Investor Activism: What Lies Ahead

| Edna Twumwaa Frimpong

This year’s activists’ outlook has shed considerable light on where the investment landscape is headed. Activism is gaining traction and the backing of prominent institutional investors. We have seen activism change the corporate governance landscape many times: The Dodd-Frank Act that mandated issuers to present executive compensation on an advisory basis to shareholders’ vote otherwise known as “Say on Pay” came to fruition because of aggressive pursuit by activist investors. Other activism mechanisms have also yielded results on CEO pay ratio disclosure requirements, for example.

The Importance of Board Refreshment and Assessment

The pandemic, in particular, has likely contributed to the rise of shareholder activism in the last two years, highlighting how companies and boards handled crisis management. Any perceived failures, especially around human capital, workforce health, and safety, or wider skills gaps could have been a trigger point for activism.

To combat these shortcomings, directors must undertake periodic board refreshments and regularly assess the contributions and effectiveness of their fellow board members. In this regard, most companies should have an annual board appraisal and use this as a valuable tool to help them identify and readjust according to the business needs and the complex business climate. When directors have stayed too long on a board, they tend to become unified with management, and this can limit their ability to oversee performance. Again, boards that are dominated by older members also tend to be out of touch with current trends. Younger board members are considered to bring innovative ideas to the table, but their risk appetite too may be higher than other members. That notwithstanding, investors are compelling boards to bring in younger members.

Activism Success Rate Increases

In our report titled Activist Investors: Setting the Pace on ESG, the data suggests that the success rate of activism has increased significantly. Our findings suggest that one in every eight shareholder activism campaigns were successful in 2021 compared to one out of nine in 2020. This year’s renewed focus on ESG implies that shareholders are closely looking at issuers’ ESG policies to ensure they are robust, with in-built business resilience and the capacity to positively impact financial returns.

ESG funds outperforming other funds has been largely documented. Dutch investment company Robeco, for example, did research on ESG Funds and ETFs in 2020 and found that sustainable funds, and Sustainable Exchange-Traded Funds (ETFs) outperformed their peers during 2020 pandemic-induced global economic downturn. This was in part because sustainable funds have relatively reduced exposure to the energy sector and have more to do with other sectors such as technology and healthcare. These are the sectors that profited during the pandemic, as they are considered more innovative and socially beneficial. As our report Activist Investors: Setting the Pace on ESG suggests, the Average Total Shareholder Return (TSR) for 2021 target companies in 2021 dropped by 19 percentage points and this could be a potential trigger point for potential activism. With sustainable performance on investors’ radar, campaigns on ESG generally garnered support from institutional investors.

It’s undoubtedly time for boards to give ESG the needed attention and embed it into their core strategy. Dismissing the current momentum around it may be a significant recipe and exposure to the risk of activism.

Likely Investor Focus for Activism in the Future

This year’s proxy season has shown that there is going to be great pressure on issuers and their boards to improve their disclosure on ESG practices, such as climate change targets, and focus on diversity and inclusion. However, as boards look to strengthen their ESG practices and align with their investors’ expectations, they shouldn’t discard other issues that are likely to be on activists’ radars in the coming future. With the current rate of cybercrime, it would not be surprising if activist investors turned an eye to the issue. We have witnessed skyrocketing losses from cybercrime in recent times which sufficiently depletes shareholders’ value. According to market reports, losses from cybercrime have almost doubled to USD 1TRILLION from USD 600Billion in 2020.

This year, we saw activist investors pushing for more climate-competent directors to join the boards of target companies to address environmental concerns. With the rise in focus on cybersecurity, this might happen with tech-savvy directors too. Particularly for issuers that are especially vulnerable to cyber-attacks such as the healthcare and financial sectors, activist investors may run campaigns against them. In our latest activist investors report, the data suggested that directors with technology credentials significantly lag other skill sets that directors bring to the board. Specifically, only 19% of directors that engaged with activist investors in 2021 had technology backgrounds. This could be a potential red flag for activist investors.

As activist investors’ demands grow more extensive in scope, it will be very interesting to see how it affects the regulatory landscape in the not-so-distant future.

About the Author

Edna Twumwaa Frimpong

Edna Twumwaa Frimpong

Head of International Research

Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US. She joined Diligent Institute in 2021 after six years with CGLytics  -- a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent -- where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise.  She received her Master's Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor's Degree in Administration, Insurance and Risk Management from the University of Ghana.