Lack of trust in the stewardship abilities of corporate boards appears to be fueling an increase in public displays of objection from shareholders demanding major changes from their board of directors. This month alone we’ve seen shareholder letters asking boards to fire the CEO, to consider strategic alternatives—including a sale of the company, as well as asking to replace board members with representatives of their activist investor group.
While letters like these are to be expected during the year on some level, there are a few reasons shareholders may be less restrained when it comes to voicing their displeasure with the board of directors in 2022. An increase in shareholder’s publicly seeking support for the ouster of directors and CEOs should be expected at companies that exhibit:
• Stagnant share price
Companies that have not experienced positive share price movement since the start of the pandemic will likely receive angry letters from shareholders this year—if they haven’t already. After all, creating shareholder value is the responsibility of the board and the executive management team, so they will receive the bulk of the scrutiny. If a company has endured two years of waning stock prices and now must face a 2022 forecast that includes inflation and continued supply chain disruptions, they will not have much confidence in the board or management and will likely air their discontent in public.
Boards will be challenged to explain why their strategies will improve the stock price immediately; but if not immediately, at least provide evidence that things will improve in the near future. Boards will need to be able to counter any public condemnation of their performance or calls for their removal with a public campaign of their own that seeks support for their corrective measures from the entire shareholder base. Building this type of support will require the board and management to reach out to individual shareholders to secure votes of confidence.
• Lack of movement on ESG-related issues
Activist investor Engine No. 1’s successful campaign that won three board seats from ExxonMobil and forced the energy giant to revamp its climate change strategy has emboldened more shareholders to challenge companies on their climate change policies and efforts to reduce carbon emissions. And with the world’s largest institutional investors (BlackRock, State Street, Vanguard) affirming that they will vote against re-election of board members who do not support certain ESG-related issues (like board diversity) smaller activist investors feel they have support for many of the changes they want companies to make. Additionally, the SEC created a Climate and ESG Task Force in the Division of Enforcement last year and indicated that the commission will “enhance its focus on climate-related disclosures in public company filings.” These developments suggest that there will be greater scrutiny on how boards and their companies deal with climate and ESG-related risks. There may even be new disclosure rules handed down by the SEC in 2022.
Expect to see more activists asking for additional information on ESG-related issues. Many of these requests will be made in very public campaigns aimed at getting shareholders, customers and communities involved in pressuring companies to make certain policy changes and disclosures. With everything ESG-related from climate change to board diversity on the table, boards will need to be prepared to either negotiate their positions on many of these issues or face proxy fights.
• “Unfair” executive compensation
A higher percentage of companies received failed say on pay votes last year, much of it due to Covid-19 related adjustments to compensation that kept executive pay high even though company stock price or profits took a hit. Some shareholders felt it unfair to make adjustments that enriched board members and CEOs who oversaw poor performance at their firms. Expect more failed say on pay votes if similar “adjustments” are made to compensate for executives who have failed to implement strategies to mitigate the negative effects of the challenging business environment that the Covid pandemic has presented all businesses with. Investors will also protest loudly if compensation is adjusted to insulate executives from rising inflation. Board members who go along with such adjustments will most likely be held accountable with public campaigns to remove them from the board.