According to a number of commentators, shareholder activism has become the new normal, with activist investors focusing on a broad range of issues, from governance to operations. Interventions have targeted, for example, board composition, executive compensation, dividend policy and proposed mergers. Activists typically employ a variety of tools to advance their goals, such as behind-the-scene diplomacy, letters to management or the board, proxy fights and shareholder proposals for board nomination. Further, shareholder activism is not a phenomenon confined to the U.S. Indeed, throughout 2013, activist investors have targeted Canadian corporations, benefiting from some of the unique features of corporate and securities law that facilitate their interventions.
Shareholder activism has translated into an increase in board-shareholder engagement initiatives over the last years. This trend shows no sign of abating in the current environment. Boards of directors of companies around the world are thus undertaking various initiatives to engage with shareholders. Engagement practices can take many forms, such as private meetings with the board of directors, letters to shareholders and online communications aimed at a large group of investors. Engagement with shareholders can improve mutual understanding while allowing companies to develop investor trust. Such engagement can also help companies to avoid unexpected shareholder contests.
Still, shareholder engagement does raise a number of challenges. Boards of directors must identify the shareholders with whom engagement will be meaningful. They must communicate a consistent message and avoid any misunderstandings. Engagement practices also take time and need to be undertaken by directors and officers with the relevant communications skills. Given these challenges, there remain a core number of directors who believe that the board “does not and should not” communicate directly with shareholders.
There is no reason to think that shareholder activism will dissipate in 2014. Certainly, pending regulatory reforms in Canada with respect to defensive tactics, early-warning disclosure and proxy-voting advisors will influence such activism. But, as this phenomenon matures, it will be interesting to watch the direction taken by activists, and the resulting response from companies including in terms of shareholder engagement, over the next year.
In a paper published in the Business Lawyer in 2010, Chancellor Leo Strine of the Delaware Chancery Court aptly summarized the two potential paths. On the one hand, corporate managers will be pushed “to be highly responsive to the immediate pressures and incentives of capital markets”. On the other hand, if activists shareholders do not “push an agenda that appropriately focuses on the long term, the responsiveness of managers to the incentives they face can result in business strategies that involve excessive risk and, perhaps most worrying, underinvestment in future growth”.