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Inflation, rising interest rates, recession concerns & market volatility have provided activists with a target-rich environment this year, and the implementation of universal proxy gives them a key tool to help capitalize on those opportunities.  That raises the stakes when it comes to shareholder engagement, and this Wilson Sonsini memo has some thoughts about how boards and management teams can most effectively structure their engagement efforts. This excerpt addresses two of the key components for successful engagement in 2023:

– Proactively enhancing governance practices. Governance is almost never the central feature of an activism campaign, but it is frequently used as a wedge issue by activists to paint a board of directors as entrenched and out of touch. As such, companies should regularly evaluate their governance practices and look for proactive measures—such as the adoption of majority voting in director elections, the elimination of supermajority vote provisions, and even, in appropriate circumstances, voluntary declassification of the board—that can be taken to show the board’s deliberate approach to governance. Shareholder engagement is a long game, and years of thoughtful evolution can reassure shareholders that the board prioritizes good governance and has sufficient internal will to make changes when they are warranted.

– Focusing on board composition and refreshment. A robust approach to board refreshment has become table stakes for the most sophisticated companies when it comes to engagement. Institutional shareholders appreciate seeing changes in board composition and view a regular cadence of new directors joining a board as evidence of a healthy boardroom dynamic. As noted above, the universal proxy rules have cast a brighter light on the skills and qualifications of each director individually. As such, boards should be conscious of, and seek to proactively address, weaknesses that an activist might seek to exploit. This is particularly true at companies that have seen an erosion in investor support for directors and say-on-pay proposals.

Other areas of emphasis in shareholder engagements include clearly articulating the company’s strategy for value creation, considering efforts to boost shareholder value, and understanding the views of the company’s shareholder base. Perhaps most important of all, the memo says that companies need to listen actively and be open to change, because shareholders—especially activist shareholders—want to know that the board takes their views seriously and isn’t “willfully blind” to alternatives.

– John Jenkins