Globally, shareholder activism is on the rise. Now more than ever, companies must proactively mitigate activist risks. On October 3, Q4 hosted a webinar, “The Changing Face of Activism and How to Respond.” The event was moderated by John Nunziati, an Investor Relations Advisor for Q4 with two decades of experience in corporate investor relations. Joining John were Valmik Desai, Director of Investor Relations at Salesforce, and Josh Black, Vice President of Editorial at Diligent.
Recent trends in shareholder activism
Market volatility and proxy season
Recalling the end of 2022, Josh related that market volatility at the time led many to believe that the upcoming proxy season would be especially active. This perception was further fueled by the soon-to-be-released universal proxy, which many thought would make small companies particularly vulnerable to proxy fight campaigns. Despite these expectations, the volume of shareholder activism was lower than anticipated. However, even with fewer engagements, activists won most of them, often securing at least one board seat.
While it potentially allowed more activists to win a board seat, a universal proxy could also limit the number of board seats they secured due to the proxy’s structure. The most striking impact of the universal proxy card, active since August 31, 2022, was the rush to reach settlements. Most engagements hurriedly reached a resolution to avoid being the first to test this new card system, significantly reducing the average gap between activists’ demand and settlement announcements.
Rising interest rates
Shifting to 2023, Josh recalled that fast-rising interest rates influenced many investment decisions. Companies with high capital expenditures or significant administrative costs were particularly vulnerable targets. The year also witnessed heightened scrutiny on executive compensation, a surprising trend considering the general support for “say on pay.” M&A activism, however, witnessed a slump this year due to a downturn in the number of deals available. Companies that were being targeted by activists responded by improving their margins and cutting operational expenses. In addition, these companies focused on returning cash to shareholders to appease their investors.
IRO’s role in preventing and responding to activism
Valmik then led a discussion about how recent events have highlighted the crucial role of Investor Relations Officers (IROs) as two-way communicators. IROs’ responsibilities aren’t limited to sharing the company’s vision, goals, and progress with investors. They must also actively listen to the shareholder base and ensure that those sentiments reach the company. Whether interacting with a regular or activist shareholder, the end goal remains the same: mutual understanding and constructive dialogue.
Using Salesforce as an example, Valmik pointed out that the feedback the company received from activist shareholders often aligned with what they had heard from their institutional shareholders. This allowed them to develop an internal playbook for addressing these shared concerns.
His takeaway message was clear: Activist shareholders are still shareholders. Their feedback is valuable and deserves the same level of engagement as any other shareholder. The main goal is to optimize for long-term returns for the entire shareholder base. Companies that resist engagement and don’t demonstrate a commitment to listening often find themselves in more challenging situations than those that do.
Activist strategies and investor relations resources
When examining the strategies of modern activists, Josh noted that many companies have faced multiyear campaigns by activist investors. He highlighted how some activists strategically invest over time, capitalizing on fluctuations in the market and identifying potentially undervalued companies. He emphasized that activist investors often emerge during critical transitions within a company, such as leadership changes.
However, strong boards and management teams that display good oversight can garner the support of asset managers. John and Josh emphasized that being proactive, responsive, and strategic in dealings with activists can put companies in a stronger position. Being prepared and already working towards improvements can make it easier to address and collaborate with activist investors when they approach.
Expanding on these points, Valmik emphasized the importance of consistently updating stakeholders about the company’s progress towards set goals, stating objectives, and executing them. He underscored that beating expectations and maintaining a steady approach are essential. Trust and credibility aren’t only about having a good strategy. It’s about consistently producing positive results.
Reporting efforts and technological impacts on activism
An audience question steered the conversation toward the effectiveness of reporting on outreach efforts as a tool to deter potential activists. Valmik shared Salesforce’s approach, which included disclosing the percentage of their shareholder engagement and the general topics of their conversations. Just engaging isn’t enough; what’s important is acting on feedback. Such disclosures might not necessarily deter activists but are instrumental for open communication with investors.
The panel then discussed the importance of technology in managing investor relations, specifically in monitoring and responding to shareholder activism. Companies can leverage their resources to address activist investors and potential challenges. For example, the Diligent Market Intelligence platform’s offerings provide comprehensive profiles of companies, their governance, compensation, ESG risks, and peer comparisons.
These profiles allow companies to determine their competitive positioning and anticipate possible areas of vulnerability. The Diligent platform also offers insights into shareholder behavior and identifies potential activist intent or waning investor support based on historical interactions. Likewise, surveillance partners should be used to detect early signs of stock movement, allowing companies to determine a strategy before activists reveal their financial filings.
Looking to the future, the panel agreed that 2024 would likely see continued shareholder activism in the corporate world. They emphasized the importance of having a well-composed board and a clear communication strategy –especially in light of the new universal proxy card.
The experiences shared by the webinar’s panel serve as a reminder that in the evolving landscape of investor relations, adaptability, transparency, and proactive engagement are the cornerstones of resilience. By emphasizing preparation, understanding, and strategic responses, companies can navigate the challenges of shareholder activism and foster long-term growth and success.
For more insights, view the full webinar “The Changing Face of Activism and How to Respond.”