Don’t Let Your Shareholders Surprise You


Don't Let Your Shareholders Surprise You Ethical BoardroomBy Rich Thomas, Managing Director at Lazard



The year 2020 proved that activism has moved irrevocably from the fringes of the share register to the centre, as this range of shareholders are increasingly emboldened to challenge companies. The deference to management of years past is gone. Today, shareholders will not hesitate to pressure or seek to replace leadership and reverse strategy when necessary to protect shareholder value.

The past 12 months have also shown how ESG has fulfilled its promise to become the next shareholder battleground. This must be a priority for boards in 2021. 

Activism, no longer just an external threat

Even as the Covid-19 pandemic put shareholder agitation on pause for much of 2020, European activist campaigns still managed to hit a new record. Activists launched 58 campaigns for the year and 22 in the fourth quarter alone. The heightened activity was driven by traditional asset managers, not activist hedge funds, who are long-term holders and not previously thought of as agitators. For this group of investors, activism tactics are but tools in their toolkit, not the centrepiece of their investing strategy.

In 2018 and 2019, established full-time activists led the vast majority, or 60 per cent, of European campaigns, falling to only 35 per cent in 2020. At the same time, traditional asset managers almost doubled their attacks, increasing from 27 per cent of the total in 2018-2019 to almost 50 per cent of all campaigns last year. 

As the catalysts for activism continues to shift to the existing shareholder base, directors must remind be reminded of the importance of staying close to shareholders and establishing a board function for direct engagement.

Shareholders are taking the driver’s sea

It’s important to observe the change in mindset that is happening across Europe. Shareholders see themselves not just as holders of listed shares, but as active, engaged, and demanding owners of companies.

European shareholders targeted changes in business strategy at a higher rate than ever before.  Campaigns seeking to influence the strategy of a company increased by more than 3.5 times in 2020. By the end of the year, they represented almost a quarter of all activist situations in Europe.

Equally striking was the increased rate of pressure on CEOs. Historically, at companies targeted by an activist, there was a 10 per cent chance that the targeted company’s CEO would change within six months. Already, this was approximately twice the rate of normal CEO turnover. In 2020 however, turnover of activist targeted CEOs was more than 20 per cent in just six months, four times the average rate for CEOs.

“In 2021, some organisations around the world are hoping for the return to some semblance of pre-pandemic operations; however, for many organisations and boards, the new normal will be nothing like the past.” 

For directors the takeaway is clear and dramatic – boards must demand that management communicate a strategic plan that resonates with shareholder expectations. Failing to do so risks that your shareholders will attempt to fulfil this duty themselves (and publicly).

ESG requires board level attention 

The past year continued to elevate environmental and sustainability as important issues of shareholders, but Covid also brought social concerns to centre stage. Most critically, shareholders now expect boards to manage ESG as a fundamental risk to the business and one that is inextricably interwoven with the long-term strategy.

ESG is impacting investor portfolio decisions, as more investors include ESG considerations in investment screening and portfolio risk management tools. Analysis of the Euro STOXX 600 suggests that the largest active managers are allocating almost 10 per cent more capital to low ESG-risk companies compared to medium ESG-risk companies.[1] In addition, 2020 saw a more than 100 per cent increase in the number of European companies targeted with ESG resolutions at their AGM compared to 2018-19.

Unsurprisingly, activists are adjusting their strategies to adapt to ESG. ESG focussed campaigns, in which stakeholders’ interests are advanced alongside (or in lieu of) shareholder value creation, are drawing more attention. TCI’s ‘say on climate’ campaign and Bluebell’s ‘one share ESG campaign’ are examples of funds that have used these ESG strategies to strengthen their reputation with investors and broaden their investment mandate

Boards must implement programmes utilising best principles 

How should boards and directors respond to these broadening and intensifying demands and look forward to a new post-Covid shareholder dynamic, rather than backward at an outdated model?

They can start by implementing programmes utilising best-in-class tools to i) address director shareholder engagement, ii) provide more active oversight of leadership and strategy and iii) intensify ESG supervision. 

Programmes, not plans

Action-based programmes must replace plans that never leave the shelf. Directors must put into action a programme that provides direct exposure to shareholder feedback so that board decisions are based on a realistic view of investor sentiment. This engagement also provides an additional mechanism to detect shareholder problems before they become activist headlines. 

The old advice of ‘don’t surprise your shareholders’ is still valid, but not complete. Today we add to that advice, don’t let your shareholders surprise you’.

Implement best practices

The universe of activism and ESG is evolving rapidly. The accelerated pace of change means that shareholder expectations and pre-2020 company practices are already outdated in 2021. Understanding the latest ‘technology and tactics’ requires a perspective that benefits from a multitude of situations spanning sectors and countries. Even the best boards cannot entirely fulfil this need internally, because even top tier directors might only sit on two or three boards and may be more exposed to outdated policies than by best practices.

Independent director-led engagement roadshows, data-driven investor analyses and shareholder assessments, board assessments of shareholder sentiment, specialised IR presentations outlining an interconnected long-term strategy and ESG, specialised committees of the board to address strategy or ESG, ESG rating optimisation, ESG branding and shareholder targeting are just a few of the many shareholder engagement and communications-related best practices that every board should implement in 2021. 

It has never been more challenging to be a director, but…

..this changing environment also creates opportunity. Management teams and boards that have a detailed understanding of shareholders’ expectations and that are quick to adapt to the changing business landscape and ESG dynamics will capture a greater share of investment. The higher the demands, the greater the rewards.


About The Author

Rich Thomas is a managing director in Lazard’s shareholder advisory group, where he leads the European practice for advising corporate clients’ shareholder related matters, including activism response, strategic investor relations, shareholder base enhancement and ESG communication.