In many ways, 2023 has been a bombshell year for activist investing. In January, US activist short-seller Hindenburg Research sent shockwaves through the business world when it accused India’s Adani Group of a “brazen stock manipulation and accounting fraud scheme” which it labelled the “biggest con in corporate history.” Hindenburg’s campaign against Adani resulted in a whopping $108bn being wiped off the company’s market value in a matter of days. Gautam Adani, the billionaire industrialist who founded the company, denies the allegations, but that didn’t stop him from plunging down Forbes’s real-time billionaires list from the world’s third-richest person to 24th, as of the time of writing.

Campaigns by activist investors, who purchase minority stakes in companies to drive strategic changes, have been on the rise since around 2017. While Adani’s fall grabbed the most headlines so far this year, plenty of other activist campaigns have rocked corporate boardrooms, from HSBC, where activist Ken Lui is calling for a break-up of the bank, to Bayer, where investor Jeff Ubben is reportedly pressuring the business to oust the CEO, to BP, where climate activists filed a resolution urging the company to set tougher emissions targets. In fact, 2022 was a record-breaking year for shareholder activism, and 2023 is expected to see similar levels of boardroom battles.

The activist landscape
The impact of activist shareholders is growing around the world. A tidal wave of campaigns, which began in the US in the age of ‘corporate raiders,’ has gained mainstream attraction in Europe and Asia. On a mission to pursue strong financial returns and strategic accountability, investors are increasingly butting up against company executives they see as underperforming.

It’s Europe that is seeing the lion’s share of new activist campaigns this year

In the first quarter of 2023, 69 new activist campaigns were started globally, which represents the second-highest quarter of activity since 2019, according to data from Lazard’s Capital Markets Advisory team. The increase in activity can be traced back to a new trend in activist investing: ‘swarming.’ This tactic is used when new campaigns are held at companies that had already been targeted by activists recently, and has affected the likes of Salesforce, Disney, Bayer and Japan’s Seven & i. In fact, 36 percent of the campaigns in the first quarter of 2023 were linked to the ‘swarming’ phenomenon, and 13 percent of targets were subject to multiple new campaigns in this quarter alone.

In 2022, activists were buoyed by tumbling markets that gave them clear sights on how companies could be pushed to improve their margins. According to the Shareholder Activism Annual Review by Insightia, 929 companies were publicly targeted by new campaigns in 2022, up six percent from 2021 and mostly driven by the US, Korea and Japan. “The outlook for activism in the US is perhaps the best in years, despite an extended run of defeats in 2022’s marquee campaigns,” the report said.

But despite this, it’s Europe that is seeing the lion’s share of new campaigns this year. According to Lazard’s data, there was a 34 percent decline in campaign activity in the US in the first quarter of the year, breaking an eight-year trend. At the same time, 21 new campaigns were started in Europe, making the first quarter of 2023 the busiest first quarter on record. European campaigns accounted for 30 percent of all global activity, though they were heavily concentrated in the UK and Germany. “What that tells us is that activist funds are looking at Europe as a new frontier,” said George Casey, global managing partner at law firm Shearman & Sterling.

In the US, Be Your Own Activist, a report by Deloitte, highlights that US activist investors have in recent years been looking toward Europe as a more attractive market. Specifically, activists have their sights set on larger companies that offer greater potential for growth and returns. What’s more, Insightia’s annual review noted that “an assertive local activism scene” in Europe was “every bit as exciting as in North America.” While Europe is expected to continue moving towards the US model of activism, which will only make it a more attractive market, there is still a difference in approach. In the US, it is common for new board seats to be won by activists through settlements, whereas in Europe, proxy contests are still popular.

“In the US, the view of both corporates and advisors has evolved over the last 15 years,” Casey said. “Very often in the past, the advice would have been to take a strong stand and fight through a proxy contest, but in the US that has evolved, and the advice now is to listen to shareholders and understand their views. If they would like to advance nominees to the board who are experienced and reputable, these days the advice is to engage and consider.”

Casey continued: “I suspect that in Europe, the trend is a little bit behind. There is still a desire to put on a strong stand. So, I would not be surprised if it arrives towards more engagement and settlements over time.”

