Shareholder activism: challenges and strategies for boards

Shareholder activism is on the rise in Australia and it’s here to stay. Recent trends in the US and Europe coupled with an increased focus on climate change activism suggest that the relatively ‘docile’ form of shareholder activism that we have seen up till now in Australia is likely to change in the near future. Boards need to take action now to equip themselves to deal with this changing – and indeed challenging – landscape.

Shareholder activism takes many forms, but the two main types of shareholder activism that we envisage will be more prevalent in corporate Australia in the near future are:

1. Economic activism – where shareholders seek to change the corporate strategy of a firm or influence specific business decisions to increase the value of a company for a near- to medium-term economic gain; and
2. Social activism – where shareholders seek to influence a company’s operations and strategy on Environmental, Sustainability and Governance (ESG) matters. This sort of activism typically takes a medium- to long-term view.   

Whilst we have seen some social activism in Australia (largely through attempts to put forward advisory resolutions or constitutional changes), there has been a relatively limited amount of economic activism compared to other jurisdictions such as the US. Instead, much of what we have been exposed to in Australia is what we would term ‘reactive governance’, where shareholders who are dissatisfied with the management of a company use their requisition and voting rights to remove directors from the board or vote against remuneration reports.

In the US, there is also a growing trend that shows that a high proportion of shareholders are now prepared to exercise their voting rights in order to drive change rather than consider withdrawing investments from companies. These trends are likely to be emulated in Australia, which means that companies can no longer ignore the demands of shareholder activists and will have to address these matters proactively.

The Australian regulatory regime

Australia’s regulatory regime is generally conducive to shareholder activism.

The current landscape allows a degree of shareholder activism in that clear statutory rights are afforded to shareholders with a relatively small shareholding, such as calling shareholder meetings, nominating and removing directors and requisitioning resolutions.[1]

However, it is difficult for activists to definitively dictate the direction of a company even with these statutory rights as case law has confirmed that the management of a company ultimately belongs to the board.[2] This is because a company’s constitution will generally vest the power of management in the board. If a requisitioned resolution seeks to direct the board on the exercise of its powers of management, the board is entitled to dismiss the resolution and is not required to put this to shareholders for consideration. This can make it difficult for shareholder activists to effect any change unless the company’s constitution is amended. However, for this to occur, a special resolution is required which is even more challenging and these are rarely successful given the significant threshold required.[3] It is however still possible, especially if there is strong shareholder support.

This regulatory framework means that shareholder activists in Australia typically promulgate their proposals for change on a number of different fronts: through publicity and the media, through constitutional and advisory resolutions (including voting on remuneration resolutions), and ultimately, through board change.

Engaging with activists

A clear and detailed strategy for shareholder activist engagement is a time-consuming but critical aspect of a board’s role in the current environment. Implemented correctly, however, active shareholder engagement can be a powerful tool to not only deflect criticism but improve outcomes for shareholders generally. A well-considered strategy for engagement also reduces instances of crisis management, and what has occasionally been described as a ’whack-a-mole’ approach to managing shareholder activism.

Set out below are some practical suggestions or ‘rules of engagement’ for boards to effectively interact with shareholder activists:

• Scenario planning is key: Much like a takeover bid defence, scenario planning for shareholder activism is critical. Different shareholder activists have different agendas so boards need a good understanding of the types of shareholder activism and the issues that their particular companies are likely to be exposed to.

Ideally, companies should arm themselves with a team that has expertise in identifying different shareholder activist agendas, managing communications and preparing appropriate response strategies. Make shareholder engagement a regular agenda item at board meetings.

• Understand your strategy and longer term value: The best defence against any action by a shareholder activist is a clear understanding of the strategy of your company and the ability to maximise value for all stakeholders in the medium to long-term. A board that is unable to articulate a clear vision for its company’s future strategy and direction will inevitably struggle to argue against alternative propositions put forward by shareholder activists.

It is important that, as part of this strategy, a board understands not just its short-term value propositions but also the medium- to long-term plan for the company (e.g. carbon transition strategies). This can be particularly challenging for companies which face shareholder proposals that appear to be fundamentally inconsistent with the core business of the company but the ability to innovate and adapt is ultimately critical to the survival of a company. In this regard, shareholder activists can sometimes even bring a different perspective or add value.

• Adopt a constructive mindset and culture: A board that has an automatic suspicion of shareholder activists (regardless of their motivations) will invariably end up with a tense and often hostile relationship with shareholder activists. This 'us–versus-them’ mentality is not always the ideal strategy. Shareholders are arguably the most significant stakeholders in a company and a board is ultimately answerable to its shareholder base. Maintaining an open dialogue to better understand an activist’s interests and goals can lead to surprising perspectives and results. If nothing else, a board will learn more about the motivations of a shareholder activist to enable it to better craft a response strategy.
  
  
• Engage respectfully, not combatively: Other than in scenarios where a shareholder proposal is clearly capricious, our rule of thumb is that boards should always engage with shareholder activists. As tempting as it might be to dismiss a shareholder activist’s approach or proposition, respectful engagement often leads to more effective outcomes.
  
  
• Divide and conquer: Many directors and CEOs are fearful of the negative publicity an activist shareholder can bring, and often feel that they or the most senior executives need to be personally involved in the day-to-day engagement with such activists. This can be hugely time-consuming and distracting. Worse, senior management are not necessarily the best equipped to deal with difficult shareholder communications. We suggest it is preferable not to have senior management caught up in daily or frequent engagement with shareholder activists. Instead, empower a separate committee which has the necessary skillset to engage and report to the board on its outcomes, involving senior management where necessary.
  
  
• If you don’t like it, change it: If a shareholder activist proposes a blunt advisory resolution, rather than resisting the resolution, an alternative for boards is to craft and tailor a more nuanced alternative resolution. This demonstrates a more considered approach to addressing shareholder concerns and offers other shareholders the opportunity to consider the matter but on terms which are better tailored to suit the company’s circumstances.
  
  
• When in doubt, refer to your director’s duties: The aims and objectives of the company and shareholder activists (and indeed different shareholder activists) can sometimes be diametrically opposed. An economic activist may, for example, have a much shorter term view of the actions that should be taken by the board than that of a social activist. In recent years, directors' duties have evolved from the concept of shareholder primacy (ie where directors have a duty to their immediate shareholders) to an understanding that directors also owe duties to the company as a corporate entity, and to some degree, to their creditors.

Shareholder activism is undoubtedly becoming a major challenge for directors in Australian boardrooms. Early preparation and the implementation of appropriate response strategies will enable directors to engage effectively and deliver better outcomes for all shareholders.

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