New study finds that majority of investors think poor governance practices open door to activist attention
The majority of institutional investors credit poor governance practices as the biggest driver of shareholder activism, a new study from shareholder advisory firm SquareWell Partners has found.
Some 84 percent of investors polled, who hail from North America, Europe (including the UK) and Asia, said that poor governance was the main driver of activist investor attention.
The findings of SquareWell’s report, titled The Long and the Short of It: Institutional Investors’ Views on Activism, center around three key themes, views on activism, evaluation criteria and engagement dynamics.
This finding means that the quality of a company’s governance framework is paramount and any governance-related changes can be seen not only as a response to activist pressure but also to potentially create value.
From ESG issues, M&A activity and anti-DEI, activists are increasingly targeting companies with vulnerabilities exposed by economic uncertainty and evolving regulatory landscapes, increasing the need to remove any activist related targets.
The report also found that activism is considered ‘useful’ by respondents – around 77 percent of investors agree that activism is a valuable market force, largely for facilitating change and driving accountability. However, the biggest concern (reported by 65 percent of those polled) is that activists often have a narrow focus that overlooks wider business complexities.
Some 87 percent of institutional investors said they focus on the strength of the activist’s arguments, followed by an activist’s track record (71 percent). Interestingly, 68 percent of investors admitted that they regretted not supporting an activist campaign in the past.
Investors also largely (71 percent) favor activism targeting the board on governance and management change versus operational (10 percent), balance sheet (3 percent) or M&A activism (3 percent).
When it comes to evaluation criteria, poor governance was identified as the biggest trigger for activism (84 percent), with 10 percent declining to answer and 6 percent disagreeing altogether.
Return and profitability metrics were rated as the top performance indicators, suggesting investors look at return on equity or return on invested capital when evaluating performance.
The biggest barrier to activism support was proposals were not well justified, proposals being overreaching, overly prescriptive or not well aligned with the issues identified, SquareWell’s research showed.
‘Our survey reveals that the key reason investors often reject activist proposals is poor justification. Yet, 68 percent of respondents admitted to having regretted not supporting an activist campaign in the past,’ said Will Samuels, activism analyst at SquareWell.
“This highlights an important nuance: even when a proposal is dismissed, the underlying concerns may still resonate with investors.’
The lesson from this, according to Samuels, is that companies should not take investor rejection as a sign of full alignment.
Instead, they should carefully evaluate activist arguments and proactively address potential issues – even if shareholder support isn’t immediately visible.
Almost half of respondents (45 percent) said that both stewardship teams and fund managers are involved in final decision-making, 39 percent said that fund managers make the final decision, while 16 percent defer solely to the stewardship team.
Some 48 percent of investors said that they would engage with an activist even before a campaign becomes public, while 39 percent said they would not.
When asked if they speak with fellow investors during an activist campaign, 52 percent said they did, 39 percent said they did not and 9 per cent did not respond. Furthermore, 52 percent of respondents said they would consider going public with their support for an activist, 39 percent would not and 9 percent declined to answer.
With investor caution surrounding activist engagement at an all-time high, Samuels believes that the number of Institutional Investors willing to engage with activists or fellow investors during a campaign could continue to fall, amid growing regulatory uncertainty – especially in the US.
‘In this environment, alternative channels for activists, such as open letters, press releases, investor presentations, microsites, and webinars are likely to become more influential,’ he said.
‘As activists work to shape the narrative with clear, persuasive messaging, companies must match or exceed that standard. Their communications must be timely, credible, and compelling because in a contested environment, how effectively a company tells its story can heavily influence investor perception and outcomes.’
It clear that boards need to better communicate the strength of governance framework and ensure that their engagements are impactful to suppress activist targeting.
But to build trust in the capital markets and strengthen shareholder confidence, SquareWell Partners advised that ‘prevention is better than remedy’.
