7 June 2022

Shareholders speaking up - Aaron Morris writes for CGI

Corporate Senior Associate, Aaron Morris, writes for CGI's G and C Digital Magazine, discussing if supply chain challenges and ESG concerns will drive an increase in shareholder activism.

The article, entitled 'Shareholders speaking up' was first published in CGI's G and C Digital Magazine on 19 May 2022.


Will supply chain challenges and ESG concerns drive an increase in shareholder activism?

As the 2022 AGM season kicks-off, the ever-changing global situation means that shareholders are, more than ever, taking a keen interest in the way in which their companies are being run. In turn, businesses are increasingly facing the challenge of balancing the need to increase profits - especially after a tumultuous couple of years for many - while acting in a way that demonstrates that their business is morally and ethically attuned to the world in which we live.

These factors, along with the government opening up the economy after two years of restrictions, mean that we are likely to see a rise in shareholder activism this year; a continuation of a trend seen over recent years, as reported by IR Magazine. At its core, this relates to shareholders exercising the rights attached to their shares or using their position as a key shareholder of a company to influence changes in how the business is run and the policies it pursues. They may do so by, for example, privately exerting pressure on the board, or putting resolutions to or raising other matters at general meetings.

ESG and sustainability issues are becoming more pressing in the minds of shareholders and are increasingly being used by them as a way to hold businesses to account. The number of environment related issues raised at AGMs is likely to go up following the COP26 summit at the end of last year, as investors will want to start seeing clear objectives for implementing longer term environmental strategies. Greater diversity – particularly ethnic diversity – on boards of directors also continues to be an important topic and, while some progress has been made, there is still a long way to go. Other issues, such as employee wages, are also likely to feature, with Legal & General Investment Management joining other shareholders of Sainsbury’s in pursuing wage increases for staff. This will be particularly pertinent in light of the cost of living crisis.

Impact of the war in Ukraine

Investors would have watched on in disbelief as events unfolded around the Russian invasion of Ukraine, and it seems certain that these actions will lead to an increase in shareholder activism – to the extent they have not already done so. Shareholders are likely to be concerned with any activity a company has in Russia and with Russian owned companies, especially following government-imposed sanctions. The impact of failing to cease business in Russia has already been felt by companies such as Coca-Cola who, due to their slow actions, faced calls on social media for a boycott.

Investors will be conscious of the operational implications that ceasing business in a particular country can have, but also the severe reputational damage that can result from not acting quickly enough. This is particularly true in light of the atrocities in Ukraine. However, as Andrew Edgecliffe-Johnson, the US Business Editor for the Financial Times reports, ‘With the exception of the oil and
gas giants with multibillion-dollar ventures in Russia, most companies’ principled statements have so far come at a pretty low cost.’ While a minority have withdrawn from Russia completely, he said ‘most have just suspended operations, halted new investments or curtailed the range of products and services they offer,’ and due to the facts that have come to light, ‘the prospect of a quick resolution that lets western brands feel fine about returning to the shopping malls of Moscow now look increasingly remote.’ It will therefore be interesting to see the extent to which shareholders push for a complete withdrawal from Russia and how this process will be managed.

The conflict in Ukraine, the COVID-19 pandemic and the after-effects of Brexit are affecting supply chains in a number of industries because of problems such as staff absences through illness and a lack of resources. The renewed lockdowns in China have further exacerbated the issue as the country pursues its zero-COVID policy, resulting in non-essential factories having to suspend production and cargo ships having no option but to wait outside ports. In an article published by Reuters, Foxconn – which makes iPhones for Apple – recently reported that its revenue could reduce by up to 3% this year, which it has put down to the cost of resources. Additionally, Russia and Ukraine produce
the majority of the world’s supply of sunflower oil of which we are starting to see a lack; this is having a knock-on effect on the manufacture of products requiring this ingredient.

Supply chains and deglobalisation

During supply chain disruption, the idea of deglobalisation reappears as companies and countries realise how dependent they are on certain suppliers.

In respect of both the supply chain issue and a possible move towards deglobalisation, activist shareholders are likely to be vocal about the increase in costs as a direct result of demand exceeding supply and delays in the worldwide transportation of goods and resources. Deglobalisation is arguably another determinant of the rise in costs and prices as it leads to a decrease in competition. Shareholders will therefore be keen to see directors adopting policies to counteract this to protect distributions and the value of their shares. There may be a push for raw materials to be supplied from different locations where possible, for manufacturing to be moved to regions deemed more stable and dependable, for funding to be invested in research and development in an attempt to find alternatives and for companies to stockpile goods as part of a contingency plan. As an example, the BBC has reported that Edible Oils has started to increase its production of other oils as a replacement for sunflower oil. Where expenses cannot be kept down, we may also see a move towards cost-saving measures which could include redundancies. Management teams who are unable to meet the challenge of offsetting rising operating rates may also find that shareholders refrain from approving directors’ remuneration packages as a result of poor performance; they may even seek to replace them with a new executive team.

Twitter purchase

Finally, in the United States, we have seen a different kind of shareholder activism through Elon Musk’s purchase of Twitter. Musk initially bought a 9.2% stake in the company to become its second largest shareholder. After his first launch of a takeover was met with Twitter passing a ‘poison pill’ provision, he has since had a $44 billion bid accepted. Such shareholder activism is seemingly being undertaken so that Musk can start to effect changes in the way Twitter operates, particularly with regard to free speech. Takeovers of this size are unlikely to be discussed at AGMs in the UK, but there are some examples of investors pushing for the sale of a company following poor performance. For example, the Financial Times reported that Phase 2 Partners, the US-based hedge fund, is applying pressure to the board of TP ICAP to sell, following a drop of 45% in the company share price over the past year and concerns about the existing governance and ownership structure.

This article has highlighted just a few of the areas in which shareholders are likely to apply pressure, but the current global political and economic position is unlike many seen before, it will be interesting to see what issues arise from shareholder activism at this year's AGMs.

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