Shareholder activism is rising globally. How can APAC boards set up for long-term success?
Boards need to be ready — shareholder activism is increasing around the world. According to Diligent Institute’s Annual Shareholder Activism Review 2024, there was a 4% increase in the number of companies subjected to activism in 2023 compared to the prior year. That number is the highest it’s been since 2019.
Across the Asia Pacific companies were subjected to a 13.4% increase in activist demands from the previous year. In the United States, 550 companies experienced activist demands in 2023 – a 7.8% increase from 2022. Meanwhile, in Canada that increase was event greater – a 25% increase year on year. For Asia, shareholder activism used to be concentrated in Japan, but in recent years we have seen increasing activity in countries like Soth Korea and Australia.
“One of the main reasons for this is that in the U.S. and Europe, everyone’s been grappling with rising inflation and market volatility. And so, as a natural response to that, activists have been looking elsewhere for value creation opportunities,” said Rebecca Sherratt, Editor for Diligent Market Intelligence.
While Australia and New Zealand experienced lower incidences of shareholder activism compared with the U.S. and Europe, it remains a growing risk, especially in an era of increasing corporate scrutiny from the public. This is evident in cases like AGL, 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.
Data from Diligent Institute’s annual report suggests many companies see increasing shareholder activism as a risk factor, despite its role highlighting the need for good governance. 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,” said Brian Valerio, senior vice president of Alliance Advisors, in the report.
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.
Navigating the complexities of shareholder activism
As shareholder activism can disrupt organisations, understanding and preparing for the potential threats and opportunities it presents should be at the forefront of board strategy.
According to another recent Diligent report, there are 5 key drivers of the recent activist activity and several solutions for how Boards can best respond:
| Key driver | Problem | Solution |
|---|---|---|
| Overboarding | To find new board members, companies often look at existing board members. This results in overextended directors. | Limit the number of boards on which a director can serve, track and evaluate directors’ hours of service and use modern governance tools to consolidate a director’s board commitments. |
| Poor board diversity | Boards generally lack diversity, with activists calling for more women and people with racially or ethnically diverse backgrounds in board positions. | Review board policies and practices, use tools to source candidate profiles through trusted nomination processes and use digital D&O questionnaires to manage director’s background and experience. |
| Lack of engagement with key ESG strategies | Activist actions related to the environment have been increasing. More investors are looking for organisations that walk the talk in terms of ESG strategies. | Educate board members on ESG issues, prioritise ESG issues among relevant committees and roles and use technology to collaborate with ESG stakeholders and monitor ESG risks. |
| Excessive executive compensation | Investors are more cognisant of CEO pay and actively revolt against companies if they disagree with leaders’ compensation. | Use modern governance intelligence tools to benchmark executive compensation practices across peer groups, industries and regions. Use digital D&O questionnaires to consolidate director’s pay information and engage with expert consultants for the best compensation practices. |
| Toxic management culture | Investors also pay more attention to company culture as it directly impacts company strength and shareholder returns. They are less tolerant of toxic management cultures that ignore complaints by female employees, or those that have incidences of racial insensitivity. | Encourage healthy discussions about difficult topics, use modern governance solutions to communicate issues and enlist outside specialists to rein in difficult situations. |
“The area with the highest increase in scrutiny was remuneration, with campaigns in this area seeing a 37.3% increase. Executive pay has risen higher on the activist agenda as well. Three proposals seeking claw back policy amendments won 36.5% average support in 2023, up from five winning an average of 27.5% support in the year prior,” said Sherratt.
Responding to shareholder activism long-term with future-ready succession planning
Future-ready succession planning was identified as one of Institute of Directors New Zealand’s top five issues facing directors in 2024. While succession planning and shareholder activism are seemingly unrelated, an effective and robust succession 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. Studies have shown that having women in board positions results in better business performance.
For future-ready succession planning, boards must consider the company’s short-term and long-term goals as well as skills needed in the future. Leadership skills needed in the last five years may not be the same as those needed in the next five. The sharp increase in shareholder activism in the past year is evidence that corporate trends can change in the blink of an eye and that board members must have suitable skills to meet ever-changing demands and challenges.
It also helps to have a pipeline of skilled candidates ready so that roles can be filled before a vacancy occurs.
While shareholder activism presents certain challenges, its successful management can drive the long-term success of a company.
Technology that can support good governance and minimise activism
In Diligent Institute’s Shareholder Activism Annual review, 41% of board directors surveyed said shareholder activism highlighted the need for good governance. A robust approach to shareholder activism 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.
If you’re interested in managing the risks of shareholder activism, Diligent can provide a robust approach to GRC that can anticipate and assist with these challenges. TheDiligent One Platform allows boards to instantly identify shareholder activism and stay abreast of activist behaviour as it happens.
Discover how GRC technology can positively impact your organisation. Contact us today to learn more.
