Swiss companies are increasingly on the radar of shareholder activists. These campaigners are using a wide range of tools to make their voices heard, calling for company management to engage in direct dialogue with shareholders. This discourse is challenging, but it can strengthen ownership rights and have a positive impact on a company.

It's an opportunity to engage more closely with the interests of investors and build a new understanding of corporate governance.

Shareholder activism is when people who hold equity in a company but aren't directly responsible for its management exert direct influence on its leadership. In Switzerland, unlike the United States, this is a fairly new phenomenon, although here too it's becoming much more prevalent. Overall, shareholders appear to be more and more willing to reject the board's voting recommendations on matters such as the election or re-election of directors, remuneration, or other strategic motions put before the annual general meeting (AGM).

Activism in the name of diverse interests

The most important activists include hedge funds asserting their interests in achieving above-average returns. Institutional investors with a long-term horizon can also become activists, calling for responsible management in order to boost the performance of their investments, and voting at AGMs in a way that reflects their views of corporate governance. Last but not least, we see activism spearheaded by shareholder rights associations such as Ethos (Swiss Foundation for Sustainable Development) aimed at promoting sustainable investment and ensuring corporate governance that safeguards the interest of society as a whole in the long term.

Goals go beyond close scrutiny

There are many reasons why shareholders become activists:

• The company has lagged its competitors, particularly in terms of dividends.
• The company's market value is poor relative to its book value.
• In the past, and by comparison with the competition, the company has held large reserves of liquidity, but has no intention of substantially adapting its dividend policy or buying back shares.
• The performance of a specific business unit is lagging well behind expectations.

Action: a choice of effective options

Shareholder activists have a wide range of measures to get the people representing the votes of shareholders on their side and wield strategic influence over them. The first step is often to seek dialogue with company management and the board to get consensus on the need for specific changes. This form of exchange is widespread in Switzerland, even though neither the management nor the board are legally obliged to engage in it. Activists can also get the debate going via the traditional and social media. These channels help create a campaign by involving and shaping public opinion.

The battle over draft resolutions can also be waged at the AGM itself. In Switzerland, any shareholder listed in the share registry on the cut-off date is entitled to attend and vote at the AGM. They can voice their opinion on individual items on the agenda or submit counterproposals. The board of directors has to treat all shareholders equally. But this method is of limited use because the decision-making process has shifted from the AGM to the preparation phrase leading up to it. However persuasive, a speech by a shareholder is unlikely to affect the result of a vote at the AGM.

Shareholders often increase their holding to influence strategic decisions. Under the terms of Swiss company and contract law (the Code of Obligations), the greater an investor's shareholdings, the greater their voting rights.

Finally, many activists try to influence shareholder decisions by directly contacting or working with institutional proxy advisors such as Institutional Shareholder Services (ISS) and Glass Lewis, whose support can make it difficult for the board to achieve a majority for specific motions.

On the rise in Switzerland

Even though compared with other countries Switzerland sees relatively few campaigns by activists, they do influence the debate in this country. The following recent examples show what impact they can have and the dimensions they can reach:

• Merger of Clariant and Huntsman: A small group of shareholder activists managed to persuade Clariant's management and board to drop the planned merger with Huntsman.
• Merger of Holcim and Lafarge: Activists forced the Holcim board to renegotiate. Among other things, this resulted in a better exchange ratio for Holcim shareholders in the merger.
• Split-up of Credit Suisse: A hedge fund with only 0.2% of the votes moved for the Credit Suisse Group to be split up into three independent units: an investment bank, an asset manager and a wealth manager.
• Restructuring of Nestlé: In an open letter to shareholders, a hedge fund called for the sale of Nestlé's 23% interest in L'Oréal, the repurchase of shares and the disposal of non-strategic activities. Only two days after the letter was published, Nestlé announced it would buy back shares worth up to CHF 20 billion. It also acceded to the demand to get three external directors onto the board.

Recommendations: leading the dialogue

To prophylactically and proactively respond to potential activist concerns, companies must communicate their strategy openly and transparently report on their success in implementing it. This includes regularly disclosing performance compared with the competition and relevant benchmarks. A company should also analyse and keep a close eye on areas of potential risk (for example unprofitable business units).

If shareholders do turn activist, it makes sense to take an objective look at their concerns. To do this, a company needs to have a clear strategy for managing the dialogue with shareholder groups and proxies and involving members of the board in the process. This requires a new understanding of corporate governance that is more closely aligned to the concerns of shareholders and shareholder rights associations.

This understanding is currently being reflected at European level, for example with the recent draft amendments to the German Corporate Governance Code, which for the first time refer directly to institutional investors, including activists. In this paper, the government commission recommends the following: “The supervisory board chair should be available – within reasonable limits – to discuss supervisory board-related issues with investors.”

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