The rise of ESG in the financial industry has coincided with a new trend – the rise of activist investors. How is this changing the boardroom?
In a recent post by Diligent, the company detailed the rise of activist investors – investors who have swung from both seen as heroes to some and a nuisance to others. Diligent recently covered the topic in its Modern Governance Summit 2022.
The company said, “Today, companies face a wider array of demands from their investors, reflecting concern for the preservation of both shareholder and stakeholder value. Activist campaigns are much more reflective of the world in which companies operate, and investors expect boards and management teams to hear them out.”
In a panel discussion on preparing for shareholder and stakeholder ESG activism, the panel broke down recent trends in shareholder activism.
FCLT Global research director Veena Ramani said, “There are many different stripes of investors who use these tactics, and there are many possible outcomes.
“Long-term investors also use activist tactics too. Activism, particularly when long-term investors are involved, represents a failure of engagement. Long-term investors participate in activist campaigns only when they’re not being heard by the company.”
Meanwhile, Loren Braswell – a managing associate at Sidley Austin’s shareholder activism practice – agreed that the idea of prioritising shareholders’ interests was being approached more holistically with the rise of ESG investing.
She added, “There should be a symbiotic relationship between shareholders and stakeholders, particularly with an ESG issue. The long-term health of a company is really tied in with stakeholders.”
The intertwining of ESG and economic factors is key to winning support from Glass Lewis, which is one of the research bodies that supports the institutional investors charged with deciding who wins a proxy contest.
Glass Lewis senior analyst Mark Grothe said, “When those factors are driven by each other and make a difference in terms of long-term value, that’s when you get a good ESG campaign.”
Ramani detailed that investors believe companies have had long enough to think through the impact of climate change and that shareholder proposals are starting to zero in on climate transition planning. “Companies need to have and articulate a long-term value creation plan that asks and answers questions about climate”.
Grothe explained that Glass Lewis’s framework starts with the question, “has there been a compelling case for change?” That stymies a number of single-issue ESG campaigns, he claims, because when overall company performance and board oversight is up to scratch, the proxy adviser won’t recommend for change just because an ESG demand seems like an improvement.
That will remain the case even with the introduction of the universal proxy card, a mandatory change that will require companies to list activist nominees on their own proxy ballots, and vice versa. Previously, each side had to file its own card, and unless they attended the meeting, investors could only vote for one side’s candidates.
“Single-issue ESG activism won’t get a lot of support,” confirmed Grothe. But in a tight contest, the ability to choose a greater mixture of candidates might lead to some subtle differences in the recommendations.
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