Author: Sven Maier, August 19, 2024
1 Introduction
In recent years, the global business environment has changed dramatically, and one of the most notable developments is the rise of shareholder activism. This term describes the phenomenon of shareholders increasingly seeking to exert influence over corporate governance and strategy in order to maximize the value of their investments1.
The relevance of shareholder activism can hardly be overestimated. In a world where the power of large corporations and financial institutions continues to grow, activism offers a way to influence these power relations and create a kind of counterbalance. Through shareholder pressure, companies can be persuaded not only to maximize short-term profits, but also to develop long-term sustainable strategies. This is particularly important in times of economic uncertainty and rising social expectations of responsible behavior2.
Environmental awareness is omnipresent in today’s world. In the past decades, the rapid globalization and industrialization significantly contributed towards environmental degradation in the form of pollution, greenhouse gas emissions, ozone depletion and global warming. This issue is a major cause of concern for governments, corporates, and individuals3. That is why economic goals such as maximizing profits, social goals such as improving living conditions, but also ecological goals such as the reduction of environmentally harmful emissions are of fundamental importance4. Environmental responsibility is a critical component of corporate social responsibility (CSR) as activists continue to accuse large corporations of having negative impacts on the environment. Because of the high costs of environmental corporate misconducts and the pressure to improve environmental performance, proposals regarding Environment, Social and Governance (ESG) issues are one of the most cited reasons for shareholder resolutions presented and voted upon at annuals meetings through the proxy vote5.
Shareholder activism on sustainability issues has become increasingly prevalent over the years with the numbers of shareholder proposals being filed on ESG issues almost doubling from 1999 to 2013. An analysis from 2014 shows that in 2013 almost 40 percent of shareholder proposals submitted to Russell 3000 companies related to ESG issues. An increase of 60 percent over the last ten years demonstrating ongoing rise of sustainable shareholder proposals in publicly traded corporations6.
Companies must move with the times to remain competitive. The growing awareness of climate change is reflected in climate legislation and demonstrations. The demand to operate in an environmentally neutral manner puts companies under intense pressure, as they encounter it on a daily basis. A key point of contact are shareholders, who want to exert influence to make the target company more environmentally friendly. Therefore, the aim of this paper is to provide an overview of why shareholder activism movements emerge and how they are practiced. Additionally, it will be illustrated how activism in general and sustainable activism in specific affect the corporation’s performance. The goal is to then use these findings and create two recommendations for action. One recommendation of action for the companies’ point of view and one for the shareholders’.
In order to achieve the aim of the thesis, the content of the literature is extracted and presented in a structured manner. In addition, the results of the literature research are examined and analyzed for the purpose of providing a clear overview of implementation approaches and possibilities. The approaches will then be evaluated and checked for feasibility. This analysis is then used to formulate recommendations for the implementation of sustainable shareholder activism in the day-to-day activities of a shareholder and in the activities of a business’s shareholder management.
2 Classification of terms
In this chapter the terms “shareholder”, “shareholder activism” and “sustainable shareholder activism” will be defined and placed in a theoretical framework. Starting with the classification of the term shareholder. This is followed by a theoretical classification of the term shareholder activism and ends with the definition of the term sustainable shareholder activism. This explanation of terms is intended to serve as a basis for the subsequent work.
2.1 Shareholder
A shareholder is an individual, company or institution that owns at least one share of a company’s stock or in a mutual fund, representing a fractional ownership in that company. This ownership grants them a claim on a portion of the company’s assets and earnings. Shareholders are crucial to a company’s capital structure as they provide the funds needed for operations and expansion. In exchange they are rewarded with potential financial return in form of dividends.7
In addition, shareholders have specific rights, including the right to vote on major corporate decisions such as electing board members, approving merges and acquisitions and making other significant corporate decisions. These rights are exercised during annual general meetings or special meetings called by the company.8
Shareholders are considered a type of corporation stakeholder, meaning they can affect or are affected by the achievement of the firm’s objectives9. To make an impact on the financial performance, shareholders submit interest driven proposals to the company’s board of directors. These proposals can be categorized in six broad categories, each addressing different aspects: Governance, Social, Environmental, Lobbying, Compensation, Director Elections.10
2.2 Definition shareholder activism
The term shareholder activism became increasingly popular in the early 1980’s, but dates to the early 20th century, when shareholders were first granted the opportunity to submit shareholder resolutions.11 Over the last decades the shareholder activism landscape has evolved. Until 1970 individual investors submitting financially driven proposals were the main characters on the shareholder activism stage.12 But in 1970 the positions of the US Securities and Exchange Commission (SEC) was successfully challenged via a lawsuit. The SEC allowed companies to omit proposals on social issues from their proxy statement, because they were considered actions improper for shareholder matters. As a result of the court’s decision the barrier regarding social issues was dropped, making way for social, environmental, and political activism seeking to pressure companies to change their business practices and their social impact.13 The founding of centers like the Interfaith Center on Corporate Responsibility in 1971 and the Investor Responsibility Research Center in 1972, being sponsored by various foundations, charities, religious and environmental organizations and socially responsible investment funds, contributed to a subsequent increase in social shareholder issues14.
