Activists focus on certain board of director vulnerabilities and target those companies who have them. And while the pandemic brought a number of environmental and social issues to a head, there are certain red flags – mostly relating to a board’s composition – that attract shareholder activists.
Because the board has an obligation to address issues when they have an impact on the value of the company, activists seek out and find companies that are not addressing them and push them to do so.
One of the most prominent is a failure of the board to address environmental, social or broad governance (or ESG) issues. Linking ESG with strategy and core operations demonstrates a company’s approach to creating sustainable, long-term value for investors. Blackrock has predicted that the ESG investing space will grow to $1 trillion by 2030 while the S&P Dow Jones has 39 ESG-related indices.
A second red flag is the pale, male, stale and frail board. Boards that are not diverse in terms of race, ethnicity and gender are at the top of the list right alongside those that have too many elderly members and/or those who lack age diversity. This has led some to consider mandatory retirement for executives.
A third common target is the entrenched board – the one that has too many long-tenured directors or those that have not added new directors in the past few years – leading to calls for board tenure limits during the 2021 proxy season. Boards with a high degree of interconnectedness, even cronyism (i.e. same geographic location, alma mater, country club etc.) are also sending up red flags.
A fourth concern is a board with weak or overboarded directors. These boards tend to have board members who skills are a poor fit with the company strategy and risk factors. Being on three or more boards can lead to performance issues and even misconduct.
And finally, boards who oversee companies where there is a disconnect between executive pay and performance are not only the targets of activists but of the media as well.