Activist Investors: Setting the Pace on ESG

| Edna Twumwaa Frimpong

Executive Summary

This report follows up a similar study published by Diligent (formerly CGLytics, A Diligent Brand) in July 2020 and examines the activities of activist investors and the characteristics of the companies they targeted in the first eight months of 2020.

In this report, Diligent Institute sought to learn more about the steps companies are taking to become better prepared for shareholder activism. The paper evaluates the number of companies that faced activism in 2020 and 2021, while drawing comparisons between the two years. Our data suggests that activist investor momentum will continue throughout the rest of 2021 and into 2022. The paper also touches on some of the governance characteristics and fundamentals of targeted companies. Additionally, we undertook a case study of three oil companies that received extensive press, as they were the targets of successful activism campaigns in 2021. The goal of the case study provides instructive insights on how shareholder activism is evolving and how issuers can best prepare.


To better understand current practices, we worked with the Diligent CGI research team to analyze the governance data of companies targeted by investor activists from January 1, 2020, through September 6, 2021. The data of 726 companies that engaged with investors was included in our sample.

For the purposes of this report, we looked at targeted companies’ “governance fundamentals,” which includes board diversity, director skill sets, executive compensation and company performance. The research focused solely on investor activism campaigns that were either successful, unsuccessful, settled and/or withdrawn. Any campaigns that were still ongoing as of September 6, 2021, were excluded from the study.

Key Findings

  • While the overall number of investor activist campaigns declined in 2021 as compared to 2020, the number of ESG-related campaigns, and the impact and success of investor activist campaigns, rose year over year. From January to August 2021, 13% of activist campaigns were successful, compared to 11% at the same period in 2020.
  • Companies targeted by activist investors consistently lag their peers in terms of the number of board members with skills in technology, compliance, and sustainability. Specifically, on the latter, directors with that background accounted for only 1% of the sample.
  • In our case study of three companies, we found that governance fundamentals tended to improve post activism. On average, gender balance, tenure, and skills set diversity improved for these three companies resulting from the activism.

Summary of Findings

Activist Campaigns Focus on ESG Policies and Performance

ESG factors have gained traction and visibility over the years, not only among investors and shareholders but also among other stakeholders, governments and regulators. This has led to increased pressure for companies to incorporate ESG policies into various parts of their businesses.

In September 2021, the Diligent Institute published Aligning Pay, People, and Planet, which evaluated the current state of inclusion of ESG key performance indicators (KPIs) in executive remuneration policies across companies in the European Union. We saw that ESG-related metrics in compensation plans are increasing across Europe according to our sample, with France setting the pace for other countries on the continent.

Due in part to substantial capital accumulated in ESG-focused funds, issuers should prepare for courting from activist investors to push ESG agendas during proxy fights. Market data suggests that the combined assets under management of investment firms that have signed the United Nations Principles for Responsible Investment is increasing, and currently totals about US$103 trillion.

ESG-Focused Investor Activism Is Gaining Ground

In the 2020 edition of this report, we indicated that governance issues, such as shareholder rights, board tenure, independence, diversity and expertise, were attracting activist investor attention. At the time of publication in July, of the 797 activist campaigns in the first half of 2020, only 9% were successful or settled — and only one campaign out of every 11 were successful. Another 38% were either unsuccessful and/ or withdrawn, and the remaining 54% were ongoing or had no outcomes.

Our current findings show that in total, 1,170 campaigns were carried out across the full year of 2020, of which 20% were successful or settled — a rate that more than doubled from the first half of the year to one out of every five campaigns. The increased success rate continued through early September 2021, with 715 campaigns, of which 18% were successful or settled.

The Odds of a Successful Shareholder Activist Campaign Increased in 2021

To measure the success rate only, we set out to understand how many campaigns were successful between January and August in both 2020 and 2021. While 2020 saw more activist campaigns than 2021, 13% of the campaigns in 2021 (1 in 8) were successful, relative to 11% of 2020 (1 in 9).

Investor Support for Say-on-Pay Resolutions at an All-Time Low

Since the SEC adopted “say-on-pay” (SOP) in January 2011 and included similar requirements in Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, various jurisdictions have implemented some form of SOP rules. In years past, companies could routinely count on receiving shareholder support of 90% or greater on most compensation policies. But SOP has become a popular vehicle for investors to use in expressing concern about compensation practices, and companies receiving low support for their compensation policies are inviting future investor activism.

