The ESG agenda has resulted in mainstream investors taking more interest in governance at firms in which they invest. Institutional investors such as Aviva have threatened to request board directors be removed or replaced if they see climate change inadequately addressed. How do you respond, given that as a listed company you need to keep large investors on-side?
Obviously, your board needs a healthy dialogue with major investors in order to manage their expectations and avoid announcements that might lead to a sudden loss of confidence. The ESG agenda is important to investors and cannot be ignored within your long-range strategy, but it is important to find out precisely what they want to see from you: is it geared towards the E, S or G?
In some cases, it will be necessary to appoint a director of sustainability and scope out a remit for this role on the board; in other cases it will fall to the Investor Relations team to prepare detailed briefings to show targets and progress towards sustainability goals.
At all times the board should resist telling investors to stop interfering, however tempting. The investor expectations might not be right for your board, but diplomacy must be maintained: your board does not want to gain a reputation for hostility.
Interference from activist investors
Activist investors also represent an interference risk that requires careful handling, but for very different reasons.
Invariably the activist will be a minority shareholder but influential enough to lobby larger, more passive investors about the need for a shake-up. The activist wants changes on your board to release latent value which your board appears incapable of exploiting. The activist will have looked at the wider picture and concluded a change of CEO or CFO is needed and they may be right. How do you respond?
Many boards reach for their financial PR firm and bombard all investors with messages of performance achievements. These are countered by the messages put out by the activist resulting in a war of media influence in which the truth of course gets buried. Each party is trying to secure investor sentiment through a proxy vote of confidence. Sometimes the board win and sometimes the activist wins, but is it a battle that needs to be fought at all?
There are plenty of examples where negotiation and engagement lead to compromise satisfactory to all parties. The activist gets some change and the board retains some control. If the latent value spotted by the activist is released and the share price rises, then it is a win-win for all parties. The activist gains a reward for the trouble and moves on to other targets; the board continues but with a clearer understanding of the levers for value creation. All shareholders benefit from this interference; all that is necessary is for the board to display a little humility.
Is investor interference a risk your board can manage? Has it even recognised investor interference as a risk? If not, perhaps this is a revelation of some value.
Garry Honey is the founder of reputation risk consultants Chiron Risk.