Shareholder Activism: A High and Rising Tide
Vinson & Elkins stands among the most trusted names in shareholder activism defense. Led by co-heads Lawrence Elbaum and Patrick Gadson, the firm’s Shareholder Activism practice has defended more campaigns than any other firm since 2015 — and earned numerous #1 rankings from The Legal 500 United States, Chambers USA, Bloomberg, and more.
In this V&E+ interview, Lawrence and Patrick share their thoughts on the 2023 proxy season, peacetime preparation for activism defense, and the HBO show that no one could seem to stop talking about.
The 2023 proxy season just wrapped up. What did we learn?
Lawrence: Data from some of the latest annual meetings is still trickling in, but some of the lessons from the season are already clear. The biggest is that the tide of shareholder activism remains high — and continues to rise.
This season, shareholders submitted a record number of proposals, just as they did in the previous two. And it wasn’t just blue-chip companies that found themselves under attack. Activists targeted companies across market caps, with bold proposals and aggressive tactics.
Patrick: As the saying goes, they are who we thought they were. But boldness and aggression don’t always equal success, and that was certainly the case this season. Despite the record-high volume, support declined — overall and for most proposal types, including ESG-related proposals.
What explains the decline in support?
Patrick: One explanation is the substance of the proposals themselves. Not just this season, but going back a few years now, they’ve grown increasingly demanding and prescriptive, making it harder for them to win support across the electorate.
Lawrence: Yes, and many companies have made meaningful efforts in areas where activists had raised concerns in previous years. There’s also the fact that, for ESG-related campaigns, institutional investors aren’t feeling as much pressure to get behind them. Having studied these issues more deeply, they now apply greater scrutiny to ESG-related proposals, and are far more selective in those they support.
About those ESG-related proposals, what did you see there?
Patrick: Well, recent headlines will tell you that the ESG movement is facing a major pushback. And to some degree, we saw this anti-ESG sentiment play out in the boardroom.
Support for ESG-related proposals fell slightly, and the number of anti-ESG proposals rose substantially. But support for anti-ESG proposals actually didn’t rise, and ESG-related proposals continued to vastly outnumber them.
Lawrence: From a defense perspective, it’s important to remember that environmental, social, and governance issues are distinct from one another — and that effective boards address them as such. As with every stakeholder concern, boards should think about these issues not in a vacuum, but as they relate to their companies’ long-term viability.
This helps boards identify and mitigate ESG-related risks before they become problems, and ward off attacks that could damage their company’s reputation, disrupt its business, or weaken its financial performance.
Patrick: I’d contend that ESG thinking should really start with G. Good governance centers on ensuring the company is positioned to create long-term value for shareholders, and having sound environmental and social practices in place can play an important role to that end.
What about the SEC’s new universal proxy rules? This proxy season was the first under them, and many analysts were looking out for any effect they might have.
Lawrence: The rules were on our radar, too. Allowing proxy voters to use one card to select a combination of director nominees from competing slates, instead of having to choose between one slate and another, stands to make voting for change more appealing to shareholders who are skeptical of supporting a full activist slate.
Patrick: Right, and what we saw this season was a rise in the percentage of campaigns that were settled before turning into a proxy fight. This was in line with what we expected. And in our view, it suggests that individual directors felt their seats were in greater jeopardy, that activists felt emboldened to take a more aggressive approach in settlement negotiations, and that companies found greater incentive to come to the negotiating table.
Lawrence: Of course, no two boards have identical issues to contend with. The new rules will affect each boardroom differently, and their full effect can be known only with time. But overall, the rules seem likely to increase shareholder power, and to prompt companies to be more responsive to shareholder concerns. It’s still early days.
You both have emphasized the value of robust board disclosure for activism defense. Tell us about that.
Lawrence: The thing is, many companies don’t disclose a whole lot about their directors beyond what’s required in regulatory filings. Investors want to know the value that each director brings to the business, and the basic information that companies provide in professional biographies generally doesn’t cut it.
Patrick: That’s why we think that enhancing board disclosure is such a critical part of defense preparation, and a useful endeavor for companies to take on during the quieter peacetime months.
Disclosure that explains what qualifies each director to oversee management and protect shareholder interests familiarizes investors with the board’s strengths. It makes investors more likely to support an incumbent slate in a proxy fight, and can even dissuade activists from waging one in the first place.
Let’s close by touching on shareholder power. HBO’s Succession managed to turn proxy voting — and boardroom dynamics more generally — into high drama. Commentators have written plenty about the show. What did you take away?
Patrick: For me, the show did an excellent job highlighting just how powerful large shareholders can be, and the outsize influence they can wield on a company’s direction. This is the ruthless reality that thousands of public companies face every day.
One thing we stress with our clients is the value of engaging with shareholders. Having a frequent, open, and constructive dialogue helps companies strike the right balance between pursuing their long-term strategy and addressing shareholder concerns.
Lawrence: My takeaway is all about reputation. Succession shows how deeply activism can damage it, and how that damage can undermine a company’s chances for long-term success. A company’s reputation can affect its stakeholder relationships, customer loyalty, access to capital, revenue growth, share price, and more. Few priorities should be higher than building and protecting it.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.