The rise of shareholder activism

Shareholder activism is increasing around the world and boards need to be ready. According to the Diligent Institute’s Shareholder Activism Annual Review 2024, there was a 4 per cent increase in the number of companies subjected to activism in 2023, compared to the previous year. That was the highest since 2019.

Across the Asia-Pacific region, there was a 13.4 per cent increase year on year. In the United States, 550 companies experienced activist demands – a 7.8 per cent increase from 2022. In Canada, the increase was event higher at 25 per cent.

For Asia, shareholder activism used to be concentrated in Japan, but in recent years we have seen increasing activity in countries such as South Korea and Australia.

One of the main reasons is that in the US and Europe, everyone has been grappling with rising inflation and market volatility. As a natural response, activists have been looking elsewhere for value creation opportunities, says Rebecca Sherratt, editor for Diligent’s Market Intelligence.

While Australia and New Zealand experienced lower incidences of shareholder activism compared with the US and Europe, it remains a growing risk, especially in an era of increasing corporate scrutiny from the public.

This is evident in cases such as AGL Energy, one of Australia’s largest power producers, where shareholders forced the company to scrap a demerger plan and elected four activist-backed nominees to its board.

The annual review also showed 41 per cent of directors surveyed said shareholder activism highlighted the need for good governance. A robust approach requires long-term planning that includes succession planning, as well as a comprehensive governance, risk and compliance (GRC) strategy, underpinned with organisation-wide risk scanning and reporting.

The risks of increasing assertiveness from shareholders include disruption of management plans, reputational damage, and potential to drive a change in control.

Shareholder activism also makes directors’ roles more complicated. “Institutional investors are voting against directors more frequently and for more reasons than they have in the past,” says Brian Valerio, senior vice president of Alliance Advisors, in the review.

As such, shareholder activism must be a key risk mitigation and resilience focus for directors and executives in the years ahead. Boards must prepare their response through greater awareness of shareholder activists, potential campaigns, trends, and targeted replies.

As board members get older, they must also consider shareholder activism as a part of their succession planning to help mitigate risks in the long term.
According to another recent Diligent report, there are five key drivers of the recent activist activity and several solutions for how boards can best respond (see infographic).

Sherratt says the area with the highest increase in scrutiny was remuneration, with campaigns in this area seeing a 37.3 per cent increase. Executive pay has risen higher on the activist agenda as well. Three proposals seeking claw-back policy amendments won 36.5 per cent average support in 2023, up from five and an average of 27.5 per cent support in the previous year.

While succession planning and shareholder activism are seemingly unrelated, an effective and robust plan for executives or directors can help organisations manage it in the long term.

After all, the threat of shareholder activism will likely surpass the tenure of existing board members. The loss of a key member of the board or executive team can also lead to significant disruptions within an organisation, and active investors may pressure boards to fill the vacancies as soon as possible to minimise downtimes.

With many activist campaigns revolving around remuneration, organisations must be mindful of their succession planning practices. Shareholders may demand clear and transparent procedures for selecting top executives and justification for remuneration packages.

Proper succession planning can also address some of the key drivers for recent shareholder activism, such as diversity and inclusion. Boards should be mindful of including members who not only have the right competencies and skill sets but also varied perspectives and backgrounds. For example, studies have shown that having women in board positions can result in better business performance.

With proper short-term and long-term planning, companies can build a pipeline of skilled candidates, identify shareholder activism early, avoid common triggers and drive a company’s future success.