Shareholder activism regarding financial issues was powered by the rise of institutional ownership. Evolving and expanding from individual investors to institutions taking part in shareholder activities the Institutional Shareholder Services and the Council of Institutional Investors were founded in 1985, marking an important year for institutional activism. The activism scene became more diverse. Public pension funds were the first to take part in institutional activism. In the 1990’s union funds joined, replacing pension funds as the most prolific sponsors of financial proposals. The latest actors on the financial activism stage are hedge funds, entering in the field in the late 1990’s, rapidly gaining prominence because of increasing activism efforts2.
In modern times the term shareholder activism is defined as the “use of ownership rights to actively influence corporate policy and practice” (Yang, Uysal, Taylor, p. 714)5. “Shareholder activism can be exerted through letter writing, through dialogue with corporate management or the board, through asking questions as open sessions at annual general meetings and through the filing of formal shareholder proposals” (Sjöstrom, p. 142)13.
2.3 Definition sustainable shareholder activism
Sustainable shareholder activism refers to a specific form of shareholder activism in which investors use their influence over a company to improve its environmental, social and governance (ESG) practices and promote long-term sustainability. Rather than focusing solely on short-term financial returns, these shareholders aim to encourage the company to adopt sustainable business strategies that create long-term value while minimizing social and environmental risks15.
The academic literature emphasizes that sustainable shareholder activism not only pursues ethical motives but is also seen as a strategy for minimizing risk and creating value. Investors rely on dialog with management, the submission of shareholder motions or voting activities at the Annual General Meeting to bring about change in corporate practices. This form of activism is seen as a means of steering companies in a direction that is more financially, environmentally and socially sustainable, which ultimately benefits both shareholders and society16.
The literature often emphasizes that sustainable shareholder activism is gaining importance due to the growing importance of ESG factors in company valuation and pressure from institutional investors such as pension funds and foundations. This form of activism is also seen as an interface between ethical investing and traditional shareholder interests17.
In this paper, the term is often used with a focus on the environmental aspect of the definition.
3 Insights from the literature
This chapter explores previous research by academics and their findings to provide an overview of the current state of research. The focus here is on research that deals with sustainable shareholder activism. However, research that deals with activism of a different nature is also considered.
There is already a great deal of research on conventional financial activism, but research on shareholder activism is growing. In particular, research on alternative activism movements is growing rapidly as the literature on activism with social goals becomes increasingly popular.6
3.1 Which corporations are targeted?
In general, one of the two biggest reasons a corporation is being targeted by activists, is performance. Companies with good operating performance tend to be less attractive to activists. Most of the times companies with an underperforming share price are the target of activist movement. Because shareholders often act on the premise of achieving financial success, companies with poor performance are an attractive target, as there are often many weaknesses in such companies that can be improved with less effort.18
The second reason is firm size. Generally, activists focus on large companies. From a financial point of view, large companies are more attractive for activists because more unknown agency problems (problems between management and the boss/board) exist in large companies, as it is difficult for shareholders to monitor large companies.19
But especially from a social perspective, large companies are more attractive for activism movements, as they are known worldwide due to their size. Consequently, campaigns involving large companies have a greater chance of being noticed by the media and the public. In this way, activists receive public support and strengthen their identity as an activist group.20
Hedge funds are the only exception. These usually aim to own a considerable proportion of the target company’s shares before they start making activist moves, as they want to have an enormous influence on the company. As it is more difficult to acquire large shares in large companies, they don’t target large corporations unless they already own a large proportion.21
Rehbein and colleagues found several instances where activism is associated with poor social performance. Companies and industries with low environmental efforts are often targeted. However, it is not always entire industries that are attacked, but rather individual companies with major problems and negative headlines. Manufacturing industries in particular, such as food and textiles, are heavily affected by sustainability activism.20
But industries in which questionable working conditions repeatedly come to public attention are also heavily affected by social activism. In particular, Rehbein and colleagues found that refineries, rubber and plastic manufacturers and hotels and entertainment service providers were accused of problematic treatment of human rights and working conditions.
3.2 From grievances to proposals to voting
This chapter is about how grievances lead to votes. Accordingly, it explains the reasons for shareholders to become active, how they communicate with the target companies and which mechanisms/strategies are used by shareholders to receive positive feedback in response from the company.
