FTI Consulting Governance & Activism Event 2024

Our governance team has set out seven takeaways for the period ahead:

1. Engagement and reporting at the core of the IA’s revised Principles of Remuneration

Following considerable debate around the competitiveness of pay in the UK on a global basis, particularly against the US, and considering feedback from the issuer and investment communities, the IA launched a review of its Principles of Remuneration. The new, simplified Principles reaffirm that they should not be viewed as rules; instead, they seek to promote a level of flexibility to reflect the unique circumstances of individual companies, which are encouraged to choose the remuneration structure most appropriate for their business.

In response, companies are expected to better explain their practices, detailing how they determined the levels and structures of remuneration, as opposed to simply relying on established market practice. While benchmarking is generally not seen as a sufficient reason to increase remuneration, transparency on companies’ peer groups is expected, particularly when employing an international peer set.

Engagement is a cornerstone of ensuring shareholders understand remuneration structures that deviate from market standards, providing companies with the opportunity to explain their specific context and the rationale for their proposals. However, impactful engagement must be supplemented  by detailed disclosures, which often condition proxy advisor and shareholder support at the time of AGMs.

2. Director skills and Board effectiveness

The skillsets of Directors are central to Board effectiveness and the ability to oversee management and the development of corporate strategy. Those skills are expected to align with the corporate strategy, including the opportunities and risks facing the company. In reviewing individual and collective skillsets, panellists detailed their expectation that companies would provide details on what skills were needed from a Board perspective to effectively steward the company, before setting out how the current Board meets these needs. Voting sanctions on skills gaps are rare, largely limited to evidence of controversies or in contested elections. It may not always be optimal to seek to address all potential skills on the Board, as it may lead to unwieldy Boards; instead, disclosure on Board training and access to outside expertise are also welcomed by investors and proxy advisors.

As part of evaluations of Board effectiveness, panel members highlighted a number of other criteria that may trigger further investigation of a Board’s effectiveness, including lack of access to Board members, dismissing investor feedback without a compelling rationale, a lack of consistency in messaging between management and the Board, and Committee Chairs not understanding the full breadth of their mandate. These red flags highlight the importance of carefully crafted and well executed engagement strategies with shareholders.

3. ESG stewardship and capital allocation

Panellists highlighted that ESG remains important in capital allocation and asset stewardship strategies, particularly in procurements and RFPs in Europe and, increasingly, Asia. Beyond engagement and voting, capital allocation can also serve as an effective ESG stewardship tool; while passive managers cannot sell out of a stock, they may index their positions on ESG scores, with active managers allocating more capital to companies with stronger ESG credentials. Each of the panellists identified key themes that impacted engagement with companies, tailored to reflect industry, macrotrends and individual company circumstances. Beyond compliance imperatives, building and disclosing strong ESG strategies may help attract capital and contribute to protect corporate reputation.

4. PR as a growing tool in stewardship

Public relations (PR) strategies are also increasingly used as an additional stewardship tool, applied to a wide range of issues from executive remuneration and board leadership to industry-specific social and environmental factors. Investors use  “name and shame” tactics to exert pressure. This is done for example by disclosing voting intentions in advance of shareholder meetings or publicly detailing investor rationale for supporting shareholder proposals or voting against certain management proposals after the meetings. Conversely, “name and fame” tactics are used to illustrate investor expectations. Investor stewardship reports often include a number of case studies and play a key role in their PR strategy. Together with investor engagement and voting policies, the PR toolkit, including stewardship reports, voting intentions and disclosed rationales provide  valuable insights to companies seeking to maximise shareholder support at their AGM.

5. Be mindful of the extra flexibility provided by the Irish Code

While modelled on its UK counterpart, and also to be applied on a comply-or-explain basis, the new Code, published at the end of September 2024 and tailored to the Irish context, offers additional flexibility to the companies that will adopt it. For example, the Irish Code relaxes requirements on shareholder responsiveness, time horizons for share awards and cooling off periods for Director independence.

While the panel did not express opposition to Irish companies starting to adopt the Irish Code instead of the UK Code, a concern was raised regarding the risk that certain companies exploit the additional flexibility offered by the Irish Code to implement lower governance standards, with fully independent Audit Committees an example of where investors’ expectations will go beyond regulations.

6. How professional activists zero in

When it comes to sophisticated hedge funds, activism is often well-thought out and sometimes the culmination of years of preparation. Targets are chosen through in depth research, with activists patiently waiting to strategically act when market conditions align. While each activist has its own secret sauce to identify a potential target, they will typically ask themselves the following four questions. First, is there a fundamental mismatch between the core value and the market price? Second, are there credible strategies to unlock this mismatch? Third, would investors and other stakeholders support this thesis? Lastly, what’s the path to force change? To lower the chances of becoming an activist’s target, our advice is “be your own activist;” ask yourselves the questions above, assess your vulnerabilities and start working on them.

7. How to prepare for and react to an activist attack?

While established activists employ more structured frameworks, it is important for companies to be aware of the emergence of newer players, who are often more aggressive and public, relying on bold, high-risk campaigns to establish credibility and attract investments. Dealing with these newer players is often more difficult than negotiating with a more established fund.

Preparing for and reacting to activists requires a proactive and disciplined approach centred on readiness, strategy, and emotional control. Regular simulations may help boards and executive teams rehearse potential scenarios, building confidence and cohesion under pressure. Emotional control is crucial—remaining calm and focused on long-term objectives can turn challenges into opportunities. Relying on seasoned advisors ensures access to expertise and guidance while avoiding impulsive responses that may restrain your strategic options down the road.

The team at FTI Consulting

The focus on robust reporting and meaningful shareholder and proxy advisor engagement should constitute a top priority for companies as preparations for the 2025 proxy season ramp up. FTI Consulting’s Strategic Communications team brings together experienced corporate governance, ESG and communications professionals who have a deep understanding of the proxy advisory, stewardship and activism landscape with a proven track record in helping companies shape better outcomes through effective reporting and engagement.