Prepare for Shareholder Activism: Expert Guidance for Public Companies

Strategic planning means organizations can respond to issues promptly and effectively and align with shareholder expectations. Planning also means a company will not be caught flat-footed and will be ready to respond with vetted and consistent messaging. Engaging a team of experienced advisors is key and will provide valuable insights and support, helping the company anticipate and address challenges effectively.

On a recent D.F. King podcast discussing shareholder activism, Tom Germinario, Senior Managing Director of D.F King, was joined by Barrett Golden, Partner of Joele Frank; Elina Tetelbaum, Partner of Wachtell Lipton; and Damien Fisher, Senior Managing Director of Evercore. The panel identified common activist challenges and trends in 2024, a few of which will be highlighted in this article.

1. Shareholder Engagement and Obtaining Feedback from Investors

Regular engagement with shareholders is critical to building relationships with proxy voting committees and fundamental investors. Just as critical is listening to the themes and questions coming from investors (whether explicit or implicit), building credibility and articulating forward-looking plans and areas of focus for the board and the business. Companies would be best served to have open and transparent dialogue with investors, ask for their feedback and clearly understand investor expectations going forward. For instance, Barrett Golden noted in our recent podcast that companies should ask investors what their views are, discuss “what am I not seeing,” in terms of uncovering problematic views and be able to articulate a forward vision for the company versus only looking at past performance. 

Obtaining a proper read on investor sentiment prepares the company to analyze vulnerabilities and develop plans for proper responses and potential improvements ahead of an activist approach.

2. Trend towards targeting of CEOs in proxy fights  

Emboldened by the success of certain prominent activists, the increasing rate of CEO turnover subsequent to campaigns and activist success in winning board seats, activists may be more motivated to target the CEO in election campaigns than they have in the past. In 2024 alone, 27 CEOs stepped down from their positions under shareholder activist pressure in some shape or form.¹

Targeting the CEO is typically viewed as destabilizing to the Company, as it means a change in direction, a change in strategy and is likely to cause a period of uncertainty, which may take time to reverse, barring extraordinary factors. It also can be a huge catalyst for M&A. Moreover, if the board fails to support its CEO, they’ve conceded and qualified candidates will be hesitant to step in, leaving the company without strong leadership, a situation that can make it a prime M&A target.²

In campaigns targeting CEOs, it is important for the Company to be prepared for every tactic under the sun. It may be a common tactic for a dissident to conduct an investigation into potential wrongdoing, with a report or dossier showing up in the boardroom. This puts the board in an uncomfortable position, however, planning for all contingencies will increase readiness and minimize the element of surprise of such tactics.³ 

Succession planning, or lack thereof, has also emerged as a huge issue in recent proxy fights. In contests where the CEO is targeted, investors and proxy advisory firms will expect detailed information on the board’s succession plans, disclosure and process. With insufficient succession planning being one of the triggers for activism, shareholder activists may also challenge leadership even when the CEO’s performance is not under scrutiny.⁴

All of that said, Tom Germinario noted that analysis of the proxy contests in 2024 still showed that large investors and proxy advisory firms showed great restraint by often voting for or recommending for a targeted CEO, even when they otherwise voted for significant change on the board in the contest.

3. Multiple activists are emerging to target the same company in high-profile situations 

There is a trend for multiple activists to target the same company. Notable situations include the activist campaigns at Salesforce, Disney and Air Products. This trend may not be totally surprising, as hedge funds may run similar analysis to find underperforming stocks, producing similar results. In these situations, one activist may not know that the other is present until the news becomes public. Each activist will try to be first and position its ideas to be the best ones. When they discover they are not alone, each may strive to position themselves as the primary and most influential party.

Dealing with multiple activists makes for added stress and significantly more management effort. This can be very challenging, and companies may be wise to focus on the best ideas and initiatives that will improve the company.⁵

Accepting the ideas of one activist does not immunize a company against further challenges, so don’t rush to a settlement. Best advice is to hire advisors and ensure any settlement offer is proposed after the director nomination deadline. Otherwise, the company runs the risk of settling with one activist and receiving nominations from another.⁶

4. Universal proxy cards are leading to greater focus and comparison of individual directors 

Currently in proxy fights, shareholders may pick and choose from management and activist director nominees on the universal proxy card.  Shareholders could vote against different nominees than those opposed by the dissident or those opposed by the proxy advisory firms creating unexpected outcomes in the voting. Often, the directors targeted by the dissident are those with the strongest counterarguments to the activist agenda.⁷

In proxy fights under the universal proxy card, a more head-to-head comparison of director nominees and a more intense individual director focus on skills and attributes is occurring. To help prepare for this scenario, companies should be sure to strengthen the board’s credentials. It is important to use your proxy statement as an advocacy tool, highlighting the relevance of each director and demonstrating how their expertise aligns with the company’s overall strategy and  value creation. Companies can consider more creative means such as videos to introduce more personally director nominees and show the value they bring to the board and the business.

5. Tenure of directors is a key issue in which directors are targeted

In proxy contests, proxy advisory firms analyze performance stats, identify problems that have occurred in the business and then determine which directors may have been responsible for any poor decisions. 

In our recent podcast on shareholder activism, it was noted that 70% of proxy fights target companies with three or more directors who have been on the board for over 10 years.⁹

This highlights the need for a continued focus on board refreshment, having directors with the right skillsets and experience, and prioritizing clear communication of their value and strategic importance to your shareholders. 

Preparation is always the key

Being unprepared and scrambling to interview advisors during a shareholder activist situation can be costly to the outcome of the campaign, so it’s essential to be ready for a potential proxy challenge ahead of time. It is essential to understand the shareholder base, obtain good feedback of the concerns and themes coming from shareholders and analyze the actions of top shareholders in similar situations, advised Germinario, saying, “It's imperative to hire the right team, be adept at identifying vulnerabilities and perform timely analysis of the shareholder base to produce an action plan for success in the situation.”