Could GameStop saga reshape shareholder activism?

Long-accepted approach to protesting corporations could give way to more disruptive, pressure-based tactics, experts say

Could GameStop saga reshape shareholder activism?

To institutional investors and other large asset owners, the concept of shareholder activism is nothing new: entities with a large voting interest in a company may exercise their influence either to champion a cause or protest an undesirable corporate behaviour, usually for reasons relating to ESG.

But in the wake of the GameStop saga in the U.S., public issuers of equity securities are faced with a much more powerful force that will require drastic changes to respond to, according to two senior fellows at the C.D. Howe Institute.

“Now that a Reddit crowd can be summoned with little effort and startling speed, the end of the present norms or ‘rules-based’ approach to shareholder activism may have arrived,” said Hugh O'Reilly, who is also executive director at Innovate Cities, and James Stewart in a new memo.

The two wrote that the GameStop affair has given markets a glimpse of the potential power of retail investors, enabled by social media, to disrupt the unofficial rules-based norms undergirding shareholder activism. As online trading platforms let individuals purchase fractional shares for a nominal commission cost, large numbers of small investors could be organized to amass a large block of shares to either pressure management or sway share prices.

They pointed to easy online access coupled with a surge in social media’s focus on securities markets, compounded by a broad movement to encourage better corporate behaviour from companies, as a potentially transformational force. However, few public issuers are currently equipped to respond to retail mobilization campaigns, as most are not even able to monitor social media channels.

“Corporations will need to develop the capacity to monitor potential issues online and deploy the requisite campaign expertise either through in-house or external sources,” O’Reilly and Stewart said, warning those that cannot may be “increasingly vulnerable to reputation risks.”

Securities regulation must also change to better allow corporations to protect their reputations against such campaigns, the two added. In particular, they said current rules preventing companies from knowing who their shareholders are must be amended. That principle was encouraged by the Ontario Capital Markets Modernization Taskforce (CMMT) in its recent final report, where it recommended giving reporting issuers the ability to determine the identity of the beneficial owners of their shares while respecting legitimate privacy concerns.

The CMMT has also recommended that public issuers be given the right to rebut reports made by proxy advisor firms as a way to fairly defend themselves against radical activism. But according to O’Reilly and Stewart, that recommendation will not be enough to stave off a “mass mobilization of shareholders,” which will require something “more akin to a full-fledged campaign capacity.

“Another way to dampen the excessive spirits of GameStop crowds would be to grant long-term shareholders more rights than short-term shareholders by, for example, delaying the right to vote for a period of time,” they said, noting that such a change could foster better ESG practices as it could lead to better corporate citizenship and reduced pressures related to short-term profit maximization.


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