Causes of shareholder activism
At the heart of shareholder activism is the quest for value. Activists need the company’s share price to rise in order to realize financial profits.6 To achieve rising share prices, activists submit proposals to management that they believe will make the company perform better. In the early days of shareholder activism, “poison pills” were extremely popular theme for shareholder activists. So called poison pills are a defense mechanism designed to protect companies from hostile takeovers by making the takeover of the company as unattractive as possible to the acquirer. Another example is management renumeration. All proposals aim to achieve fundamental change in the corporate structure, corporate strategy or corporate management in order to increase the operational performance of the company.22
In general shareholder activism consists of two streams. The first one being the financial stream as mentioned above and the second one being the social stream.
The social stream is based on social grievances. Increasing awareness of social grievances in society means that companies are also taking on the role of polluter. Especially about sustainability and environmental protection, but also to working conditions. Headlines about social misconduct, such as intolerable working conditions, animal testing, the writing of false statements, quickly lead to shareholders becoming aware of these abuses and deciding to take action against them.2,6
In the literature these two streams are either viewed as complementary, because both try to remedy managerial deficiencies or as colliding, because social goals are not shared by financially driven shareholders.23
However, there is a third reason for activism, derived from the second stream: the environment. Climate change and the associated environmental pollution are also part of the shareholder activism world. This can be seen, among other things, in the growing body of literature on the subject. In modern times, activists have produced the idea that sustainable investments benefit the target companies, as they have positive effects for the company. One example is better marketing of products and services.6
The goals of environmental and financial activism stream often go hand in hand because both share the possibility of resulting in rising share prices.
But in general, the reason, a shareholder makes the decision to actively take part in activism movements can always be traced back to the fact that a shareholder wants to pursue his personal interest, no matter its financial, social, or environmental origin.
Communication
As soon as there is a desire for activist activity, the next step is to communicate the idea to the target company. Whether as an individual actor, as a group or as an institution, there are different approaches to this.
Traditionally the choices available to shareholders have been loyalty (hold), exit (trade), voice (activism).24 With a view to the third selection, the question can now be answered as to how active shareholders meet the target company. Shareholders need to have a strategic approach, when they want their proposal to be included in the companies’ proxy statement, because firms can decide for themselves whether the proposal makes it to the annual meeting and is approved for voting, or whether the proposal is simply rejected25 (Securities and Exchange Commission rule 14-a-8). Among other things, the SEC sets rules for shareholder proposals. If these requirements are met, the proposal submitted by the shareholder must be included in the annual meeting so that it can be voted on. This special type of proposal can only be rejected with reasons in special exceptional cases. But these types of proposals are rare, and shareholder rely on other strategies.25
The literature differentiates between two approaches:
Firstly, public activism, which is often practiced through published letters, focus lists and media campaigns.26 This is publicly comprehensible for every player in the financial world and beyond.
Secondly, private activism, which is typically not observable to researchers. It is practiced through behind-the-scenes consultations, letters, phone calls, meetings and dialogues.27 According to the literature, private activism, sometimes referred to as “quiet diplomacy”2 (Goranova, Ryan, p. 1248), is more effective than public activism because executives and directors tend to be more responsive to activists when it is done behind closed doors. In this way, they avoid public embarrassment and protect their reputation.24 Private activism is the much more widespread variant of the two types.28However, the two variants are not mutually exclusive, as activists can, for example, take a public stance on an originally private approach that has failed and thus try to achieve satisfactory results again.21
The content of the proposals should be in line with the interests of other shareholders, as this is the only way to obtain a large amount of support, which can be of great importance in the subsequent voting process, should this occur.29
Depending on the content and communication channel, proposals are approved directly by the company, released for voting at the Annual General Meeting or rejected directly.
Shareholders need to become salient, in order to achieve an approved proposal or positive feedback from the company.30To become salient, shareholder need to have specific characteristics, form coalitions or build a strong relationship with companies.31
3.3 Shareholder activism outcomes
In general, scientists disagree on the results of shareholder activism. Despite increasing research figures, there is no common conclusion.
