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Five Ways Shareholder Activism Spurs Corporate Change

In 1960, four freshmen from North Carolina Agricultural and Technical College in Greensboro walked into the F. W. Woolworth store and quietly sat down at the lunch counter. They were refused service but stayed until closing time. The next morning, they returned with twenty-five more students. On the third day, sixty-three students joined the sit-in. The following day, the students were joined by three white female students from the Women’s College of the University of North Carolina, and by the fifth day Woolworth had more than three hundred demonstrators at the store. 

By the sixth day, the company said they were willing to negotiate with the students; however, only token changes were made. The protesters resumed their sit-ins, and the city adopted more stringent segregation policies.  Forty-five students were then arrested and charged with trespassing. The students were so enraged by this they launched a massive boycott of stores with segregated lunch counters. Sales at those stores dropped by a third, forcing the owners to relent. Six months from the very first sit-in, the four freshmen returned and were served at Woolworth’s lunch counter.

In the more modern era, social activism has expanded into shareholder activism. We have recently witnessed widespread demonstrations strongly affecting both communities and corporations, driven by concerns around climate change, personal inequalities, and social justice.  This has led boardrooms to make corporate policy changes at previously unheard-of speed.

Over the next few lines, we want to examine the major impact that contemporary shareholder activism is having on corporate change. 

First, some background.  Activist shareholders seek to use their equity stake in order to motivate a corporation to adopt certain policies or achieve specific goals.  They intend to affect the behavior of a company by exercising their collective voting power, or by influencing other shareholders.

Five common forms of Shareholder Activism

  1. Shareholder resolutions
  2. Proxy fights
  3. Management negotiations
  4. Publicity campaigns
  5. Litigation

No greater example exists of this powerful and influential group than the emergence of ESG over the past ten years.  In fact, ESG has been around for much longer than people realize..  According to MSCI, the roots of socially responsible investing can be traced back to the 1960s when certain investors excluded stocks, or entire industries, from their portfolios based on business activities such as tobacco production and involvement with the South African apartheid regime.

Shareholder activism is gaining momentum today because it actually does create reforms, or change the composition of Board members.  According to an article in Forbes magazine, research on companies targeted by shareholder activists can both increase and destroy a firm’s value.

ESG Threats & Opportunities

In the case of ESG, we see threats and opportunities both abounding when these types of external pressures are being exerted.  The costs associated with fighting these changes can be overwhelming to a company, along with a potentially devastating negative publicity campaign.  On the other hand, adopting these shareholder demands may result in a more efficient business operation, happier employees, and more loyal customers.  Perceived company values can seriously affect retention and recruitment. The key is to meet and communicate with the activists to compromise on goals, establish achievable benchmarks, and regularly report on the progress made.

Nike is a classic example. Activists targeted it for relying on sweatshop labor through much of the 1990s. The company fiercely resisted, but high-profile protests on college campuses in the late 1990s motivated it to meet with protesters and initiate reforms, including a code of conduct and factory inspections to ensure compliance. In 2001, Nike established a corporate responsibility committee and began issuing progress reports measuring its own labor and environmental practices. Openness to shareholder activism and the pursuit of a sustainable business model gradually became key elements of the company’s identity. Ethical Consumer, a British watchdog organization, recently gave Nike it’s highest rating in the category of supply chain management.

Modern Shareholder Activism Trends

Over the past few years shareholder activism has risen to a new level, institutionalized by the term, “responsible investing”.  Virtually every large money management and investment firm has adopted some form of this trend.  At its core, responsible investment means evaluating investment options based on a company’s published ESG score and recorded performance in key metrics.  The higher the score, the more attractive an investment is.  This pressure from the capital markets has placed tremendous urgency on Boards of Directors, and C-level executives to adopt policies leading to higher ESG scores.  Of course, environmental, social, and governance factors should be considered by both management and investors.  However, they are factors that should be evaluated before implementation, not mandated.

Okapi Provides Tailored Solutions

Okapi Environmental Services offers a wide suite of both strategic and tactical solutions for addressing environmental and sustainability concerns.  With proprietary planning tools such as the OPTIMUM system, combined with our robust on-demand reporting platform – Eco-Visor, we offer economical and efficient waste and supply chain solutions for companies.

This can be a win-win for the responsible investor, the governing board, employees, suppliers, and the end user of a company’s product or service.  

We offer a free initial consultation and analysis for companies wishing to improve ESG scores, and particularly accelerate their drive to zero waste.  Okapi Environmental Services has certified TRUE Advisors on their team, who are capable of helping an organization achieve this renowned zero-waste certification status for facilities. Read more about TRUE here.

Adopting change and developing it into a corporation’s cultural DNA is difficult.  Sometimes this change is worth the challenge, as evidenced by the students at the lunch counter in 1960.  Today’s ESG movement, especially the “environmental” component, is a valuable and worthy pursuit, especially when viewed across the benefits it delivers to multiple concerned audiences.  Companies would be wise to be proactive in this pursuit and avoid any shareholder activism activity.

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