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Shareholder Activism Trends in 2017

February 7, 2017

Conference Room

2016 was a most robust and vigorous year for shareholder activism. As 2017 unfolds, companies should prepare for a wide range of shareholder activism trends, which will touch on a broad range of issues and concerns. Investors are becoming more vocal than ever and are increasingly involved in voting processes; they are also utilizing alternative platforms such as social media to articulate their goals.

Thus, it is more important than ever for companies to understand how shareholders think and what types of issues will concern them in the upcoming months. This is especially true as organizations prepare for annual 2017 shareholder meetings. 

Shareholder Activism Trends for 2017

Shareholder activism was very strong in 2016, with institutional shareholders continuing to pressure companies to conduct their operations in a more transparent manner. For 2017, most shareholder activism agendas will focus on the implementation of corporate governance policies that will benefit shareholders, such as:

  • Executive compensation clawbacks
  • Management of board compensation
  • Majority voting processes
  • Guidelines with regards to ownership of stock
  • Increased engagement of traditional investment managers (resulting from significant shifts from active to passive investment strategies in recent years)

Simultaneously, shareholder activists are discouraging other policies, such as staggered boards (voting on a fraction of the board of directors each year rather than all members at once), plurality voting, and “poison pill” plans. These types of policies tend to blur transparency efforts and complicate engagement with shareholders.  

Broader Shareholder Activism Trends

A broad trend that will likely emerge in 2017 is an increase in shareholder activism geared toward smaller companies. Smaller companies have historically lagged with regards to governance policies that promote shareholder engagement. Bruce Goldfarb, president and CEO of Okapi Partners, states that “large-cap companies have been targeted already” and “have become much more adaptable and open to voices outside the boardroom.” 

The lack of shareholder-friendly policies in smaller companies may also be a factor in the increased number of shareholder litigation lawsuits against smaller companies in 2016.  

A recent study indicates that shareholder activists may no longer be strictly adhering to the traditional “activist season” (i.e., the six-month period before annual meetings in May and June). Instead, many activists are using special meetings and public campaigns, held strategically after the annual meetings, in order to target corporate change. This means that activism efforts may involve more year-round activity rather than cyclical periods of buildup.  

Finally, there is also speculation that shareholder activists will opt to use social media platforms such as Twitter to express their voices and use such platforms to impact share prices. Thus, boards and C-suites must be able to factor in this type of activity, as it could represent a new type of risk to their brands and companies. 

Department of Labor Issues New Guidance on Shareholder Rights

The Department of Labor (DOL) issued Interpretive Bulletin 2016-01 last December to provide guidance on when employee benefit plan fiduciaries are allowed to vote their proxies. According to the Bulletin, plan fiduciaries may exercise their proxy voting rights in accordance with their fiduciary duties to manage plan assets. The guidance also addresses various issues surrounding environmental, social, and governance (ESG) investments (especially climate change issues). 

Permitted Activities 
The DOL guidance identifies various permitted activities that are considered consistent with the performance of fiduciary duties. These include:

  • Adoption of proxy voting policies
  • Participation in proxy contests
  • General engagement with management

The guidance also addresses issues that are appropriate as subject plans for shareholder involvement. These include ESG issues like workplace diversity, equal opportunity, climate change, and sustainability. The guidance comes at a crucial moment, as shareholder proposals on sustainability and greenhouse gas emissions continue to be the most prevalent types of resolutions. 

Comparison With Prior Guidance
This most recent guidance reiterates a basic principle that has been outlined in prior guidance for this topic. That is, fiduciaries may consider collateral goals such as social or environmental goals when making investment decisions, so long as returns on the plan do not suffer. This is a somewhat softer take on the issue than the prior guidance, which cautioned against spending plan resources on collateral objectives unless it was justified by positive economic benefits to the plan.

Lastly, the new guidance acknowledges that the voting of proxies does not often entail a significant expense to overall investment plans. It also appears to suggest that shareholders can benefit economically from corporate activism. 

Shareholder activism is a complex subject that can shape the direction and momentum of company operations. Continual discussion and education are highly beneficial for all parties involved in governance and engagement. For instance, conferences such as The Rights & Responsibilities of Institutional Investors (RRII) Forum, hosted annually by Kessler Topaz, provide opportunities for discussion and analysis of activism and corporate governance. 

If you have any inquiries or concerns regarding important issues like shareholder activism, contact us today at Kessler Topaz. We work closely with corporate governance experts and other shareholder advocates to promote public policies that encourage corporations to implement shareholder-friendly governance measures.