On the one hand, it is claimed that shareholder activism can create value. According to Becht and colleagues, who examined the activities of a fund called HUKFF in their study, there are positive changes in the value of the target company in result to shareholder proposals. This fund specifically looks for poor corporate governance performance in companies where it believes that there is a high probability of intervention being successful and resulting in considerable share price gains. Becht and colleagues concluded that a high portion of the interventions from the fund was successful and resulted in substantial shareholder gains meaning that’s well-focused engagements can result in considerable returns not only to those actually involved in the engagements but also to outside shareholders.32
Taking a different perspective, the results from Becht and his colleagues find confirmation. Looking on firm-level outcomes, Cunat and colleagues find that on average, the market reacts with positive return to the passage of a governance related shareholder proposal. In their study they examined, how shareholder proposals trying to improve internal corporate governance create value for shareholders. They come to the conclusion, that one successfully implemented shareholder proposal is equal to an increase of 2,8% in market value.33
On the other hand, there are studies that prove the opposite. For example, Gantchev found that the returns from activism campaigns are insignificant. In his 2013 study, Gantchev examined activist block-holders (Block-holder activist usually own more than 5% of a company’s stock) return to activism and took another variable into account. Gantchev measured the cost of activist campaigns to provide a better understanding of the net return to activism. By comparing the cost of hedge fund activism campaigns, he found out, that the average campaign ending in a proxy fight cost $10,71 million. He suggests that costs play a significant role in the activist’s decision-making behavior and concluded that on average the returns to block-holder activist are insignificant. However, he also noted that shareholder activists differ enormously in their ability to capture financial benefits and that a small amount of activists exist, who are able to reap significant financial benefits for their efforts.34
The findings of Cai and Walking summarize the finance driven activism outcome. Cai and Walking researched on how “say-on-pay”, an initiative that allows shareholders to vote on executive compensation, would impact a firm’s value. In their first experiment from their 2011 study, they were examining the relation between shareholder proposals on executive compensation and the willingness of US-companies to include those. They conclude that firms that are more willing to improve compensation practice under the pressure of shareholder votes can create higher value for themselves. In the second experiment of their study, they find out that “say-on-pay” does not benefit all firm. Companies suffer abnormal negative returns when executive compensation proposals sponsored by labor unions are announced, because these proposals tend to receive lower support from other shareholders.19
From the prior research up to date I find that there seems to be a disagreement in the literature about the outcome of finance driven shareholder proposals and in order to successfully summarize the results of financial shareholder activism, a very large and multi-variable study is needed, as the outcome of a shareholder proposal depends on a number of variables such as proposal content, support from other shareholders, cost, implementation by management and the manager’s willingness to negotiate with shareholders.2
But even though value maximization lays at the heart of shareholder activism, there are also non-financial outcomes of shareholder activism. In his study examining labor union shareholder objectives Agrawal found out that union pension funds have preferences reflecting union worker interests, rather than value maximization alone. Union funds interests lay in benefiting corporate stakeholders such as employes. They strive for social value instead of financial value and do not hesitate to create social value in expense for shareholder returns. But the outcomes of their actions are ownership related. Agrawal states that non-value-maximizing entities, such as pension funds, are more of importance, when their shareholdings are relatively larger, because in these circumstances their votes are likely to be more important for issues such as labor relations, management compensation and other decisions where directors have influence.35
As stated, the interest behind proposals is not always of financial nature. Another alternative is Sustainability. Consensus prevails in the research field of sustainability.
The outcome of sustainable shareholder activism seems to be more clear and easier to define. Sustainability related proposals can be categorized in the material and immaterial. Material issue proposals have direct influence on the company’s financial performance, whereas immaterial issue proposals only indirectly affect the companies’ financial performance. According to a study from Grewal and colleagues, 42 percent of all ESG related shareholder proposals are material while 58 percent are immaterial. Following that they suggest that shareholders either cannot differentiate between material and immaterial topics or pursue objectives other than enhancing firm value, which supports the concept of social shareholder activism. By tracking targeted firm’s performance on ESG issues they gathered evidence, confirming that all ESG issues addressed by shareholder proposals create awareness and are accompanied by larger and faster increase in company’s performance on the ESG issues that was identified in the proposal.6
Regarding financial outcome, sustainable shareholder activism seems to be superior since Grewal and his colleagues also examined the financial performance of the targeted firms by tracking their Tobin’s Q. Tobin’s Q is a tool used to calculate the current enterprise value. According to their study, proposals on immaterial issues are accompanied by subsequent declines in Tobin’s Q, while proposals on material issues are accompanied by subsequent increases in Tobin’s Q.6
This suggests that putting pressure on companies to address ESG issues that are financially material for the firm could create financial value even though achieving financial gains is not the main goal of sustainable shareholder activism.
These findings overlap with the results of another study. Khan and colleagues examined a large number of proposals on sustainability issues. Using the guidance of the Sustainability Accounting Standards Board they also classified sustainability issues as material and immaterial and tracked its future performance.36
They conclude that firms with strong ratings on material sustainability issues have better future performance than those with inferior ratings on the same issues. Contrary, firms having strong ratings on immaterial issues do not outperform firms with poor rating on these issues. Finally, the best performing firms are those, that have strong ratings on material issues and concurrently poor rating on immaterial issues. Khan and colleagues point out that materiality guidance is helpful in improving the decisions of which issues to work on, because the classification of material and immaterial issues differentiates between industries.
These two studies were one of the first to show evidence that shareholder activism on sustainability issues is associated with a better financial performance if done correctly.
3.4 Shareholder networks
One of the most important phenomena that have developed in shareholder activism over the last decades are networks. The 21st century has been dubbed “the age of networks” (van Dijk, p. 2).37 A time in which individuals, organizations and nations are connected through a multitude of networks to channel information, resources and power.38
This is precisely why it is important to understand how networks can contribute to corporate management and strategy. Many activists have already understood the power of networks and are actively using them to generate greater influence.
