What has fueled the activism of shareholders in the past 25 years? We know that periods of flat or negative growth, flat or negative profitability and low stock growth can drive traditionally passive institutional shareholders to activism. (In fact, according to Shareholder Activism Insight, the likelihood is 79 percent.)
But long-time participants and observers in the corporate governance community think it’s much more basic: it’s a sense of voicelessness and helplessness felt by major institutional investors. These shareholders believe they suffer from lack of access—to the directors, to information. This “under-representation” feeds some activists’ demands to be recognized as owners, whether it’s advocating for “say on pay”, majority voting and in even a battle for board seats.
If directors seem confused by the criticism, it’s because many believe they have been in full disclosure through legal documents properly filed—the 8K, the 10K, the proxy, the governance documents posted on the company’s website. But in an era of transparency can boards afford to remain in the background?
The NACD’s “Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies” was universally endorsed by the director community. But how many boards have designed “governance structures and practices” to “encourage communication with shareholders”? And what would it look like?
Shareholders have a legitimate interest in the governance of their companies. What are the issues for your shareholders? How has the board addressed those issues?
Here are some points to keep in mind, courtesy of Ram Charan, “the go-to advisor for corporate directors and CEOs.”
- Shareholder activism is here to stay. Boards need to change their psychology to see it as a constructive influence, not a nuisance.
- Boards must be prepared to communicate directly with shareholders when the situation warrants.
- Shareholders want the board to hear their concerns, but boards must be independent and sometimes push back.