Utilizing data from Diligent CGI and reviewing 2021 proxy season trends in the S&P 500, we learned the total number of proposals receiving strong investor support (over 90% shareholders in favor) is at an all-time low: approximately 18% fewer SOP-related resolutions received strong investor support in 2021 versus 2020

Average support level for SOP in the S&P 500 dropped from 2020 to 2021

Norwegian Cruise Line saw the biggest defeat on SOP in 2021, with 82.56% of votes being cast against their executive compensation report. Shareholders rejected the advisory executive compensation proposal of US$36.4M as granted CEO pay for 2020, up from US$17.8M in 2019, suggesting growth of 104% at a time when the cruise and transportation industry was suffering due to the COVID-19 pandemic.


A Lack of Modern Governance Practices Is a “Red Flag” for Investor Activism

Modern governance practices include having a diverse board with the necessary skill sets, perspectives, and independence to adequately represent the interests of the company’s stakeholders. Companies face increased scrutiny from investors when their boards lack important skill sets, have a low level of director independence, a combined Chair-CEO role or high levels of director entrenchment. We examined each of these red flag issues in our study.

RED FLAG #1 Combined Chair-CEO Role

Utilizing Diligent CGI, we reviewed the governance data of 735 companies globally that engaged with activist investors on governance, ESG strategy or M&A issues in 2020 and 2021. Our findings suggest that 230 companies combined chair and CEO positions in both years. Separation between the two roles has been a red flag issue for investors and proxy advisors, as the combination of the two roles is perceived to hamper effective supervision. In March 2021, Glass Lewis released an updated report finding that “boards with independent chairs serve shareholders more effectively than boards led by a CEO or other executive.”

For the companies in our sample for the year 2020, 29% had combined chair and CEO positions. In 2021, of the companies that engaged with activist investors, the data suggests that 36% had combined chair and CEO positions.

This year, “Big Oil” companies Chevron and ExxonMobil faced significant activist activity; both companies had a combined chair-CEO role. For ExxonMobil, shareholders presented a resolution requisitioning the board to require the chair be an independent member of the board. The resolution was resolved with the shareholders that this would be phased in for the next CEO transition.

RED FLAG #2 A “Skills Gap” in the Boardroom

A recurring issue being discussed among investors is whether board members have the requisite skills to effectively carry out their oversight function. Activist investors have often questioned the experience of board members of the companies they have targeted, particularly if they feel directors are not the right fit for the company’s industry, stage of growth or future strategy. Investors seek to know about directors’ previous board experience, either as an executive or non-executive members, and whether they have served in C-suite roles and gained finance, technology, and sector-specific expertise.

The average industry expertise that directors of targeted companies have is 30% and 31% for 2020 and 2021, respectively.

Arguably, compliance and technology expertise rank highly among the skills most needed to navigate today’s business climate. Sustainability has also become one of the most desired skills, with the explosion of ESG focus. Yet our data suggests that they are some of the least represented skills on the boards of companies targeted by activists.

  • In 2021, of the 3,098 directors in our data set, approximately 19% had technology expertise, and 11% had a compliance background.
  • In 2020, of the 4,623 directors in our data set, approximately 14% had technology expertise.
  • In both years, directors with a sustainability background were the least represented. Directors with sustainability acumen represented 1.42% of directors who engaged with activist investors in 2021. For 2020, we found that they represented approximately 1.21%.
  • The data suggests that for targeted companies, directors lacked exposure to the industries and their sectors. In 2021, companies in the utilities and energy sectors had the least percentage of directors with industry expertise, with 11% and 14% respectively

We also found that close to one-third of companies in the data set (89 companies out of the 283 that experienced an activist campaign) had no directors with technology expertise in 2021, with most of these companies being in the financials sector.

RED FLAG #3 Lack of Technology Expertise in the Boardroom Invites Cyber Risk

Regulations mandating technology expertise on the board have yet to materialize, but boards have grown increasingly nervous about their dependence on information technology combined with directors’ general lack of experience in professional technology roles. Corporations are currently dealing with competitive pressures compounded by increased cybersecurity risks, which have heightened board sensitivity to IT risk. Unfortunately, many boards remain in the dark when it comes to overseeing cyber risk and digital transformation strategy.

In 2020 and 2021, our data suggests that companies in the energy, materials, consumer staples, and utilities sectors had the fewest directors with technology expertise. Of companies that engaged with activist investors in 2021 in the energy sector, 20 out of 235 directors had technology expertise, compared to 19 out of 192 directors in 2020.

Meanwhile, the level of cyber risk has exploded, growing more than four-fold during the pandemic. The recent attacks on issuers, such as the ransomware attack against Colonial Pipeline and the cyberattack against Microsoft Exchange, have highlighted the importance of effective cybersecurity risk management.


