How companies can address — and mitigate — the risks of evolving shareholder activism
After years of growth, has ESG activism fallen out of favor?
2021 seemed to be a landmark year for activists. Yet in 2022, activist campaigns around the world appeared to be on the decline, as were their success rates.
“ESG activism is suffering a crisis of confidence, beset by declining support, confusion about valuation, and a budding conservative backlash,” Insightia Editor Jason Booth wrote in Insightia’s 2022 ESG Activism report.
But boards who take their eye off of the ESG ball risk to do so at their own peril.
ESG Scrutiny Redirected, Not Abandoned
In Europe and Australia, ESG and remuneration activist campaigns significantly declined in number from 2021 to 2022. Overall in 2022, only 55% of global activist campaigns featuring both board representation and ESG-related demands had any success so far, down from 60% in 2021 and a 67% average for the entire 2018-2021 period.
In a move that would have seemed inconceivable just a few years ago, sustainable investing has generated a negative rather than positive response, as a number of U.S. states threatened to place some of the world’s largest financial institutions on their restricted lists — for boycotting fossil fuels.
Another previously lauded tactic, linking compensation to ESG goals, received similar backlash. “With stock prices down sharply this year, executive compensation is a likely target,” Booth notes. He cited Glass Lewis’ concerns about “management teams rewarding themselves based on ESG metrics that are hard to measure.”
“Where ESG issues factor into a campaign, it begins and ends with issues that impact the bottom line, including the strength of individual directors and a company’s exposure to long-term sustainability risks,” Sustainable Governance Partners CEO Jessica Strine said in an interview in the 2022 ESG Activism Report.
Amid this heightened focus on the bottom line, “Some social issues have also taken on new prominence, in particular, racial equity,” Strine noted. “Many investors are seeing this issue as financially material, premised on the understanding that a company’s reputation, brand, attractiveness to employees and customers, and/or dealings with regulators can be impacted by its handling of risks and opportunities related to social justice.”
Bolstering External Intelligence and Internal Defenses
How can you meet shareholder and stakeholder demands while decreasing vulnerability to investor and legal action?
Proxy papers and surveys are a good place to begin for keeping a finger on the pulse of stakeholder sentiment, as are conversations with investors and third-party sources of business intelligence. It’s imperative to know what your peers are doing and what your investors want.
At the same time, you’ll need oversight into critical areas of the business. This includes:
- Establishing efficient and effective systems for monitoring and compliance
- Reinforcing these systems with a company culture that prioritizes both transparency and compliance
From there, you’ll assess your company and define its purpose with an eye on stakeholder perspectives. This means:
- Setting ESG targets based on what you’re seeing among your peers and hearing from your investors
- Using multiple ESG ratings, frameworks and standards as a guide
- Consulting with advisors on the issues that boards should keep on their radar to guide oversight priorities and reporting.
Once you’ve established this foundation, you’re ready to build a defensible and auditable ESG program.
Stay Ahead of Shifting Activist Trends and Risks
Increased visibility is the first step to building such a program and reducing vulnerability to investor, shareholder and legal action.
Companies can achieve this visibility by leveraging data from across the organization, combining it with proprietary intelligence and bolstering these efforts with the right technology solutions.
With a 360-view, followed by purposeful action, you’ll strengthen your company’s ability to:
- Identify which red flags to escalate on the board agenda
- Monitor evolving risks — and mitigate them as needed
- Document compliance and risk management efforts in defensible, auditable detail
With these measures in place, your company will be better prepared to face whatever trends 2023 has in store.
