Directors often miss the mark when engaging with shareholders
Many board members who speak directly with investors are frequently viewed to be unprepared and unpersuasive when meeting with shareholders, which can reflect negatively on the board and company. Even after formal preparation, directors are sometimes known to say things that are inconsistent with management commentary or reveal outdated perspectives. Additionally, directors are often not sufficiently aware of what their shareholders actually want.
Rather than relying on management and IR to escalate shareholder concerns, boards should engage directly with investors throughout the year. Boards that view annual shareholder engagement as a formality or fail to understand shareholder priorities do so at their own peril. One large institutional shareholder explained that more than 50% of the time that board members come to see them, the directors would have been better off not coming at all.
New SEC guidance is having a chilling effect on shareholder engagement
In February, the SEC’s Division of Corporate Finance issued new guidelines for investors who own more than 5% of a company’s stock. Traditionally, most large shareholders filed a 13G while activists filed a 13D, indicating their intent to push for changes at the company. The SEC’s new guidance, which caught many off guard, dictates that any shareholder that “exerts pressure on management to implement specific measures or changes to a policy may be ‘influencing’ control over the issuer,” and should therefore file a 13D, which many investors avoid at all costs.
The clarified guidelines have had a chilling effect on shareholder engagement with large passive shareholders, with some opting to forgo discussions with boards and management teams entirely. This gap in communication is making it harder for companies to receive valuable investor feedback and gauge how passive shareholders, who hold significant voting power, may cast their ballots.
First-time activism is on the rise
The line between traditional shareholders and activists is blurring, with a record number of first-time activists in 2024. More traditional asset managers who have never before publicly pressured management teams are increasingly taking a page from the activist playbook by threatening or running public campaigns. Meanwhile, a growing class of “maverick billionaire” activists are launching campaigns at companies across industries.
Activism isn’t just for aggressive hedge funds anymore. Boards should be aware that any shareholder can become an activist. In this context, members of the board should routinely engage with a variety of investors to ensure they have a clear view of what all shareholders are thinking and are ready to act on their feedback when appropriate.
Earnings calls have become public affairs platforms
In the context of new trade and economic policies, quarterly earnings calls are increasingly monitored by political officials. Several companies have found themselves in political crosshairs following earnings call disclosures. After a large consumer electronics company indicated it would shift additional assembly production to India, President Trump threatened to impose a 25% tariff on the company. Similarly, after a large retailer disclosed plans to pass tariff-related price increases on to its customers, Trump suggested the company should “EAT THE TARIFFS” on social media.
Directors and management teams should carefully evaluate how their strategic and financial disclosures - typically designed to provide updates to shareholders - may invite political scrutiny.
Perceived reputational threats for directors are overblown
Many board members fear reputational damage from public activist campaigns, even though the activist’s threats are often overblown. While criticism of board members is common during proxy contests, attacks on a director’s character are, in fact, rare and can be counterproductive to activists’ goals. Being targeted by an activist also has a limited impact on a director’s future professional opportunities.
Preparation can protect reputations and help directors navigate activist threats. Boards should have a plan for when and how to respond to activist threats and attacks.
Boards are too quick to settle with activists
Settlements between activist investors and the companies they target are occurring at an ever-faster pace. These agreements may not be in shareholders’ best interests. Our analysis of 634 settlements from 2010 to 2024 shows that ~60% of companies underperformed the market post-settlement, with the average company trailing the market by nearly 10%.
The data shows that companies tend to underperform the market post-settlement, unless they are sold. When considering a settlement with a shareholder activist, boards must balance the practical goal of minimizing distractions and cost with the understanding that a settlement may not yield positive results.
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