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Could this be the next chapter of shareholder activism? 3 steps for boards to be better prepared for market volatility

Maria Castañón Moats Governance Insights Center Leader, PwC US February 17, 2021

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.

How did we get here?

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.

How directors can be better prepared 

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. 

  • Actively monitor social media. Don’t be caught by surprise. As much as the targeted stocks seemed to suddenly surge overnight, the reality is that they’d been the subject of internet boards for months, with chatter steadily ramping up. Many companies already have social listening programs in place to monitor social media channels for mentions of their brand, products, industry, or competitors. Confirm they’re also keeping an eye on informal investor forums as well.
  • Evaluate your plans and policies. Boards should revisit the internal policies and controls the company has in place with stock volatility in mind. In contemplating this new scenario, you may identify circumstances that could allow individuals to create potential legal, regulatory, or reputational risk. Even if your company’s stock isn’t targeted, there may be industry or broader market impacts from this phenomenon you should consider.

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. 

  • Do the math on incentive compensation. Almost every company has tied executive compensation to stock price in some form. In this new environment, the compensation committee should take another look at incentive compensation that may be tied to measures like stock prices or earnings per share. The board should know how market volatility could impact all possible payouts of executive performance targets.  For example, if your executives have numerous vested options and the stock price soars, the board should understand what the result would look like.

 

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.