In a study in which they examined 844 sustainability applications, Yang and colleagues found that less than 30% of the applications were submitted by individual activist organizations. In addition, none of the 231 organizations isolated themselves from other groups. All participants interact with each other. Yang and colleagues conclude that networks enable activists to share resources and function as a group. They also found that two groups achieve particularly high success rates with regard to their submitted sustainability applications. These include activists who are very well networked and activists who network with important other activists.5
From this, it can be concluded that shareholder networks play a large part in successful sustainability development.
Rowley examined similar relationships in his study and developed his own stakeholder influence theory. This states, among other things, that companies do not only interact with one stakeholder. Companies have to deal with several stakeholders at the same time and respond individually to their different demands and needs.39
The other findings of Yang and his colleagues go hand in hand with Rowley’s stakeholder influence theory because they also found that companies do not only deal with one stakeholder at a time. Companies are also part of networks and, together with their stakeholders, form an overall social network. Especially at such points of contact, where the corporate world and the activist world overlap, there is plenty of room for network activists to successfully exert pressure and influence on the company and its strategies.
To conclude the study, Yang and colleagues found that the position within the network also plays a decisive role when it comes to the response from the target company. Central figures in the network are more likely to receive a positive response from the company when they want to effect change. They concluded that network strategies are an effective tool to exert pressure on companies to effect social change. In addition, individuals who are at the center of the network can more easily mobilize other supporters who are behind the change requests to achieve even higher success rates in terms of the likelihood of implementation.5
The results of this study clearly show the enormous influence shareholder activist networks can have in the world of social shareholder activism. But these networks do not exist suddenly. Networks must be formed and built. Based on common interests individual activists join together to represent their interests and demands.40 Especially when activists feel that their particular interests are being ignored, activists tend to become active. Activists who identify more strongly than average with their interests tend to become active much earlier. In America, for example, this includes religious groups. They interact proactively with like-minded people in order to shape the interaction process together.5
3.5 Spillover effect
The spillover effect is the phenomenon whereby activities, measures, or events in one specific area or sector have a positive or negative impact on other areas or sectors. This was researched early on in shareholder activism. Ferri and his colleagues found in a 2009 study that the presence of a proposal to change the method of accounting for employee stock options at one company led to a tendency for other companies in the same industry to implement the same proposal at their own companies. Shareholder activism aimed at a single company can therefore bring about and drive industry-wide changes in practices.41
Especially in the context of sustainable shareholder activism, the findings of Ferri and his colleagues are confirmed. Reid and Toffel found that companies were more likely to follow up on submitted proposals to improve sustainability practices if they had already been the target of sustainability activism themselves, or if other companies in their industry had already been targeted by sustainability activism. This means that overcoming potential barriers to implementing sustainability proposals for the first time makes the path for additional implementations much easier and thus drives investments in sustainability.11
3.6 Countermovement
In addition to the positive aspects associated with sustainable shareholder activism, the literature also describes a phenomenon that runs counter to positivism. Companies that promote sustainability and put a large amount of money into sustainable investments are an attractive target for investors and shareholders who care about protecting the environment. But they are also an attractive target for an elite group of shareholders: hedge funds. Hedge funds see sustainable investments as “wasteful” because they take away time and resources that the company could have used to maximize shareholder value. In a company with the above intentions and opportunities, hedge funds see the chance to generate considerable profits in a short time by reorienting the company.21
In their study on CSR and hedge fund activism, DesJardine and his colleagues confirmed their hypothesis that above-average engagement in CSR-related activities significantly increases the likelihood of becoming a target of hedge fund activism. If CSR efforts increase by one standard deviation above the average level of CSR, the likelihood of becoming a target of hedge funds also increases from 3.04% to 3.88%. If CSR efforts increase by 2 standard deviations, the probability rises to 5.11%, almost doubling31. In the field of sustainable shareholder activism, there are therefore not only positive effects and advocates, but also opponents.
4 Practical Implementation
In this chapter, the implementation possibilities of sustainable shareholder activism are examined from two different perspectives. Starting with the shareholders’ perspective, it examines how they can most effectively integrate sustainability-related ideas and proposals into their day-to-day practices as shareholder activists. This is followed by implementation within the company. As there are no guidelines for the implementation of sustainability-related activism and this paper does not deal with the implementation of sustainability-related proposals, the question “How should companies respond to sustainable activism?” will be answered in this section.
For both perspectives, possibilities are first developed, which are then evaluated in the form of a recommendation for action.
4.1 Practical Implementation Shareholder
How can shareholders integrate sustainable activism into their actions and achieve positive results? To answer this question, sub-categories are developed that are based on theory chapter 4 and partly go beyond it. The categories are: Target company, Communication strategy, Position and Network.
