Preparations for Investor Activism: 5 Tips on Executive Appointment

The activism of institutional investors, who hold stocks and make demands and proposals to companies, is becoming more active. As conflicts deepen, there have been many cases in 2023 where attention is focused on resolutions at shareholders' meetings.

Although the demands and proposals of activists are ostensibly aimed at improving shareholder value, they do not always have a long-term perspective.

Therefore, it is important for companies not to give activists the opportunity to take advantage of them.

In this regard, the execution side (human resources, strategic planning, general affairs, secretariat, legal affairs) and the nominating committee play important roles.

So, what preparations are necessary? This article focuses on the area of executive appointment.

1. General Demands & proposals of activists

The demands and proposals of activists towards companies since 2020 mainly fall into the following categories:

• Executive appointment
• Restructuring of business portfolio, divestment or withdrawal of unprofitable businesses
• Dividend increase, disposition of surplus funds
• Share buybacks
• Sale of policy-held stocks
• Abolition of anti-takeover measures
• Strengthening ESG

2. Demands & proposals on Executive Appointment

Specifically, demands and proposals regarding executive appointment converge into the following five types:

3. Points for not losing to activists

The tone of demands and proposals varies, ranging from friendly cases where activists align themselves with the company, to cases where they vocally criticize and deny. In the latter case, activists actively communicate information, and through media and meeting notifications, their voices reach not only shareholders but also the wider society.

In the midst of public and shareholder attention, if the company cannot provide persuasive responses, they may find themselves at a disadvantage against activists.

In order for the company to maintain an advantage, it is essential to have "evidence" that can respond convincingly to the demands and proposals of activists.

In the departments responsible for executive appointment and the nominating committee, it is important to systematically gather evidence regarding the selection of current executives and candidates.

In previous cases, even if the company countered the demands and proposals of activists, there have been many cases where they merely stated the company's opinion without referring to any evidence, resulting in a lack of persuasiveness.

The following measures are effective as preparations for the demands and proposals of activists.

(1) Demonstrate "Qualifications"

A mechanism to measure qualifications is established and implemented.

a.	Definition of the qualifications, skills, and experience required for corporate growth and improving shareholder value is clearly articulated.
b.	A mechanism for evaluating the above qualifications, skills, and experience of current executives and candidates (evaluation criteria, evaluation process, reporting process) is established.
c.	The above mechanism is systematically implemented without hindering factors.

Actual fulfillment of qualifications:

d.	Current executives and candidates are evaluated to possess the above qualifications, skills, and experience.
e.	The rationales for the evaluation results are clearly documented and recorded.

(2) Demonstrate "Trackrecord"

A mechanism to measure trackrecord is established and implemented.

a.	Indicators for measuring and evaluating the achievements and performance in terms of corporate growth and improving shareholder value are defined.
b.	A system for measuring and evaluating the above indicators (evaluation criteria, measurement and evaluation processes, reporting processes) is systematized.
c.	The above mechanism is systematically implemented without hindering factors.

Actual fulfillment of trackrecord:

d.	Current executives and candidates are evaluated to possess sufficient track record and performance.
e.	The rationales for the evaluation results are clearly documented and recorded.

(3) Demonstrate "Comparativity"

Benchmark targets are clearly defined:

a.	Competing companies or similar companies that serve as benchmark targets for the company are clearly defined.
b.	Benchmark targets selected are reasonable enough to convince investors

Comparativity to benchmarks:

c.	Current executives & candidates are evaluated to possess qualifications, skills, and experience sufficient enough compared with benchmarks
d.	Current executives & candidates are evaluated to achieve performance in terms of corporate growth and shareholder value sufficiently enough compared with benchmarks

(4) Demonstrate "Diversity":

a.	The content and policy of diversity required for the executives & directors are clearly defined in a written form.
b.	The above content and policy meet investors' expectations regarding stakeholder diversity.
c.	The actual composition possesses sufficient diversity.

(5) Demonstrate "Fair Process"

a.	The process is practiced with mechanisms that ensure fairness, including the operation by independent outside directors and the involvement of third parties. The process is not limited to operation by stakeholders only and is not conducted in a black-box manner.
b.	The effectiveness of the above mechanisms is evaluated without hindering factors.

As long as a company is listed, there is always a possibility of becoming a target of activists. Preparedness by the execution side and the nominating committee is important. Recently, its importance has never been greater.

Fulfilling the measures listed above cannot be achieved overnight, and it requires a step-by-step approach to gradually build them. Even best practice companies take time to establish these measures.

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