Boards Beware - Activism Is Evolving, And On The Rise
Never before have corporate transactions and executive decisions been so contested. Whether politically, financially or environmentally motived, we’re now living in an age of activism where everyone from shareholders to employees and consumers, are influencing decision making, resulting in missed business opportunities, reputational damage, executive changes and potential stock drops. And it’s affecting both public and private companies alike.
In this new era of conscious consumerism, consumers are increasingly vocalizing their support and distaste for brands, and basing their purchasing decisions around their political, social and environmental ideologies. In light of this newer consumer landscape, brands should tread lightly. When companies or their officers make controversial statements or decisions, or go against the grain of their core brand image, conscious consumerism can quickly escalate into damaging consumer activism. In July 2019 it was #BoycottHomeDepot, a month later it was #BoycottEquinox, both a result of insiders’ political support for Trump. In October, gaming company Blizzard encountered a boycott of their own following their banning of an e-sports player after his vocal support of Hong Kong’s protests. Fast forward one month, and Uber was on the receiving end; the target of a boycott following its CEO’s comments over the Khashoggi killing. This is a rate of approximately 1-2 widely publicized boycotts per month, each attracting celebrity attention, trending hashtags and strong social media following, with the most aggressive activist campaigns often backed by deep pocketed funding and coordinated media campaigns. There is also a fine line between consumer activism and consumer class action litigation, which has tripled over the past 10 years. Contributing to this steady increase, is the rise of data breach & privacy related litigation, and the rise of false labeling claims alleging deceptive advertising. The environment is also becoming very contentious, with some companies such as Chevron and Exxon going so far as retaliating against consumer watchdogs with subpoenas of their own.
While the stock drops instigated by these campaigns have (so far) generally been mild and short lived, things could quickly change as campaigns become more aggressive. Additionally, despite the ability of stocks to remain fairly stable, companies will still undoubtedly suffer financial damage in the form of decreased earnings, costs incurred with resulting regulatory investigations, lost consumer loyalty, and costs incurred with reputational management/restoration, among others. While all companies with recognizable brands are subject to consumer activism, certain companies appear to be at an increased risk. This would include larger companies/brands, and those that market themselves are being more pro-social. According to this 2012 paper by King & Mcdonnell. “Belonging to the top tier of most reputable firms and engaging in reputation-building actions, like announcing prosocial activities, exposes a firm to activist attention, making them more likely targets of boycotts.”
Whereas consumers inflict change with their wallets, shareholders do so by leveraging their equity positions. Shareholder activist campaigns can range from simpler say on pay campaigns concentrated on controlling executive compensation, to proxy battles aimed at board or governance changes, to M&A related campaigns contesting transactions or encouraging a sale or divestiture. Over the past 20 years these activist campaigns have been steadily increasing with companies today being more willing than ever to settle with their activists. According to Shearman’s 2019 Activism Trend Report, 295 companies were targeted in the first quarter of 2019 alone, with 70% of those being US companies. Shareholder activism is also evolving, with activists now focusing on new industries and socially responsible investing, taking aim at a range of social issues such as environmental concerns, and gender equality. In 2018 Trilium Asset Management took aim at Nike with a proposal aimed at its sexual harassment policies, lack of diversity, and gender pay gaps. According to a recent press release from Arjuna Capital, their investment firm alone has filed “46 gender and racial pay proposals at 23 companies in the tech, financial, and consumer sector”. Most recently, activist investor Edward Bramson launched an attack on Barclays citing “governance weakness” over the CEO’S relationship with Jeffrey Epstein. In the wake of Covid-19 and current economic collapse, some shareholder activists have backed off, however some experts speculate that overall activity may increase in the coming months, driving some companies to implement aggressive takeover defense strategies such as the implementation of “poison pills”.
These campaigns are also not limited to large cap public companies. In fact, small cap and micro cap companies appear particularly attractive to activists. According to Sullivan Cromwell’s 2019 Shareholder Activism report, historically just over 40% of all activist campaigns targeted micro-cap companies with market caps between 100 Million and 500 Million. Companies in the following industries also appear to be most at risk: REITs, Investment Trusts & Mutual Funds, Packaged Software, Oil Companies, Commercial Services, and Pharmaceutical companies. The most damning statistic in the report however indicates just how damaging activist campaigns can be; “Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a meaningful divesture”.
Employees have been protesting for years, but the millennial workforce is proving even more aggressive, and social media platforms are making it easier than ever for employees to voice their distastes and organize their causes. This has resulted in a greater number of employee activist campaigns, which are also evolving. The stimulus has shifted from compensation and working conditions to include more complex ideological driven causes. In early 2018, Google employees concerned over the ethics of a proposed government artificial intelligence contract dubbed Project Maven, launched an aggressive protest in the form of a signed letter addressed to the CEO, resulting in the company abandoning a potentially lucrative contract. Roughly year later, Amazon, potentially responding to an organized environmentally-motived employee walk-off, pledged early compliance with the goals of the Paris agreement and promised to become carbon neutral by 2040. Employees are also getting creative – when their voices aren’t heard through simpler means such as signed petitions or organized protests/walkouts, they may resort to a louder, more effective platform, such as petitioning to (or speaking out as) investors, a strategy attempted by Amazon employees and utilized by Walmart employees who were successful at instigating a new paid family leave policy by appealing to investors through a shareholder resolution. Controversial corporate decisions can also often create a domino effect, resulting in multi-front activism. In addition to the consumer boycott, Blizzard Entertainment also suffered from subsequent employee walkouts and found themselves under the scrutiny of US lawmakers. In reviewing the list of companies affected: Twitter, Microsoft, Uber, Amazon, Facebook, Google, Blizzard, and others, some common denominators emerge. Larger tech companies appear to be the most at risk, and employees, ethically driven, are often reacting to (or motivated by) environmental, social and/or political stimuli.
While activism may be unavoidable, there are certain defensive measures companies can take in an effort to mitigate the risk. To begin, it’s important that organizations act in line with their corporate values, remain engaged with their employees and consumers, monitor social media, and increase awareness among the boardroom of trending activist campaigns. Implementing a proactive crisis response plan is equally important – it is largely believed that a quick, well executed response, can significantly reduce any brand damage. The C-Suite should also have a carefully structured insurance program in place. When addressing D&O insurance; coverage limits and breadth of coverage (including regulatory coverage) should be carefully assessed for adequacy, with programs including a sufficient layer of Side A DIC insurance. Policy exclusions such as the pollution exclusion and majority shareholder exclusions (while rare) should be avoided entirely or softened as much as possible. Directors and officers should also ensure that the policy contains pre negotiated 3-6 year extended reporting options to ensure coverage can be maintained following an activist instigated sell off. The c-suite should also consider reputational risk insurance which can serve a critical role, providing both reimbursement for lost profits following a reputational crisis, and assistance with reputation remediation costs. Lastly, when addressing defense strategies against shareholder activists, companies are best advised to seek counsel from activist defense firms.