A client memo by Sullivan and Cromwell argues that shareholder activism is the "new normal," explaining that:
The ability and willingness of shareholders to influence the management and affairs of corporations has been steadily increasing for more than a decade. It began with the success of shareholder proposals to dismantle classified boards and other takeover protections and continued with the use of shareholder proposals to pressure boards to adopt majority voting and other governance measures, combined with the policy of ISS to recommend withhold votes for directors at companies that fail to implement successful shareholder proposals, the advent of universal say-on-pay votes and the move toward proxy access. These initiatives have been championed as examples of “good governance”, often with too little examination of the fundamental question: do they contribute to the creation of enhanced long-term value? There are credible academic studies that suggest that they do not.
The playing field has changed fundamentally and the changes have resulted in greater influence for shareholders. Boards and managements must recognize this reality when engaging with shareholders generally, and when preparing for and responding to a particular activist campaign. Unlike hostile takeovers, activist campaigns can have a multiplicity of possible outcomes, with varying degrees of disruption. The key is to realistically assess the situation so as to obtain the best outcome possible under the circumstances.
The memo goes on to provide useful advice for boards facing an activist campaign.
But should the law just acquiesce in the new normal? I think not, as I argue in my recent essay Preserving Director Primacy by Managing Shareholder Interventions:
This is a draft chapter for a forthcoming research handbook on shareholder power and activism. This chapter provides an analysis of shareholder activism based on the so-called director primacy model of corporate governance, which argues for a board-centric, rather than a shareholder-centric, understanding of corporate governance.
Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
