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Shareholder activism has traditionally been associated with proxy fights for control of multi-billion-dollar corporations and aggressive hedge funds with a plan to break up conglomerates to fully leverage/maximize its growth potential.
Today, shareholder activists have shifted their focus to corporate environmental and social performance issues.
This can include whether a company has an appropriate policy related to greenhouse gas emissions, board diversity, robust disclosure on the diversity of its workforce or how a company contributes to political causes.
The focus on environmental and social performance will likely accelerate and be more successful this year, meaning more opportunities for shareholders to push back and have their voices heard. Companies need to stay ahead on sustainability issues to avoid becoming a target and to improve the chances of successful engagement with an activist shareholder.
One type of shareholder activism — environmental and social shareholder proposals — was a big factor in the 2021 proxy season and has increased substantially so far in the 2022 proxy season. This trend is in part due to changes in rules for when a company can block a vote on a proposed resolution. A company can generally block resolutions for several reasons specified in federal regulations, and the U.S. Securities and Exchange Commission announced new interpretations of those regulations in November.
Two key impacts are:
- greater latitude for resolutions asking companies to set greenhouse gas emission targets aligned with the Paris Agreement. Previously, resolutions of this nature would often be excluded as impermissible micromanagement of the company. In its latest interpretation, the SEC indicated that such resolutions would be allowed so long as they permit the company discretion in how its sets the targets.
- greater latitude for resolutions asking companies to take action on socially significant topics (such as diversity) without a compelling rationale for how that topic affects the company. Previously, such resolutions would often be excluded unless the proponent could establish that the topic was of significant social importance relative to the company. The SEC has now indicated that such resolutions will be allowed so long as they focus on a socially significant topic relative to society.
Shareholders should look out for these proposals in proxy statements, along with supporting statements and the company’s response.
Many of the most well-known companies are dealing with such proposals, and early results for 2022 show high levels of shareholder support even against management recommendations.
Another type of shareholder activism, “vote no” campaigns and proxy fights/contested director elections, is also likely to be increasingly used by shareholders to promote environmental and social issues.
Starting in September, proxy cards will be required to list both sets of director candidates (i.e. the company’s slate and the activist slate). This will allow shareholders to selectively support certain activist candidates without abandoning the rest of the company’s nominated directors.
This change will also make it less costly to wage a proxy fight since activists will not need to incur costs related to mailing a new proxy card each time the company mails a new proxy card (in order to avoid having a later-in-time proxy card trump an early proxy card for the activist).
These changes may be particularly significant for proxy advisory services that have long requested these voting rights and that provide voting recommendations for passively managed funds representing trillions of dollars of assets.
In any event, shareholders may start receiving competing proxy cards more frequently.
For companies, the most prudent way to manage activism risk is to avoid becoming a target by proactively setting a clear sustainability strategy and associated goals, and meeting or exceeding industry standards.
For the benefit of their shareholders, organizations should also set clear short, medium and long-term targets for areas in which they hope to improve on sustainability metrics, and disclose a clear governance structure for how material sustainability topics are identified and managed.
Companies can maximize the value and visibility of their sustainability strategy through sustainable finance transactions. For example, a company may emphasize its commitment to reducing its greenhouse gas emissions by issuing a green bond with the proceeds allocated to renewable power developments. Or a company may emphasize its efforts to expand diversity in its management by entering into a sustainability-linked loan with margin adjustments depending on the company’s annual progress towards diversity targets. These transactions allow a company to proactively frame their sustainability strategy and demonstrate enhanced commitment as well as validation and support from the financial community.
The above trends are likely to not only accelerate but also be more successful as proxy advisors recommend more votes against company recommendations and large asset managers cope with increasing pressure to demonstrate their ESG credentials with their votes. Those companies that recognize the challenge and build a coherent, long-term strategy to respond will be best placed to thrive in an era of enhanced shareholder engagement on sustainability.
Aaron Franklin is head of sustainable finance at Sumitomo Mitsui Banking Corporation, Americas Division.
