to hold corporates to account.
Now it would be naïve to suggest that this is all down to pure altruism or moral responsibility, after all there is evidence to suggest that socially responsible investing delivers higher returns and companies with better governance principles achieve a higher share price and a better credit rating. Indeed, Vanguard recently noted in its stewardship report, “A consensus is growing in the investment community that certain environmental, social, and governance matters can significantly affect a public company’s long-term financial value.” So, it’s not surprising that proxy support for ESG proposals have been rising for the past four years.
So, should corporates worry about proxy contests from ESG activists?
Well, it would be premature to suggest that ESG activist investors will command as much attention as or exert as much pressure as traditional activist funds – especially as they are fewer in number and typically employ less confrontational or disruptive tactics.
However, there is still reason to suggest that corporates need to up their game when it comes to ESG practices and disclosure, as 81% of investors believe companies do not adequately disclose their ESG risks that could affect their current business models.
As such, it is crucial that companies pay far greater attention on articulating and demonstrating how ESG approaches influence everyday business decisions, focus on engaging with investor audiences around ESG metrics and commit to implementing tangible changes to proactively unlock business value.
The bottom line is the activist game is changing and disparate stakeholder interests are on a collision course. Today, your company’s investors are more than your financial shareholders, they’re also your customers, your employees – and everything you say, think and stand for must go wider, delve deeper and reach wider.
In practice, this means companies must be far more robust in their ESG materiality assessments and use it to inform how they measure impact, how they implement new programmes and how they communicate success – creating a working framework to engage with all stakeholders and investor audiences.
Ludo Baynham-Herd, Corporate and Financial Communications
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November 20, 2023
November 15, 2023