How Investor Activism Impacts Modern Governance: A Case Study of “Big Oil” in 2021

This proxy season, we witnessed an unprecedented series of successful activist campaigns against several “Big Oil” companies, and growing interest from institutional investors appearing at the ballot box. Shareholders are increasingly viewing issuers’ attention to ESG criteria as a link to their business performance and resilience. The success of this year’s activist campaigns against energy giants served as a harbinger of the mounting pressure on companies to enhance their performance and ESG practices.

There are new guidelines and stakeholder pressure mandating investors to demonstrate their pledge to be responsible owners — and institutional investors have responded by updating their voting policies to incorporate ESG. Notably, earlier this year BlackRock released its proxy voting guideline with key guideline changes focused on climate risk, human capital management, diversity and stakeholder interests. The investor also announced plans to engage with more than 1,000 issuers on climate issues.

ESG-cognizant shareholders are looking into how boards and management teams oversee environmental and social performance, how ESG oversight is allocated among board committees, and whether a board has sufficient expertise in environmental issues and social issues. To explore the impact of activism on modern governance, we conducted a case study of investor activism against the three energy giants that received press significant attention in 2021: Exxon Mobil Corporation, Chevron Corporation and Royal Dutch Shell.

Background: Activist Investors Target “Big Oil” in 2021

Engine No. 1, which has only a 0.02% stake in ExxonMobil, won the support of some of the company’s biggest shareholders, including the California State Teachers’ Retirement System (CalSTRS), the second-largest U.S. pension fund; the New York State Common Retirement Fund; and BlackRock, ExxonMobil’s second-largest shareholder with a 6.7% stake. Though ExxonMobil said it would add two new directors to complement their board’s expertise on sector and climate, Engine No. 1 was not impressed with their choices. The activist investor made the case that the company would need directors who were not only ESG conscious, but who also brought more experience in the energy sector and would be able to more effectively help the company reposition itself for a future “green economy.” In December 2020, the energy giant unveiled a five-year greenhouse emission plan: intensity of upstream emissions to drop by 15%–20%; methane intensity by 40%–50%; flaring intensity by 35%–45%. The plan was met with a negative reaction from the market, as it was less aggressive than the plan from ExxonMobil’s peers — such as BP, which committed to reduce carbon emission by 40% in 2050.

Chevron saw shareholders vote 61% in favor of a proposal introduced by Follow This, a campaign group that uses activist investment to put pressure on oil companies into decarbonizing in line with the limits set by the 2015 Paris climate agreement. The proposal required Chevron to substantially reduce the greenhouse gas (GHG) emissions of their energy products (Scope 3) in the medium- and long-term future. According to Follow This, they sought to compel Chevron to follow the lead of BP, Equinor, and Total, which had already adopted Scope 3 goals. In Chevron’s response on January 18, 2021, the company stated the proposal dealt with matters relating to the company’s ordinary business operations and would therefore be excluded from proxy materials in 2021. That approach did not stop the proposal from making its way to the ballot box and being approved by shareholders.

Royal Dutch Shell plc (Shell) narrowly escaped rebellion from shareholders after an activist investor backed by Legal and General Investment Management (LGIM) launched a campaign against the oil company’s carbon-cutting plans, saying that the plans lacked credibility and ambition required to combat global warming. At the meeting, a shareholder resolution calling for Shell to take a more aggressive approach on the climate crisis — by setting binding carbon emissions reduction targets — received 30% of votes, LGIM among them. Shell put forward a resolution on its own “energy transition strategy” to reduce carbon emissions, which passed with 88% of votes cast in favor. While the activist proposal was not ultimately successful, it represents an escalation of pressure on Shell to consult shareholders and report on their climate-related plans within six months.

How “Big Oil” Governance Changed Following Activist Campaigns

Utilizing Diligent CGI, we examined and analyzed how the governance of these three companies has evolved post-activism. We found the following modern governance practices were impacted:

  • The gender balance of the three boards improved.
  • The diversity of director skill sets increased.
  •  Average director tenure and age both decreased.
  • Executive compensation fell, commensurate with a decrease in total shareholder return (TSR).

Impact of Activism on Board Refreshment

Though the agitation of shareholders was not directly linked to board diversity, director refreshment was one of the outcomes of the activist campaigns. For all three companies, there was a better gender balance on their boards post–shareholder activism. Notably, Shell’s board currently has gender parity, with an even 50-50 split between male and female directors.

Additionally, the average tenure of the directors on the three boards decreased from 5.25 years to 3.76 years, and the new additions to the board were also slightly younger. The average age of the companies’ directors reduced from 64.60 years to 62.96 years. Meanwhile, the average board size increased from 11.00 to 11.67.

