The activist effect: shareholder activism in the UK

May 2020  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

May 2020 Issue

Shareholder activism in the UK has risen significantly in recent years, sparked by a cocktail of factors including a weak pound, strong shareholder rights and Brexit. Companies’ governance issues are also a major factor behind shareholder revolts.

According to research by Alvarez & Marsal (A&M), shareholder activism in 2018 saw a double digit rise in the UK over the preceding 12 months. Moreover, the number of UK companies and their boards predicted to be under threat from public activist targeting rose to 60 companies over the year, with UK corporates more than 40 percent more likely to face activism than those overseas.

UK companies are prone to investor activism thanks to the nation’s ongoing consumer crunch, suggests the A&M research. Furthermore, consumer companies in general account for the largest number of corporates at risk, as they seek to adapt to continued market disruption from evolving retail channels, squeezed consumer spending and rising costs. On average, states A&M, the consumer sector is 23 percent more likely to attract activism, while the industrials sector is 13 percent more likely.

“Boards need to take a broader perspective,” says Malcolm McKenzie, managing director and head of European corporate transformation services at Alvarez & Marsal. “A board that sees the warning signs should act pre-emptively to avoid the considerable financial, reputational and disruptive risks that can accompany a public activist campaign. In this heightened environment, it is crucial for boards to move decisively to ensure meaningful change is delivered before the ‘wolf pack’ closes in.”

Among the types of activism typically utilised by the ‘wolf pack’ are proxy battles, publicity campaigns, shareholder resolutions, as well as litigation and negotiations with management. Much of this activist targeting is being driven by environmental, social and governance (ESG) factors, particularly issues such as climate change.

“Shareholder activism levels in the UK have risen steadily over the past few years,” observes Patrick Swain, a partner at Freshfields Bruckhaus Deringer. “It appears that activists are broadening their attacks to include smaller targets, with a greater proportion of M&A-driven activist campaigns than previously.

“There has also been a marked increase in US hedge-fund investment into activist campaigns in the UK,” he continues. “Among the typical hallmarks that mark out a target for shareholder activism include weak share performance, inefficient use of capital, a failure to deal with industry change and disruption and disinclination to grapple with corporate governance concerns.”

Key campaigns

In the UK, changes to boardroom structure remain a principal feature of recent activist campaigns, many of which have resulted in board-level resignations or changes in company strategy.

“In the last few months, the chairman of Universal Coal and the chief executive of Imperial Brands have announced resignations that have been attributed to campaigns by activist campaigners,” notes Mr Swain. “We have also seen shareholder challenges in areas such as climate change and gender diversity lead to changes in group strategy, such as BP’s adoption in 2019 of additional, tailored reporting obligations.”

Boosting activist activity is the more shareholder-friendly legal and regulatory environment that exists in the UK. “English company law offers savvy shareholders a wide range of mechanisms that can be used to focus or underpin their campaigns, including rights relating to requisitioning of and speaking at general meetings, voting, the removal or appointment of directors and the availability of shareholder litigation,” adds Mr Swain.

Engaging with activists

As activist tactics change, so too must the approach taken by companies to defend their position. “This is an area where prevention really is better than cure,” suggests Mr Swain. “Companies should seek a good level of shareholder engagement and corporate governance to reduce the risk of complaints, monitor the market for signs of shareholder activism, continually monitor the identity of their shareholders and maintain relationships with analysts and media representatives.

“Companies should also keep on hand a team of trusted advisers, including lawyers, financial advisers and media consultants, who know the business and the market well and can step in swiftly to defuse or rebut activist concerns. Private settlements with shareholders, although more common in the US, are an option but need to be carefully considered and negotiated.”

Evolving activism

Growing and evolving, shareholder activism across Europe is at a high, with the UK forecast to be the favourite market for activists on the hunt for corporates and their boards.

“The number of shareholder activist campaigns is likely to grow, particularly in light of recent high-profile corporate failures that have increased the scrutiny of companies and their boards,” concludes Mr Swain. “We also expect the growing focus on ESG issues to be reflected in the campaigns activist shareholders wage and, as a result, in the strategies adopted by company boards. While arguments can be made as to whether and how transformation in corporate culture arises, the enduring presence of activism will continue to militate against and ultimately drive out cultural complacency.”

© Financier Worldwide

BY

Fraser Tennant