Shareholder Activism

In these turbulent times, business leaders can expect higher levels of activity and interaction from shareholders. Indeed, at a recent Criticaleye breakfast for non-executive directors, the issue of shareholder activism was high on the agenda, namely what boards should be doing to communicate with shareholders, reassure them of the validity of management decisions and prevent the type of knee-jerk, reactionary behaviour which could have negative implications for the company.

What was clear from the discussion was that tough times put an even greater emphasis on effective investor relations. In other words, as the downturn continues, CEOs will have to spend more time on keeping shareholders happy. 

John Cole, Chairman for Facilitas Group, Motorclean Group and Associate for Criticaleye, believes that shareholders will become more active. He comments, "Perhaps some NEDs should be elected by shareholders to represent their interests. This would move towards the aligned interests found on the boards of private equity businesses."

Lindsay Tomlinson, Vice Chairman of Europe for Barclays Global Investors added, "There have been serious corporate governance failures in the period leading up to the credit crunch. In the UK, the general view is that the Combined Code and the 'comply or explain' mechanism gives a good framework for governance. To make it work, boards have to perform better, and shareholders have to be more effective at holding them to account. This puts both the chairman and shareholders under the spotlight. Boards should expect shareholders to be more engaged in the future and will have to devote time and resources to communicating with them. The alternative is a more prescriptive governance regime and I know what I prefer".  

Leaders also need to prepare for those activists that may be keeping a low profile while things are toxic but will resurface when the upturn comes. As Rob Woodward, CEO for Scottish Television Group comments, "In a down market, no one wants to catch a falling knife. I expect activists to keep a low profile as markets continue to deteriorate. There is currently also a discontinuity between share performance and operational reality, making it difficult for activists to make the case for boardroom change. I would, therefore, expect them to return when the markets pick up."

But as John Cole remarks, until boards and leaders are more effective, no policies or any amount of shareholder activism will help the negative situations that many companies are facing. He says, "Shareholders will surely become more active but neither that nor using NEDs as corporate police will make any difference until there is more emphasis on leadership and integrity and less respect for big egos." 

Shareholder Activism Insights
We have some great insight on the issues raised in this week's newsletter from Rotterdam School of Management. Shareholder Activism by Professors Gerard Mertens, Abe de Jong and Hans van Oosterhout, which debates the pros and cons of shareholder activism and asks if active shareholders are nothing more than raiders and opportunists or drivers of significant value.

Matthew Blagg, CEO, Criticaleye