Following the changes to the three boards, we also observed an increase in the diversity of skill sets represented in the boardrooms. There was a slight increase in the number of directors with technology expertise (from four to five across the three companies), while the number of directors with finance expertise remained consistent. Meanwhile, the number of directors with nonexecutive, leadership and executive, and governance expertise was reduced.

For Royal Dutch Shell and Chevron, there was not a significant difference in the sector expertise of their boards post-activism. The upheaval at ExxonMobil led to three new directors with industry and sector-specific expertise. Pre-activism, only the chairman and CEO, Darren Woods, had energy sector expertise, due to his previous nonexecutive role at Imperial Oil.

Realigning Executive Compensation to Fit the Times

Looking closely at the average compensation of the three CEOs, the data suggests that average realized compensation has been on a steady rise from 2016 to 2018 though it dipped a little in 2017. From 2016 to 2018, average realized compensation grew by 41%, while average granted pay and TSR dropped by 23% and 16%, respectively. From 2019 to 2020, all indicators fell; however, TSR fell faster than average granted compensation and average realized compensation.

Tying Executive Compensation Incentives to ESG

There has been increasing pressure on compensation committees — coming from regulators, institutional investors and proxy advisors, among others — to include ESG-related KPIs in the pay plans for executives. In our case study, we explored how ESG metrics were incorporated into pay plans for the three oil companies’ executives from 2019 to 2021. One of the current challenges of incorporating ESG-related metrics in executive compensation plans is that it can be difficult to measure and monitor. Still, the number of ESG metrics employed by these companies in their CEO compensation plans seems to be on an upward trend.

Analyzing the 2019 Shell annual report, the company’s policy introduced executive incentives tied to KPIs on sustainable development goals, weighted at 20% of the total short-term incentive (STI). The company included metrics such as total recordable case frequency, operational tier 1 and 2 process safety events, and refining GHG intensity (tons of CO2 equivalent per Solomon’s Utilized Equivalent Distillation Capacity). These underlining metrics were all clearly defined, with their weightings clearly disclosed. Additionally, compensation was tied to a measure known as “energy transition,” weighted at 10% of the long-term incentive (LTI). The goal focused on Shell’s strategic ambition to focus on energy transition toward meeting their net carbon footprint (NCF) commitment. For 2020, Shell’s ESG metrics remained largely unchanged. However, looking ahead, Shell announced that 2021’s incentive pay will include additional ESG-related metrics, including progress on energy transition and safety, which will be weighted at 15% each. The weighting of the energy transition condition under the company’s LTI has also been increased to 20%, reflecting the increasing importance of delivering on the strategic business transformations required to succeed in the transition to greener energy.

Analyzing the 2020 Compensation Discussion and Analysis (CDA) section of Exxon’s DEF 14A, the LTI plan was linked to operating performance (safety and operations integrity), rather than ESG specifically. Explaining the reasoning behind this, the company said that safety is a leading indicator of business performance and underscores as a core value for the company. The executive compensation committee reported that the operating performance metric includes process safety, controls and environmental performance, but they did not provide any specific ESG-related metrics. In their 2021 DEF 14A, the company disclosed that no annual bonus was granted, in-line with current business environment and resulting company earnings. Prior to the successful activist campaign in 2021, ESG metrics in the long-term incentives were largely absent, despite the company adding a KPI on progress toward meeting strategic objectives, one of which was reducing environmental impacts. We anticipate that the incentive structure is likely to change for next year as a result of board refreshment and shareholder pressure on the company’s approach to ESG.

For Chevron, the 2020 CDA disclosed that 15% of the annual bonus payout for executives was hinged on health, safety and environment. The focus of this metric as the company defines it is improving “loss of containment performance and spill volume, personal safety and greenhouse gas management.” However, the company’s LTI plan has no element of ESG-related metrics. The 2021 Definitive Proxy Statement disclosed that most of the metrics remained unchanged, with the exception of adding a new metric on “energy transition” as part of STI. According to the issuer, this is in response to investor input and reinforces Chevron’s focus on advancing a lower carbon future. The new category will account for 10% of STI and will measure Chevron’s progress toward reducing GHG intensity, increasing renewable energy and carbon offsets, and investing in low-carbon technologies.

ESG Metrics in Executive Compensation Focus on the Short-Term

Among the three companies, our data suggests that ESG metrics are more prevalent in the short-term incentives (STI) annual bonus component of variable compensation, relative to long-term incentives (LTI). They are also more prevalent in cash-remunerated plans compared to equity-remunerated plans.

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.