Shareholder Activists Question Board Quality, Performance

Analysis of recent proxy season data appears to indicate that there has been a notable shift in the focus of activist investor campaigns against corporate boards for 2024. Jamie Smith, investor outreach and corporate governance director for the EY Americas Center for Board Matters recently shared insights about the 2024 proxy season that corporate board members can learn from.

Unsurprisingly, shareholder activism has increased this year, up 2.4 percent from previous years. According to Smith, the increase is due to shareholders becoming more interested in the quality of board composition and the performance that boards produce.

Smith notes that due to today’s high interest rate environment, relatively high inflation and recession fears, “scrutiny of past acquisitions intensified, and activist investors are questioning management’s past capital allocation choices.” Additionally, “When there is a lack of industry knowledge or experience among board members and succession planning is lacking, those areas can become focus points in prominent campaigns.”

Corporate board members can expect these activist campaigns to be very aggressive. Unfortunately, business decisions directors have made will be scrutinized publicly and directors’ qualifications and experience may be questioned vigorously in an effort to remove and replace members of the board. Corporate boards should consider that there may be a greater number of shareholders dissatisfied with board performance who are more inclined to force change onto a corporate board rather than negotiate a solution. Poor performance is leading to more activist challenges. The EY data suggests that the consumer sector, financials and the technology, media and telecommunications sectors have been targeted most.

This information may help some corporate boards avoid being targeted by activists in the coming year:

Re-evaluate any planned acquisitions. The current economic uncertainty makes it imperative for boards to triple-check any due diligence on management’s acquisition plans before approval. How will interest rates affect the financing of the deal? How much will a recession negatively impact company operations and revenues? Is there any way the costs of the acquisition could outweigh the financial benefits?

Is it time for board refreshment? Could a shareholder activist attack the level of knowledge and experience on the board? An honest assessment may help to strengthen the board with new insight and new members who can build greater trust with shareholders. The needs of an evolving company are always changing. Board directors should change with the company’s needs.

Are the board and management team in alignment? Ultimately, the board is going to be approving decisions the management team initiates. Is the board in agreement with the management team’s vision for the future? Is the current leadership the right team to take the company into the future? If the board doesn’t think so, shareholders probably won’t either.