Target company:
Before activist movements start, they need a goal. In the context of this research, the goal of activist shareholders formulated in 2.3 is to encourage companies to adopt sustainable business strategies that create long-term value while minimizing social and environmental risks. In order to achieve this goal, a target company that makes it as easy as possible to achieve the goal is required. To find such companies, various variables, which can, depending on their intensity, have different effects on the achievement of the goal, must be considered. As described in 4.1, a distinction must be made between large and small companies. Large companies are much more frequently the target of sustainable activism movements than smaller companies because large companies are much better known to the general public. It is therefore quite easy for public activism to gain the support of the media and the public. In addition to the size of the company, the operational performance of the company is also important. As described in 4.1, well-performing companies are much less likely to be the target of activist movements than underperforming companies, because shareholders see underperforming companies as having greater potential to bring about change.
Another important variable, particularly in the case of environmental activism, is negative headlines. In the case of companies with negative headlines, the general public is already informed and shareholders, with the public behind them, can exert immense pressure on the company and thus force a change. We also know from 4.5 that spillover effects exist. The chapter shows that companies have an increased acceptance of sustainability-related activism movements if they themselves or other companies in their industry environment have already been the target of sustainability-related activism movements. Finally, when choosing a suitable target company, it should be noted that there are now counter-movements to sustainable activism/investment. As described in 4.6, a company with excessive efforts in sustainable development often tends to be the target of institutional shareholder activism by hedge funds that do not agree with the sustainability strategy.
Communication strategy:
In order to receive a positive response from the selected target company, it is important for shareholder activists to use the correct communication strategy. As explained in chapter 4.2, there are two general alternatives to choose from. Trading on the stock market and engagement in the form of activism. In this case, share trading on the stock exchange is limited to holding, which expresses loyalty to the company and its decisions, and exit, which expresses rejection of the company’s practices. The second option describes the activism form. Here shareholders can choose between private or public activism, or a combination of both. In the literature, private activism is described as the predominant alternative, as it achieves significantly stronger results when it comes to obtaining a positive response from the company. Private activism also offers an enormous range of communication channels, such as private letters, private meetings with management, private phone calls and more. Public activism is limited to public campaigns and the annual general meeting, to which proposals can be submitted. However, private activism also lacks transparency because decisions made through private activism have not been approved by all shareholders. This creates an information gap between the shareholder activists and other shareholders. Whether the result of private communication is profitable for all shareholders is still being clarified.42
However, the two original alternatives were supplemented by a slightly different strategy. In their 2023 study, Marti and his colleagues investigated the introduction of another strategy, which they call “field building”. Just like sustainable shareholder activism engagement, field building is also an impact strategy that focuses on making companies more sustainable. However, the two strategies differ in their approach. While shareholder engagement focuses on individual companies, shareholders try to change the corporate environment, i.e., the industry, via field building. This is done, among other things, by stigmatizing business activities43 or establishing voluntary reporting standards for companies.44The result of their study is that field building has no direct impact on companies. However, field building does have an indirect impact on business sectors, for example by misrepresenting certain practices in the oil industry, making them public and thus attempting to bring about fundamental change in an industry.15
Position and Network:
As described in sections 4.2 and 4.4, it is especially important for a shareholder to be conspicuous. Companies give conspicuous investors a special form of attention. There are numerous ways for shareholders to be conspicuous:
In the literature, the characteristics are largely based on the fact that certain shareholders have made a name for themselves. For example, large pension funds such as Blackrock or Vanguard are very well known and therefore attract more attention as soon as they become activist investors. However, those who have made a name for themselves also include shareholders who are known, for example, for threatening companies45, or geographically proximate shareholders.46 Also, institutional shareholders from countries with high environmental norms are considered more salient than others. Having one or more particular characteristics increases the salience of the shareholder and thus contributes to the establishment of sustainable practices.
If specific characteristics are not available, another option is to form groups. As described in 4.4, acting in groups and networks is of great importance, as it has been proven that companies are more likely to respond to large groupings and alliances than to smaller groups or individual activists.5 Group formation mostly takes place in existing networks, where shareholders sharing the same interests network together, and jointly communicate their concerns to the company.
Another way to increase its visibility is to build relationships with the company. Long-standing relationships lead to mutual trust. Both parties know about the values and standards, working methods, wishes, etc., and can communicate with each other optimally. Characterized by mutual respect, this significantly increases the chances of a positive response from the company side.47
4.2 Recommendation for action: shareholder
To answer the question “How can shareholders integrate sustainable activism into their approach and achieve positive results?”, I refer to the options listed in 5.1. There are a few things to consider for the optimal approach. In principle, the shareholder can choose how they want to communicate their interests. Simple “hold” and “exit” on the stock market can be used to communicate approval or disapproval of the company. Shareholder can change the corporate environment through field testing. However, shareholder engagement is most suitable for this, as direct contact with the company can also have an immediate direct influence on the company. The literature shows that a shareholder must be conspicuous for the company to pay attention to their sustainable concerns. Ideally, the shareholder has either already built up an incredibly positive reputation or is known for putting companies under massive pressure because these extremes receive a lot of attention from the company. In addition, the shareholder does not act alone, but together with other shareholders who pursue the same interests. The shareholder group communicates regularly with the target company in a network that offers plenty of scope for dialog. To enable the most effective implementation possible, the company and shareholders have already been in contact for a long time and have built up a stable relationship with each other. Based on mutual trust and respect, it is easier to communicate and respond to the wishes of the other party. Normally, private communication is also more effective in sustainability-related activism movements. However, the ideal shareholder should also consider and utilize the positive factors of public activism by disclosing their (failed) project to the media and the public in order to gain more approval.
