SHAREHOLDER activism is one of this year’s biggest business stories, as the recent public disputes over executive pay attest. But this is just the beginning. The conditions are ripe for the shareholder spring to turn into an activist autumn.
Where does shareholder activism go from here? The debate on executive pay will now focus on new legislation proposed in the Queen’s Speech, which will give shareholders greater powers in the “say on pay”. Social and governance activists have led the debate so far. Notching up significant minority votes against executive pay packages has been a successful way of expressing disquiet, but it has failed to deliver a constructive engagement with management. Those companies that have suffered at the hands of shareholder activists have changed very little – only the identity of their chief executive.
A more interesting consequence of the shareholder spring is if it leads to an acceptance of the kind of investor who takes stakes in companies to agitate for change (in order to increase share prices). These activists are often been referred to as being short-termist, self-serving or even asset strippers – yet is this the type of investor that many firms need?
One could argue public relationships between management and institutional investors have not been critical enough. Large institutions have been pressuring directors to curb excessive pay, in private, for a long time, but it has only had an impact once that pressure has been made public.
Shareholders must consider becoming more adversarial, emulating parliament and the law courts. Where relationships are conducted outside public scrutiny, there is a greater risk of private influence suffocating public accountability.
The foundations laid in the shareholder spring create a unique opportunity for activists to force engagement and achieve their goals. UK company legislation provides the mechanics for relatively small groups of shareholders to requisition shareholder resolutions and require companies to present such resolutions to a meeting of shareholders. Activists can now also use the media – and social media – to promote their agenda.
I also expect that the use of proxy solicitation techniques by activist shareholders will become a more common feature of public company life in the UK (as it has done in the US). The shareholder base of US companies may contain a greater number of non-institutional shareholders than in the UK, but recent figures from the Office for National Statistics suggest that ownership of shares in UK-listed companies by retail investors has increased since 2008. Retail investors still face difficulties in exercising votes held through a broker account but, if this trend continues, it could provide fertile ground for activists to appeal directly to ultimate shareholders.
Hold onto your hats. The shareholder spring could soon make way for an autumn of activism.
Saul Sender is corporate partner at Mishcon de Reya.