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The evolution of shareholder activism

Thursday, January 28, 2021 @ 1:58 PM | By Trevor Zeyl, Nader Hasan and Brandon Schupp

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Brandon Schupp
The year 2020 will be remembered as a year that was rife with uncertainty. As the COVID-19 pandemic has taken a historic toll on the global economy, many companies and investors alike have struggled to stop the bleeding amid mandated lockdowns, supply chain disruption and unprecedented volatility in capital markets around the world. The year also saw widespread calls for racial and social equality and a renewed focus on environmental responsibility.

Much has been written about how these developments might impact shareholder activism going forward. What is clear is that the activism landscape is evolving, and the playbooks used by activists and the companies they target must evolve with that landscape. In particular, consideration of the following issues may be warranted ahead of the 2021 proxy season.

In face of uncertainty, adaptability is paramount

A well thought-out and well articulated business plan is a primary defence against shareholder activism. Absent such a plan, companies risk being caught off guard by an activist who comes forward with its own business plan and accusations of unpreparedness. Following such accusations, it may be difficult for a company to disclose its own plan without appearing to validate assertions that it lacked a sufficient plan in the first place. Consequently, it is important that companies clearly convey to shareholders a plan for moving forward.

At the same time, the past year has shown that the ability to adapt during uncertain times is an essential component of a resilient company. Companies that have failed to adapt to changing consumer demands, widespread supply chain disruptions and the challenges of virtual workplaces have performed poorly relative to competitors that have remained flexible in the face of these changes. As such, rigid or static business plans, even if previously successful, are now vulnerable to criticism on the basis that they lack adaptability in the face of uncertainty.

Given the potential for such criticism, directors and executives may consider developing and disclosing nuanced business plans that explicitly address the climate of uncertainty in which most companies now operate. A starting point may be to simply acknowledge the presence of uncertainty, but going further, companies may consider developing and disclosing contingency plans that respond to a wide range of circumstances.

Focus on ESG will continue to increase

Gone are the days where the success of a company could be measured solely by reference to its financial performance and shareholder returns. In addition to these traditional metrics, environmental, social and governance (ESG) criteria have become prominent metrics that shape how companies are viewed by both consumers and investors. As the focus on ESG criteria has grown, a new trend of activists targeting companies based on ESG metrics has emerged.

To pre-emptively defend against activist scrutiny on the basis of ESG issues, companies may consider adopting a proactive approach that involves implementing and disclosing policies and progress regarding ESG issues, even in the absence of criticism about those issues. This proactive and transparent approach may serve not only to deter ESG activism but also to lend credibility to a company in the event that it is scrutinized on the basis of ESG issues.

Executive compensation a hot topic

As companies grapple with the financial impact of COVID-19, a lingering question for many is how executive compensation should be tailored to reflect poor performance of a company during the pandemic. While shareholders may be frustrated if executive compensation goes unchanged despite poor financial performance, retention and other challenges may arise if executive compensation is reduced on the basis of financial performance at a time when many executives have had to shift their focus from performance targets to keeping their employees safe and their companies solvent. If these concerns are not balanced in a demonstrably justifiable fashion, executive compensation may be raised as a wedge issue during the 2021 proxy season.

One possible solution for balancing these concerns is to tailor executive compensation, to the extent possible, based on a broad assessment of a company’s performance relative to its competitors during the pandemic. This assessment might include consideration of financial performance, employee retention, health and safety and other issues that have taken the spotlight during the pandemic. In this way, executive compensation may remain meaningfully linked to the performance of the company, but executives are not held accountable for challenges that have impacted the industry as a whole.

A general theme running through each of these topics is that transparency and open communication with shareholders is essential to avoiding and defending against shareholder activism. While such candour may not always be sufficient to prevent shareholder activism, it will be an essential component of a strong defensive strategy in the event that a company is targeted by an activist campaign.

Trevor Zeyl practises corporate and securities law, with particular emphasis on public and private mergers and acquisitions, financings and corporate governance. He is a member of Norton Rose Fulbright’s special situations team, which encompasses Canada’s leading hostile M&A, shareholder activism and complex reorganization transactions. Nader Hasan is an associate in the M&A and securities group and a member of the Canadian special situations team at the firm. Brandon Schupp is an associate with a focus on securities, mergers and acquisitions, corporate governance and shareholder activism.

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