In addition, when searching for a suitable target company, the shareholder makes sure that it is as well-known as possible, has already been affected by sustainable activism and is generally on the lookout for negative headlines regarding environmental pollution, as companies with these characteristics have an increased chance of implementing sustainability proposals. Ideally, the shareholder is aware that a company with an elevated level of sustainable investments and efforts can also entail a certain amount of risk, as there are also opponents of sustainability movements on the financial market.
In terms of content, shareholders should ensure his suggestions for change complement the interests of the company. As this is not always the case, shareholders should alternatively ensure that the content communicated is directly related to the company’s performance, as proposals that can make a direct difference are much more likely to be integrated by the company than other proposals.
In general, both shareholders and companies should pull in the same direction on this issue, as both parties, no matter how different their interests and wishes may be, ultimately share an environment.
4.3 Practical Implementation company
How should companies respond to sustainable activism? Before this question can be answered, it is important to understand what a shareholder is and what purpose it should fulfill.
As described in 2.1, the main benefit that a shareholder brings to a company is the provision of liquidity. This fact may not apply to all companies, as very large and established companies tend to finance their investments with reserves or loans, but is especially true for small companies that are just starting out.48 However, this fact, which is primarily characterized by financially driven activism, also applies in theory to sustainable activism. Shareholders with sustainability interests share intentions with conservative shareholders. They want to help the target company to become more sustainable, which, as described in 4.3, can lead to an increase in the share price in the long term. Shareholders who are only concerned about the good of the environment and ignore the costs arising from sustainable investments will eventually contribute to the company’s better performance through positive side effects, such as better marketing of products.
Why are not all proposals for sustainable change accepted? This has to do with the fact that it is necessary to filter precisely which suggestions are material and which are immaterial. As explained in 4.3, not all suggestions lead directly to improved company performance. Suggestions are either directly related to performance (material) or only indirectly related to performance (immaterial). Correctly working with materiality and implementing material issues also increases the company’s environmental awareness. In addition to the correct distinction between material and immaterial, the costs must also be considered. Sustainable investments can sometimes be extremely expensive, which is one of the main reasons why corporate managers tend to be reluctant to make them.
In a 2010 study, Sloan conducted a project called “Response”. The project involved interviews with 1210 managers and 217 shareholder representatives. One result of the study is that the majority of managers classify sustainable activism as risky because they interpret their role as managers as keeping the company out of harm’s way and managing risks. Sloan argues that developing a mindset away from shareholders as a source of risk towards shareholders as a source of opportunity could help sustainable ideas and proposals gain more recognition.49
How can companies respond?
In general, companies have four separate ways in which they can respond to sustainable activism by shareholders.
Companies can apply to the SEC for an injunction. If approved, the company has permission to remove the proposal from the proxy statement. This option deprives shareholders of the voting process because the proposal will not be voted on at the annual meeting. They must find an alternative way. For the company, the process costs time and money for interaction with the SEC.
Alternatively, companies can submit a proposal for a vote at the Annual General Meeting. The proxy statement, which is sent to all shareholders before the meeting, contains a recommendation on how to vote on the submitted proposal, depending on the management’s opinion. This option saves costs, particularly in the short term.
The third option is to agree with the shareholders’ proposal. If shareholders and the company agree on a proposal, or if the company itself was already planning to implement certain changes, the company can ask the shareholders to withdraw the proposal as it is no longer needed. This option strengthens the relationship with the shareholders involved. In terms of costs, these vary enormously depending on the type of proposal.
Finally, there is the option of entering into a dialog with the shareholders. This offers the opportunity to bypass the resolution process and work on a solution in a unique way. The dialog option gives shareholders the feeling of being seen, which may lead to the withdrawal of proposals that are unpleasant for the company. This option takes a lot of time and comes with opportunity costs.50
The last option seems to be the most effective when it comes to minimizing costs, as the dialogue does not result in immediate implementation and therefore no immediate costs. In addition, the positive side effects should not be forgotten. Additionally, the networks described in 4.4 are of significant importance.
4.4 Recommendation for action: company
For the creation of the recommendation for action, I rely on chapter 5.3.
