How firms can address and mitigate shareholder activism risks


A key trend across both 2021 and 2022 was the rise of shareholder activism in the world of financial services. While 2021 was a boon year for activists, 2022 fell short of the mark.

According to Diligent, while ESG activism suffered a hit last year, ‘boards who take their eye off the ESG ball do so at their own peril’.

In Europe and Australia, ESG and remuneration activist campaigns significantly declined in number from 2021 and 2022. Overall in 2022, only 55% of global activist campaigns featuring both board representation and ESG-related demands had any success so far, down from 60% in 2021.

Diligent said, “In a move that would have seemed inconceivable just a few years ago, sustainable investing has generated a negative rather than positive response, as a number of US states threatened to place some of the world’s largest financial institutions on their restricted lists — for boycotting fossil fuels.”

The company highlighted that linking compensation to ESG goals also received similar backlash.

Jessica Strine – CEO of Sustainable Governance Partners – said, “Where ESG issues factor into a campaign, it begins and ends with issues that impact the bottom line, including the strength of individual directors and a company’s exposure to long-term sustainability risks.

“Some social issues have also taken on new prominence, in particular, racial equity. Many investors are seeing this issue as financially material, premised on the understanding that a company’s reputation, brand, attractiveness to employees and customers, and/or dealings with regulators can be impacted by its handling of risks and opportunities related to social justice.”

How can companies meet shareholder and stakeholder demands while decreasing vulnerability to investor and legal action? Diligent said that proxy papers and surveys are a good place to start for keeping a finger on the pulse of stakeholder sentiment, as well as conversations with investors and third-party sources of business intelligence.

Businesses also need critical oversight into key areas of their organisations. This includes establishing efficient and effective systems for monitoring and compliance and reinforcing these systems with a company culture that prioritises both transparency and compliance.

From this point, firms should assess themselves and define themselves. This means, Diligent underlines, setting ESG targets based on what they’re seeing among their peers and hearing from their investors.

It also means using multiple ESG ratings, frameworks and standards as a guide and consulting with advisors on the issues that boards should keep on their radar to guide oversight priorities and reporting.

From here, Diligent believes a company would be ready to build a defensible and auditable ESG program.

The firm said, “Increased visibility is the first step to building such a program and reducing vulnerability to investor, shareholder and legal action.

“Companies can achieve this visibility by leveraging data from across the organization, combining it with proprietary intelligence and bolstering these efforts with the right technology solutions.

“With a 360-view, followed by purposeful action, you’ll strengthen your company’s ability to identify which red flags to escalate on the board agenda, monitor evolving risks — and mitigate them as needed and document compliance and risk management efforts in defensible, auditable detail.”

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