By Rob Starr, Big4.com Content Manager.
The EY Center for Board Matters recently conversed with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. They also gained insights from investors, directors and other stakeholders through proxy season dialogue dinners. The recent surge in shareholder activism continues to keep boards on alert heading into the 2015 proxy season. Jamie Smith, Assistant Director, EY Center for Board Matters, answered a few questions about this issue, including proactive measures some companies are taking to prepare for potential activist investor campaigns, including engaging long-term institutional investors.
Can you define shareholder activism?
In the context of the EY Center for Board Matters 2015 proxy season preview, we’re defining
shareholder activists specifically as investment partnerships (hedge funds) that file 13D forms indicating their intent to influence management’s strategic, financial and/or operational decisions.
Why is it the focus of this part of the report?
Campaigns by activist investors have been increasing in scope and influence. Both companies and long-term institutional investors are learning to navigate this changing landscape. We wanted to provide insights around how long-term institutional investors view the rise in shareholder activism.
What are the key findings in relation to shareholder activism?
Most of the investors we spoke with believe whether activism is beneficial over the long term depends on the particular circumstances involved. Not all activists are alike and most investors stressed that in activist situations they closely evaluate the activist’s track record at other companies, the track record of the company (including accountability to shareholders), whether the activist’s strategy and goals align with their own and/or whether they consider the particular agenda the activist is advancing to be the right solution. Notwithstanding, a fair amount of investors we spoke with raised concerns that activism has created a harmful dynamic in how companies are thinking (i.e. promoting short-termism) and could have damaging impacts on stakeholders and the broader economy.
What are the same for shareholder engagement?
When company and long-term shareholder views are aligned, those shareholders can be a tremendous ally for the company in an activist situation, including actively reaching out to other shareholders to argue in support of management’s position. Such alignment may be reached through an effective engagement program through which the company builds relationships with key long-term shareholders and demonstrates responsiveness to shareholder concerns.
What’s in the future?
Given the amount of capital allocated to activist strategies, shareholder activism is not going away and will continue to present challenges and opportunities for companies going forward. One of those key opportunities will be to strengthen relationships with long-term institutional investors.