Who’s Afraid of Shareholder Activists?

Fall is fast approaching, so most major US public companies have held their 2024 annual meetings.

But while temperatures are sure to cool in the coming months, the same can no longer be said for the shareholder activism environment.

In years past, companies generally saw the fall as “peacetime”: A post-meeting respite to regroup from tense settlement negotiations and any proxy battles, evaluate their long-term strategies, and shore up their defenses before any activists come knocking in the winter and spring.

These days, however, there is no rest for the weary.

As our leading Shareholder Activism partners write in CorpGov, activists are increasingly surfacing outside that conventional pre-meeting window, and companies can’t afford to let their guards down.

What should companies be watching for?

In this edition of Vantage Point, we highlight three trends to watch in shareholder activism this fall.

Interest Rate Cuts: Will Activists Shift Their Focus?

Tighter monetary policy in recent years has driven up the cost of capital, weakening M&A activity and leading many activists to focus their campaigns on operational, strategic, and governance changes that they contend will unlock value for shareholders of their target companies.

Unlocking shareholder value will always be a key thesis for campaigns grounded in financial performance. But in the coming months, we could see a shift in how some activists work toward that end: Calling for companies to break up divisions, spin off subsidiaries, or sell themselves outright.

The case for this shift is straightforward.

With inflation falling and the job market softening, many analysts expect the Federal Reserve to begin cutting rates in the coming week. A decline in financing costs could then re-ignite the M&A market, and enable activists to find more buyers willing to take up their cause.

Of course, none of this is to suggest that activists will abandon conventional campaigns entirely. But if companies face new activist demands to sell or divest, they shouldn’t be surprised.

ESG: Can Institutional Investors Fly Under the Radar?

Not long ago, shareholder proposals advancing environmental and social causes enjoyed sky-high support. Today, that support has cratered.

Among S&P 1500 companies, support for climate- and DEI-related proposals have each fallen by half since 2021, according to the EY Center for Board Matters.

An important factor here involves institutional investors. These global asset managers own massive shares of US public companies, and thus similarly massive sway in the success or failure of activist campaigns.

But as ESG has become a political football in recent years, institutional investors have faced heavy fire from critics who say that ESG investing runs counter to shareholder interests, leading institutional investors to become far more selective in the environmental and social proposals they support.

This criticism likely won’t subside soon, yet institutional investors have other ways to push their environmental and social priorities.

For example: Targeting specific directors, especially influential committee chairs, can send a message just as powerful as supporting a proposal, while potentially drawing less unwelcome attention.

Will institutional investors take up this tactic? New data suggests some might.

A third of investors surveyed by EY this year said that, if they were to have concerns about a board’s oversight, they would be more likely to vote against specific directors than to vote for a related shareholder proposal.

Universal Proxy: Will the Starbucks Contest Open the Floodgates?

When the SEC adopted its universal proxy rules in late 2021, it aimed to “put investors voting in person or by proxy on equal footing.” In practice, the rule’s impact could turn out to be far more expansive, making it easier for groups with small stakes in a company to advance a single-issue campaign.

That’s in essence what happened in Starbucks’ recent proxy contest, where the Strategic Organizing Center (SOC) — a coalition of labor unions — nominated three director candidates as part of its efforts to organize the company’s workforce.

Under the universal proxy rules, each side in a contested director election must use a proxy card that includes both the company and dissident nominees, so proxy voters can now select candidates from both slates, rather than having to choose one slate or the other.

This dynamic worked to SOC’s advantage, putting individual directors in greater jeopardy and incentivizing Starbucks to engage, even though SOC owned only about $16,000 of Starbucks’ $105 billion market cap.

SOC ultimately withdrew its nominations, but don’t underestimate the campaign’s impact. Indeed, the coalition drew outsize media attention to its cause — which would have been unlikely without the pressure mechanism created by the universal proxy rules.

This outcome will not be lost on advocacy groups — labor-focused or otherwise. Companies should prepare for the possibility that even their smallest shareholders try to follow in SOC’s footsteps.

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