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Zach Stein, Cofounder, Carbon Collective

Shareholder advocacy or activism is the process by which individual shareholders, or groups of shareholders, attempt to influence the decisions made by a company's management.

It encompassed various strategies to engage in companies' investment portfolios on corporate, social, and environmental governance issues.

There are various forms of shareholder advocacy, including resolutions at shareholder meetings, proxy fights, publicity campaigns, negotiations with management, and litigation. Shareholder activists may use any or all of these tools to achieve their goals.

While there are no definitive statistics on the effectiveness of shareholder advocacy, there are several high-profile examples of successes achieved by activist shareholders.

In some cases, shareholder activism has led to significant changes in a company's operations or policies. However, it is essential to remember that shareholder activism is not without risk, and there is always the potential for losses to be incurred.

Forms of Shareholder Advocacy

There are many ways that shareholders can advocate for their interests, and the three most common forms are the following:

Resolutions at Shareholder Meetings

“Shareholder advocacy or activism is the process by which individual shareholders, or groups of shareholders, attempt to influence the decisions made by a company's management.”

A shareholder resolution is a formal proposal that a shareholder or group of shareholders puts forward to the company’s board of directors. The resolution must pass a number of tests to be valid, including the requirement that it pertains to the company's business. Shareholder resolutions can address a wide range of issues, from corporate governance and executive compensation to environmental and social responsibility. Shareholders can propose resolutions on any topic they choose, and a resolution must receive a majority vote to be adopted.

Proxy Fights

It involves seeking to gain control of a company's board of directors by winning the support of its shareholders. In a proxy fight, the shareholder(s) will get other shareholders to vote for them instead of the current board of directors. This is done by submitting a proxy statement , which is a document that allows shareholders to indicate whom they want to be represented at the annual meeting. The goal of a proxy fight is to gain control of the company's board of directors so that the shareholders can implement their agenda.

“Many shareholders prefer to negotiate with management to reach a compromise on the company’s issues. Negotiations can be facilitated through direct negotiations or a proxy advisory firm.”

Publicity Campaigns

Publicity campaigns raise public awareness of the issue(s) to persuade other shareholders to join the cause. Shareholder activists will often use various methods to publicize their campaigns, including press releases, social media, and letters to the editor, to highlight their cause and put pressure on management. One of the most famous examples of a publicity campaign was the "Greenmail" campaign waged by Carl Icahn against TWA in the 1980s . Icahn purchased a large amount of stock in TWA and then began a public campaign demanding that the company be sold or restructured.

Negotiations with Management

Many shareholders prefer to negotiate with management to reach a compromise on the company’s issues. Negotiations can be facilitated through direct negotiations or a proxy advisory firm. Direct negotiations involve the shareholder(s) meeting with management to discuss the issue(s) in person or over the phone. Proxy advisory firms provide advice to shareholders on how to vote. They can also help to facilitate negotiations between shareholders and management.

Litigation

“One of the most famous examples of shareholder litigation was the lawsuit filed by the pension funds against Enron. The pension funds filed a lawsuit alleging that Enron had committed securities fraud, and they eventually recovered over $7.5 billion in damages.”

Shareholder advocacy can also take the form of litigation. Shareholders will often file lawsuits against a company if they cannot settle through other means to compel it to change its policies or recover damages. One of the most famous examples of shareholder litigation was the lawsuit filed by the pension funds against Enron. The pension funds filed a lawsuit alleging that Enron had committed securities fraud, and they eventually recovered over $7.5 billion in damages.

Uses of Shareholder Advocacy

There are various reasons shareholders might choose to pursue shareholder advocacy. Some common goals include:

Increasing Transparency and Accountability

One of the primary goals is to increase transparency and accountability by holding management accountable for their commitments, ensuring that financial information is accurate and complete, and monitoring corporate governance policies.

Reducing Costs

Another goal is to reduce costs for shareholders. Shareholders often pursue campaigns to get the company to focus on its core business and divest non-core assets. They may also try to get the company to reduce its spending on things like executive compensation, administrative costs, and capital expenditures.

Protecting Shareholder Rights

It is essential for shareholder rights to be preserved, and shareholders can do that by seeking to enforce their rights concerning the company's bylaws, voting their shares in accordance with their wishes, and preventing dilution of their ownership stake.

Reforming Executive Compensation

Executive compensation has become a significant issue for shareholders in recent years. Shareholder advocacy is often used to reform executive compensation practices, such as opposing excessive pay packages or seeking to tie pay to performance.

Improving Corporate Governance

Improving corporate governance practices includes increasing board independence, enhancing management oversight, and ensuring that executives are held accountable for their actions.

Achieving a Higher Return on Investment

Shareholders hope to achieve a higher return on investment by ensuring that the company is efficiently managed and maximizing the value of the company's assets.

Promoting Environmental and Social Responsibility

Advocacy can be used to promote environmental and social responsibility. Shareholders may push the company to adopt environmentally-friendly policies that benefit society.

Prevent Take Overs

It can also be used to prevent a company from being taken over by a hostile bidder or to block a merger or acquisition that the shareholders feel is not in the company's best interest.

Examples of Shareholder Advocates

There are several prominent examples of shareholder advocates who have successfully achieved their goals. Some of the most notable include:

Carl Icahn

Carl Icahn is a well-known activist investor who has been involved in several high-profile proxy fights. He is known for pushing companies to sell off non-core assets, reduce spending, and increase transparency and accountability.

Bill Ackman

Bill Ackman is the founder of Pershing Square Capital Management, a hedge fund. He is known for his advocacy of shareholder rights, and he has been very successful in pushing for corporate governance reform at different companies.

Dan Loeb

Dan Loeb is the founder of Third Point LLC, another hedge fund. He is famous for taking significant positions in companies and pushing for changes such as board shake-ups, asset sales, and executive compensation reform.

Engine No. 1

Engine No. 1 is a group of shareholders that focuses on environmental and social responsibility. They use shareholder advocacy to get companies to adopt environmentally-friendly policies and practices. They have won at least 2 Exxon board seats, and they were also successful in getting Walmart to adopt a comprehensive sustainable energy plan.

The Bottom Line Shareholder advocacy is a tool that shareholders can use to pursue various goals.

Common goals include:

increasing transparency and accountability,
reducing costs,
protecting shareholder rights,
reforming executive compensation,
improving corporate governance,
achieving a higher return on investment,
promoting environmental and social responsibility, and
preventing takeovers.

This article was originally published by the Carbon Collective.

Zach Stein is the Co-Founder and CEO of Carbon Collective. Zach Stein was the CEO and Co Founder of Osmo Systems, an agro-tech startup offering all-in-one monitoring and control systems to hydroponic and aquaculture farmers at a price they can actually afford. Since graduating from Hamilton College, Zach has plunged into the burgeoningintersection of technology and agriculture. He believes that as our climate becomes increasingly unpredictable, we will need to harness the most advanced tools to feed a growing global population and fight food insecurity. Therefore, since late 2012, Zach has worked to bring his company's flagship product, the OsmoBot, to market. With his business partner Paul Holowko, Zach aims to reduce both the technological and financial barriers to entry for those advanced farms that can remain sustainable and profitable in a changed climate.

Volume 70: What Is Shareholder Advocacy?