Asia-Pacific (APAC) is another growing market for activist investing. Companies based in APAC targeted by activists accounted for 19 percent of campaigns in the first quarter of 2023. Typically, these campaigns have been “overwhelmingly concentrated” in Japan, Lazard’s report noted, but this year has seen a wider range affected, including South Korean and Australian targets. The broadening interest followed a “bumper” year for campaigns in Asia in 2022, Insightia’s report said.

The landscape for activist investors is evolving, but there is another shift taking place in the world of shareholder activism that is just as significant. While many activist campaigns are focused on improving a business from a financial standpoint, another area under increasing scrutiny is a business’s environmental, social and governance (ESG) strategy.

Bringing ESG issues to the boardroom
Broadly, there are two types of activism shareholders are pursuing: operational financial activism and ESG-related activism. The former is made up of activists targeting companies for financial returns by asking for specific operational changes, be that looking at a company’s financial performance and driving change in the way they operate or pushing the company to sell one of its lines of business.

On the other side is a trend for ESG and anti-ESG related activism that has been growing since around 2020 (see Fig 1). “While ESG as such has been increasingly important to investors, corporations and activists for over a decade, in the last four or five years in particular, many corporations have become much more socially active while others have found themselves under pressure to take public positions on environmental and social issues that they would not have previously spoken publicly about,” explained Lara Aryani, partner at Shearman & Sterling.

Indeed, issues like climate change and diversity have seen increasing public pressure, and regulatory changes that have required companies to consider them more fully. “A lot of companies felt that they needed to take a position on these issues of public importance. And so I think companies are more vocal about issues that are social or environmental in nature,” Aryani said.

While boardrooms debate where to declare their position on social and environmental issues, campaigners see shareholder activism as a new option for driving change. “The recent success of a number of ESG activist campaigns coincided with these shifting investor and corporate priorities, and this energised shareholder activism on a range of ESG issues,” Aryani said. “This was particularly the case on climate change activism, which seemed to be seeing some success in corporate action even while congressional reform on these issues seemed to have stalled.” BP faced activist demands in April to set tougher climate targets. Although the resolution was rejected by shareholders, it received more support than it had in 2022.

As ESG demands grow, anti-ESG backlash is also finding its way to the boardroom. With social and environmental issues gaining prominence, there are a growing number of individuals who believe the corporate boardroom is not the place for these discussions. Because of their ties to political issues, many of these campaigns have hit headlines despite the trend still being in its infancy.

“There has been a reaction to the growing popularity of ESG, in the form of ‘anti-ESG’ activism that is comprised of both shareholder activists and certain politicians,” Aryani said. “Though anti-ESG has received a lot of press, it is still somewhat nascent, and so people are watching to see the extent to which those efforts will impact corporate and regulatory action in a meaningful way.”
While businesses may need to take a wait-and-see approach on the anti-ESG trend, it’s important that they consider both sides of the debate when planning their approach to handling activist investors.

In the sight lines
With these two forms of shareholder activism in mind, zeroing in on the trends in both the companies being targeted and the demands being made tells us more about the state of shareholder activism today and what we can expect to see in the years to come.
In 2020, activist campaigns that were focused on mergers and acquisitions (M&A) were the most common, making up 41 percent of the total new campaigns at large companies during the period, according to Lazard’s data, which was in line with levels seen in the previous years.

However, with financial markets having taken a nosedive, Insightia’s report found that activists have “been forced to be more judicious about calls to sell the company in recent years.” Few experts believe that dealmaking will be a prominent trend this year or until markets even out. The decline of the M&A market is to blame for a decrease in the number of campaigns focused on M&A and on capital allocation, the team at law firm White & Case said in a recent report. Instead, established activists and new funds alike are pursuing more campaigns focused on ESG and corporate strategies.

While Lazard’s data backed up the trend of fewer activists calling for industry consolidation or full company sales, M&A-related demands remained popular in Europe, emerging in 57 percent of all campaigns, which was above the historical average. This was driven by a surge in calls for divestitures, the asset management firm said.

With ESG-related campaigns picking up speed, there’s a particular focus on those centred on environmental issues. The rumblings were there in 2020, with new London-based hedge fund Bluebell Capital Partners announcing a ‘One Share ESG Campaign,’ through which it would buy one share of a company in order to challenge its ESG practices. In 2022, the small activist investor took on BlackRock, the world’s largest asset manager, accusing it of greenwashing in its ESG strategy. ESG-focused activist investor Engine No.1 also found success electing three directors to the board of ExxonMobil, which received significant support from institutional investors.

