Mitigating shareholder activism

Recent press has identified growing activism amongst institutional shareholders in Australia.

Australia braces itself for shareholder activism

The increased activism has, to a significant degree, been facilitated by recent regulatory developments in the areas of executive remuneration and corporate governance. Boards must devote more and more resources to grapple with and respond to the relevant shareholder concerns, although we note that the government will reportedly legislate this week to remove one enabler of activism – the 100-member rule, which enables 100 shareholders to call an extraordinary general meeting.

The increased shareholder activity has led to a rapid growth in advisory services to help ‘defend’ companies from such activist attacks or to help activists agitate for change. This has given rise to accusations of Boards “using shareholders’ money to protect themselves from shareholders”.

In the executive remuneration space, the ‘two-strikes’ regime has given shareholders the ability to protest against Boards by voting against executive remuneration arrangements, forcing greater accountability on directors. In response to the increased scrutiny of remuneration practices, more and more Boards are engaging remuneration advisors to assist with their deliberations. Initially, such assistance was sought soon after a first strike was received but, increasingly, advisors are engaged in anticipation of any shareholder objection.

We have previously commented on the criticality of Boards seeking remuneration recommendations in respect of Key Management Personnel remuneration. The engagement of remuneration consultants who provide formal remuneration recommendations is strictly governed by the Corporations Act. Seeking remuneration recommendations means strict engagement, governance and disclosure practices have to be followed.

These practices increase the transparency for shareholders and should mitigate future shareholder objection in the form of shareholder activism.

It is interesting to note the number of companies that faced their first or second strike whose Boards did not seek remuneration recommendations. It is also interesting to note the number of companies currently subject to ‘activist activity’ whose Boards similarly have not sought remuneration recommendations.

Unless such Boards seek remuneration recommendations from their remuneration advisor, there is a risk they may find themselves resorting to “using shareholders’ money to protect themselves from shareholders”. 

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