Shareholder activism in Europe is growing

Shareholder activism in Europe is growing: corporate governance education insights on how a key investor trend impacts directors.

The Corporate Governance in Europe Report 2024, produced by Diligent in association with White & Case, has shone the spotlight firmly on activist investors and how they impact boardroom agendas in three of Europe’s biggest economies: the UK, France and Germany. 

Activism in corporate governance, a trend that has been steadily growing for years, is now more significant than ever. It’s fuelled by increasing passion and stakeholder attention on various corporate issues, from pursuing more profits to solidifying sustainability goals. 

Here are the main points:

Expert respondents to the Diligent report have flagged an increased focus on three key trends in the UK governance arena:

• The UK saw a record 31 new activists launch campaigns in 2023—double the figure for 2022. Many of these campaigns have focused on mergers and acquisitions (M&A), a key issue in British governance. 
• Activists want UK companies to add a US stock exchange listing or simply move their primary listing to Wall Street. They pursue this because they believe the US market is generally stronger and that UK companies are being undervalued. 
• ESG remains “high on the agenda for most boards.” However, environmental activists continue to push for greater action, while scepticism persists about companies’ environmental strategies—specifically, whether they are thought-through and align with shareholder value.

First and foremost, they mean activism is growing in popularity. This could be because activists see a greater chance of success or more urgency to speak up; perhaps it’s a little of both. 

The trends in ESG are largely expected. The topic tends to create a tug-of-war between stakeholders who feel firms should be more sustainable and others who think sustainability shouldn’t compromise returns. 

The report acknowledges that this scepticism doesn’t compare to the negativity seen in the US, but the fact that it’s a key observation is worth noting.

• German companies are “increasingly popular targets” among activists. Experts have cited lower valuation multiples, decreasing returns, the rising cost of capital, supply chain issues and dependence on foreign markets. 
• In general, 2023 was “one of the most active years ever” in German activism. It has focused on leadership and strategic changes, operational enhancements, improved capital allocation, and more special audits to investigate potential fiduciary breaches.

We’re seeing a similar trend of growing activism in Germany as in the UK, but the issues in Germany are far broader in focus. 

Ultimately, they’re more indicative of an economy struggling to find its feet in the new norms that this decade has brought us. Germany remains a powerful economy, but the war in Ukraine, political shifts, and supply chain crises have significantly altered strategies in many industries. 

Activists look at these shifts and see more urgency to speak up. 

It’s also worth noting that Germany usually operates on a two-board system (a management board and a supervisory board working together). This system tends to give stakeholders more of a voice, which can significantly impact activist-related issues.

• Activism in France has “remained stable,” and the resolution of many activist conflicts has been achieved “privately, often through closed-door engagements.” 
• The biggest activist conflicts have been over ESG. These conflicts have involved litigation at major companies and landmark shareholder dissent votes over more sustainable strategies.
• Last year, France withdrew the proposed “Say on Climate” regulation shortly before enactment. The regulation would have obligated French-listed companies to develop a climate and sustainability strategy and submit it to shareholders at three-year intervals. French businesses broadly welcomed this, saying that “Say on Climate” was a burden they didn’t need. However, the report notes that the underlying principles of “Say on Climate” continue to gain popularity.

The main conclusion is that ESG is front and centre in the landscape of French business. 

Compared to the UK and Germany, France is seeing a more vocal push for the concept principles among activists. At the same time, big companies and lawmakers embrace the principles more than those in other jurisdictions. 

The case studies mentioned above demonstrate just how aggressive pro-ESG activists can be. Their success depends on various factors, but we should note the growing enthusiasm from stakeholders in France—a reflection of how ready the country is to embrace ESG principles.

Activist investor campaigns don’t automatically mean big changes are coming. Usually, activists will control only a small part of the companies they’re targeting, but enough of a stake to mean they could make a difference if they get more people onside.

Boards tend to be at odds with activist investors because they often target directors and their leadership records. So, if an activist campaign is successful, there could be dramatic shifts in corporate governance personnel. 

A lot of campaigns aren’t successful, but with large companies especially, they are loud and newsworthy – two ways of ensuring that the message may, in some way, impact future strategy. 

You can read the full Diligent report here.