Activists are becoming more sophisticated in using ESG and governance metrics as entry points, especially where institutional shareholders are likely to support intervention.
Conducting a Board-Level Activist Audit
One of the most effective ways to mitigate activist risk is to conduct an internal review before an external party does. A board-level activist audit simulates how a shareholder activist might scrutinise the company and tests the board’s ability to defend its decisions and structure.
1. Governance Review
An activist-style governance audit should examine the fundamentals:
- Director tenure and independence: Are any directors overextended or perceived as too closely tied to management?
- Board diversity: Does the board reflect a diverse mix of skills, backgrounds, and experiences?
- Committee effectiveness: Are audit, risk, and nomination committees functioning transparently and independently?
- Executive compensation: Is there a clear link between pay and performance?
- Peer benchmarking: How do governance practices compare to competitors or sector leaders?
The UK Corporate Governance Code encourages annual board evaluations, diversity disclosures, and succession planning. Activists will flag any deviation from these norms.
2. Shareholder Communications
Activists are skilled at exploiting weak or inconsistent communication with investors. Boards should evaluate:
- Whether investor messaging is clear, consistent, and proactive
- The quality of engagement with institutional shareholders beyond proxy season
- How well the company monitors social media sentiment and activist discussions
- Board visibility into the investor relations (IR) narrative and outreach strategy
Transparency and proactive communication reduce the likelihood of shareholder surprise or support for an activist campaign.
3. Strategic Narrative
Activists often frame boards as complacent or out of touch. To defend against this narrative, companies must be able to tell a compelling and forward-looking story.
Key questions for the board to ask:
- Is our long-term strategy clearly articulated and aligned with investor expectations?
- Are strategic risks, such as regulation, digital disruption, or climate change, acknowledged and addressed?
- Can we clearly explain why current leadership is the right team for the company’s future?
- Are non-financial KPIs, such as ESG and culture, integrated into our reporting?
Strong communication of the strategic narrative, including ESG performance, will resonate with institutional shareholders and proxy advisors.
4. Capital Allocation
Capital structure is one of the most common activist attack angles. Boards must regularly assess:
- Cash reserves, debt levels, and dividend policy
- Effectiveness of share buybacks and shareholder return strategies
- Strategic investments or M&A activities and their rationale
- Whether capital allocation decisions are likely to be criticised by an activist
Benchmarking against sector peers and preparing justifications for capital strategy choices is essential. A report by Lazard showed that capital allocation disputes accounted for more than 40 percent of campaigns launched in the first quarter of 2024.
Anticipating Activist Arguments: Mock Campaigns and Internal Stress Tests
Activists use public letters, media interviews, and proxy materials to bring their case to shareholders. These campaigns often feature pointed critiques of strategy, governance, and leadership. Boards can prepare by modelling potential activist scenarios internally.
Creating a mock activist letter should be a standard part of the board’s preparedness programme. This exercise tests the board’s ability to defend its decisions and build confidence in its leadership.
Mock Activist Questions to Model
- Why has your stock underperformed its benchmark index over the past three years?
- Why does your board lack expertise in critical areas such as sustainability, digital, or cybersecurity?
- Why has your ESG strategy not progressed beyond reporting to real impact?
- Why is your CEO paid more than peers, despite delivering lower total shareholder returns?
- Why are you holding excess capital instead of returning it to shareholders?
By running these scenarios annually, the board can anticipate and address its most vulnerable areas.
Scenario Planning and Rapid Response Protocols
Preparing for an activist campaign is much like preparing for a reputational crisis. Response time, clarity of messaging, and alignment across leadership are critical.
Steps to Build a Rapid Response Framework
- Designate a response team that includes key internal leaders, external legal advisors, communications consultants, and investor relations professionals
- Pre-draft holding statements, FAQs, and talking points for employees, media, and investors
- Identify third-party validators such as analysts, ESG rating agencies, or independent governance experts who can support the company’s position
- Establish ongoing relationships with proxy advisors and legal counsel to ensure prompt advice when a campaign emerges
- Develop a stakeholder communication playbook that defines who communicates what, and through which channels
A Deloitte report recommends that companies rehearse these scenarios annually and update materials regularly, particularly ahead of AGM season.
Building Activist Resilience into the Board’s DNA
True activist resilience is not about being defensive or oppositional. It is about transparency, responsiveness, and building a board that reflects the needs of a modern, accountable company. Boards that take this view are more likely to retain the support of long-term shareholders.
Best Practices to Build Long-Term Resilience
- Refresh board composition every 2 to 3 years to ensure a mix of experience, industry knowledge, and emerging expertise
- Tie ESG and sustainability metrics to executive compensation and publicly disclose how these goals are tracked
- Rotate committee leadership roles to prevent stagnation and encourage fresh perspectives
- Hold annual off-site board strategy workshops with a focus on future risks, innovation, and external disruption
- Include activist scenarios in the board evaluation process and assess readiness through formal peer reviews
- Disclose long-term value creation strategies clearly, with quantifiable milestones and an honest assessment of risks
By adopting these practices, boards demonstrate to investors that they are capable stewards of capital and leadership.
Legal and Regulatory Preparation
Activists are increasingly leveraging regulatory tools to build support, such as submitting alternative board nominations or requesting special meetings. Boards must be legally prepared.
- Regularly review the company’s Articles of Association and by-laws
- Understand the threshold for calling special meetings or nominating directors
- Ensure the company’s shareholder rights plan (if any) is up to date and defensible under UK Takeover Code regulations
- Stay informed of evolving shareholder engagement standards such as those published by the Financial Reporting Council (FRC) and Investment Association
These legal and regulatory protections are not designed to block legitimate dissent, but to ensure fairness and transparency throughout the engagement process.
Preparation as a Competitive Advantage
Activist campaigns can be disruptive, but they do not have to be. The most effective boards are those that recognise activism as a constant possibility and prepare accordingly.
Activist-proofing is not about creating barriers or rejecting critique. It is about building a resilient, forward-looking board culture. By strengthening governance, sharpening strategy, and improving transparency, boards can protect shareholder value while reinforcing trust with investors and employees alike.
Where public perception, ESG scrutiny, and capital activism intersect, proactive governance is essential for boards that wish to lead, rather than react.