In the best-case scenario, a company implements every sustainability-related change proposal as long as it appears to make sense. This is not possible in terms of cost alone, which is why it should be carefully examined, which proposals contribute greater benefits than others. Ideally, the company will be able to assess exactly which proposals will bring direct improvements and which will not. However, the company is also dependent on the quality of the suggestions that are submitted to the company. In order to keep this as high as possible, the company should be in constant communication with its shareholders. Even beyond the proposals submitted, dialog with shareholders should always be an option. To this end, a company should ideally look for important exchange partners in its network. The continuous exchange of ideas and suggestions, wishes and values lead to a consolidated relationship that offers scope for productive collaboration in the future. Ideally, a company will engage in sustainable investments itself so that shareholders “only” play an advisory role. This requires a management that is pro-sustainability. In general, sustainability-related activism movements in particular should not be directly labeled as risky or pointless, as sustainable investments can be profitable over a longer period of time and have positive side effects such as better marketing of products or a better image.
In order to communicate their openness to sustainability movements to the outside world, companies can, for example, already declare their willingness to publish voluntary sustainability reports, although these are not mandatory51. Furthermore, attention should be paid to what is happening in the company’s immediate industrial environment regarding sustainability in order to be informed about current changes.
In addition, a company is also aware of the backlash from institutional shareholders and can protect itself against this by ensuring rising share prices and thus shareholder profits despite sustainable investments. In general, companies should collaborate with shareholders on sustainability and pull together to ensure a fair future for all involved.
5 Discussion and limitation
Both recommendations for action have been formulated in simple terms and are more pro-sustainability, because when writing the recommendations for action it became apparent that a universally valid recommendation for action, which is appropriate for both shareholders and companies, cannot be formulated considering the points examined. A universally valid recommendation for action cannot be formulated because not all players in the world of financial activism have the same prerequisites. Recommending a company to respond to sustainability-related activism and implement its ideas and suggestions can only work if the company is in a position to do so. Financial and time resources must be available. If these are not available, sustainable investments simply cannot be implemented and the resulting benefits are denied to the company. Logically, the company would then not implement the suggestions and ideas but would try to reject them with all available means. There are also considerable differences in the management of the companies. For example, in extremely environmentally damaging industries such as crude oil extraction or ore mining, there are a large number of management teams that are unwilling to make sustainability efforts. Any form of dialog is rejected, and companies even take the liquid assets to have proposals reviewed by the SEC. In such a case, it seems pointless to recommend the dialog option to shareholders, as using other options, such as planning and executing a campaign with the support of the public, may be seen as a much more effective option. A company that is already investing huge sums in sustainability and may even already be carbon neutral and able to operate, does not necessarily need to implement every incoming sustainability proposal into its practices.
There are also significant differences between shareholders in terms of the requirements and characteristics of a shareholder. The recommendation for action states that, ideally, a shareholder should have a reputable image and have something to exert pressure on the target company. Proposals and ideas from this type of shareholder are much more likely to be accepted by companies. In reality, only very few shareholders are in such a position because they are difficult to reach. For those who have the means to achieve such a status, the recommendation appears to make sense. For a medium-sized shareholder, who has significantly fewer resources, the recommendation for action would presumably be more likely to convey that they should join forces with other shareholders in order to achieve greater visibility.
The courses of action formulated in the respective recommendations are not wrong, as they still apply to the general shareholder and to the general company. Shareholders need to find ways to be conspicuous to the target company, as this gives them a much better chance of receiving a positive response to their request. At the same time, companies definitely need to make sure that they consider the cost of sustainable investments, if the cash is available upfront.
However, because the financial activism field is characterized by a multitude of different actors with different desires and values, the recommendations for action do not take into account the needs of everyone. Simply making contact and conducting a dialog varies from person to person, which is why a recommendation for action tailored to the individual (the management/shareholder group) would be necessary to ensure a reasonable chance of success. Formulating such a recommendation is simply impossible due to the immense effort involved, which means that the work is limited in this respect. The formulation of precise recommendations for action, and therefore also this work, is limited by the fact that the topic of sustainable shareholder activism is based on a large number of individuals who all behave differently and represent different values and norms.
7 Conclusion
This paper provides a structured overview of the reasons and origins, the communication channels, and the results of sustainable shareholder activism. In addition, the theoretical part describes and explains important phenomena and constructs of shareholder activism. In the practical section, recommendations for action were formulated for shareholders and companies regarding the implementation of sustainable shareholder activism. The recommendations for action show that the awareness of the environment and sustainability is proving to be a crucial factor. Sustainable investments and engaging in sustainable shareholder activism turn out to be related to positive effects, both for the environment and for company performance, but also entail risks in the form of costs. The recommendations for action regarding implementation are severely limited for both, the shareholder perspective and the company perspective, as the process is always accompanied by many different participants and must therefore be individually adapted to enable success.
I did not expect this result, but I believe that this work could be used as a foundation for future work, for example to examine the various needs and prerequisites of stakeholders. After careful examination, these could then be grouped together in order to then formulate group-specific recommendations for action that take all the needs of the various individuals into account.
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