Board representation remains a goal of many activist campaigns

In 2022, there was a “significant increase” in the number of environmental and social (E&S) proposals that were put to a vote, a report by Shearman & Sterling said, but this was likely influenced by a new regulation from the Securities and Exchange Commission (SEC) which made it harder for companies to exclude E&S proposals from proxy statements. While the number of proposals increased year-on-year, the number of approved E&S proposals actually fell from 38 in 2021 to 32 in 2022.

“While the decline in the number of successful E&S proposals seems incongruent with the increasing support by both activists and institutional investors for E&S initiatives, this is likely due to the fact that a significant number of proposals, particularly those relating to climate change, prescribed specific actions to be taken by the company, in contrast with the historically more successful types of proposals – E&S and otherwise – that contained more general recommendations or enhanced disclosure,” the report said.

White & Case also identified greater scrutiny of ESG campaigns as a trend to watch this year. Large institutional shareholders, including BlackRock, began to scrutinise campaigns more carefully, and their success depended largely on whether there was an economic case for them.

Beyond the ESG debate, another trend taking shape is campaigns that target large businesses. “Due in large part to activist campaigns, such as Engine No.1’s successful proxy contest against ExxonMobil in 2021 and Third Point’s successful campaign against Walt Disney in 2022, there will likely be a surge of activist campaigns targeting S&P 500 companies,” White & Case said in their report. “These campaigns have demonstrated that size alone is not a defence to a well-funded, thoughtful activist attack.” Indeed, Lazard’s data shows that this trend is well underway, with global targets with market capitalisations greater than $50bn representing 16 percent of unique companies targeted in the first quarter, the highest share on record. This trend was identified in both the US, which logged its third consecutive quarter of elevated levels of mega-cap focus, and Europe, which also saw a spike.

These strategic trends aside, which sectors are in the firing lines? Technology firms continue to be one of the most frequently targeted sectors by activists, according to White & Case, with software, services and the internet likely to be the targeted subsectors. Industrials will also be in focus, with engineering and construction machinery expected to be in activists’ sight lines.

A changing regulatory environment
Board representation remains a goal of many activist campaigns, but the majority of board seats obtained are now through settlement agreements rather than proxy contests. One reason behind this change is new regulations that are reshaping the shareholder activism landscape. In the US, activist campaigns are facing new universal proxy rules, which are expected to have a significant impact on the industry. Universal proxy rules adopted by the SEC in November 2021 will, experts predict, make it easier for activists to get one or two nominees elected to boards, though it could make it harder to elect a majority. The new rules are also expected to make proxy contests easier and more affordable, which will encourage smaller activists with fewer resources.

These changes, Insightia’s report said, “sent a jolt through the industry as advisers try to model how the greater choice available to investors will influence voting decisions.” According to data from Insightia’s Activism module, settlements have risen compared with last year since the rules came into effect in September. Lazard’s early look at the effects of the universal proxy rule found that activists have demonstrated the same apparent appetite for board changes at US companies, but there has been a “significant shift” to smaller activist slates nominated at US companies. Activists secured 43 board seats in the period from September 2022 to March 2023, 98 percent of which were through settlements.

Technology firms continue to be one of the most frequently targeted sectors by activists

As activist investing spreads around the world, flashy headlines of boardroom battles abound. But the most common advice for executives dealing with shareholder activism is to hear them out. “What often happens, which in the past people did not necessarily pay attention to, is that the activist may be raising the kind of issues that institutional shareholders may be thinking about as well,” Casey warned. “And so if the activist strikes a chord on a particular issue with the concerns that institutional shareholders have, then in a proxy contest, institutions will support the activist.”

“The number one recommendation would be to engage, to listen, understand the positions, see if there is something in what the activist is saying that actually may be useful for the company. And discuss. If you disagree, then it’s better to explain it in a way where you are engaged, as opposed to just rejecting a particular position but without explaining your own point of view,” Casey said.

As shareholder activism campaigns are seen more as an eventuality and investors are open to supporting them, it seems the new era of activism will be less about standing against activists and more about unexpected partnerships.