In my first post as leader of PwC’s Governance Insights Center, I talked about the new and unfamiliar risks businesses are facing. January added the latest wrinkle to a shareholder activist playbook we thought was fairly well established.
Sure, activists might consolidate a sizable chunk of your stock and then push the company to make operational or leadership changes. They might take a short position in your stock. Or, they might wage a proxy fight to replace members of the board. We’ve seen all of these tactics. But retail shareholders banding together on social media to aggressively drive up a company’s stock price in less than a month? And when the stock comes back to earth, the fall happens in under a week? That’s a new one.
This trend may not be widely spreading through the markets just yet. But that doesn’t mean you should ignore it. Here’s a quick overview of what is happening and a look at what boards can do now: Actively monitor social media, evaluate your plans and policies with stock volatility in mind, and consider potential impacts on incentive compensation.
At the start of 2021, stock market watchers began to notice rapid increases in the stock price of a handful of consumer brands. The unusual activity was traced back to internet forums populated by retail investors. Chatter over the targeted stocks—many of them shorted by hedge funds—had gained momentum in December and then spread to broader social media. Trades went through the roof. The reach and the speed of the movement was remarkable.
Online brokers and trading apps struggled to keep up with the trading frenzy. Some apps even restricted stock activity, leading to calls from members of Congress for regulators to look into investor protections. Treasury Secretary Janet Yellen gathered regulators, including the SEC and the Federal Reserve, to discuss market volatility. As these groups grapple with what happened, the rest of the market realizes that it could easily happen again.
Could this kind of retail shareholder activism become common in 2021? That remains to be seen. But this activity has caught many by surprise. I would like to offer some suggestions that boards can take now to better prepare for unpredictable market volatility.
In particular, boards should also review the company’s 10b5-1 policy to understand the impact exponential stock gains—or losses—may have. These plans can allow company insiders to trade company stocks while complying with insider trading laws. The price, amount, and triggers are set in advance and determined by a formula or metrics. Take a close look at whether there are elements of your company’s policy that could be exploited in a volatile stock scenario.
If there’s anything I’ve learned from the past 12 months, it’s that there’s no predicting exactly what the next 12 months holds for us. But as with most unexpected events in the marketplace, this latest twist offers directors the opportunity to learn, adapt, and be even more prepared.