JAN 22, 2024

Activism: Collective voting power of retail shareholders could sway contested votes

By Bruce Goldfarb

Companies have potential to set pace for 2024 proxy season

In early 2021, individual investors – including many amateurs – got together on Reddit and other social media platforms to buy shares of struggling companies like GameStop, AMC and others to create what the SEC called the ‘meme-stock phenomenon’. The result became a Wall Street vs Main Street story, the likes of which inspired books and movies. For IR professionals, the lesson is that companies needed to reconsider the power of retail shareholders, an investor segment that many issuers and other investors had largely ignored for decades. 

At the time, that lesson was even more acute for the hedge funds that were short the meme stocks. Today, however, company executives, boards and IR professionals should also take note: retail investors matter now more than ever, especially in contested corporate elections. Roughly 58 percent of US households owned stocks in 2022, according to the Federal Reserve’s survey of consumer finances released late last year. That percentage is up from 53 percent in 2019 and ‘marks the highest household stock-ownership rate recorded in the triennial survey,’ according to the Wall Street Journal.

Although most individuals hold stocks indirectly through a mutual fund, ETF or an investment in a retirement account such as a 401(k) plan, the number of people who directly hold stocks is still considerable: an estimated 19 mn families hold shares directly, out of a total of 65 mn families holding shares in any form. In certain cases, indirect ownership now also affords voting rights for investors: the three largest asset managers – BlackRock, State Street and Vanguard – have pilot programs underway designed to give underlying retail investors the power to vote their shares held through some of their ‘passive’ index funds. 

Delivering your message

In the modern corporate era, public companies (and their activist opponents) have focused their solicitation outreach efforts mainly on big institutional investors during proxy season because of their large, concentrated stakes. That focus, of course, remains important for many companies. But individual shareholders, including company employees, may hold significant collective voting power and could help turn the tide in an activist situation or sway the vote in other non-contested but important instances. Corporations need to find ways to deliver messages that will persuade these newly empowered individual voters to side with the board of directors and management in these contested and critical situations.

The good news is that tools derived from social media platforms make it easier to communicate with retail holders – increasing the odds that individual owners can be wrangled into a meaningful voting bloc. Activists have successfully used fintech and social media to rally retail holders to their cause in the past – think of Third Point’s Mmm, Mmm, Bad video about Campbell’s Soup that you can still watch on YouTube, or Elliott Management’s video messages sent to Arconic shareholders – so it is critical that companies and boards of directors also tap into the power of the retail vote.

The growing power of retail shareholders may impact the outcome of the activist campaign against Starbucks, which, at time of writing, is being waged by the Strategic Organizing Center (SOC), a coalition of North American labor unions. In an action motivated by human-capital mismanagement failures at Starbucks, related in part to the company’s responses to the nationwide labor-organizing efforts that the coffee chain has experienced in recent years, SOC has nominated three candidates for election to Starbucks’ board of directors at the March 2024 annual meeting, as an alternative to the company’s nominees.

With a significant portion of the outstanding shares of Starbucks owned by individual shareholders (including current employees), the outcome of this campaign could depend on which party – the company or the activists – does the best job of targeting retail investors, understanding their motivations and engaging them effectively to win their votes. 

While the impetus for what creates value may differ from company to company, this analysis of how a retail shareholder base may impact an outcome at a shareholder meeting is significant for any (prospectively upcoming) proxy fight at The Walt Disney Company, and has already influenced the result of the 2023 proxy elections at Amarin and other companies.

Reaching individual shareholders

Given the changes in share ownership patterns noted above, the traditional arguments for focusing mainly on institutions – that individuals are hard to reach efficiently, never read proxy materials and rarely vote – no longer hold true. Companies need to devise persuasive messaging and targeted digital campaigns to reach these shareholders, and couple those strategies with the proper follow-up to ensure these investors vote their shares in the right way and on time. The campaign can be a resource-intensive endeavor, but one worth the effort in contested elections with a potential long-term payout.

Social media campaigns are key. Last year, a survey by the FINRA Foundation and CFA Institute found that 48 percent of Gen Z investors use social media as a prime source of information about investing and finance, with their preferred online resource being YouTube (60 percent of respondents), followed by internet searches, Instagram, TikTok, Twitter, Reddit and Facebook. To be most effective, such efforts need to be ongoing and consistent, rather than simply an afterthought triggered by an activist’s threats. 

Employing sophisticated stock surveillance programs is also important in understanding who owns shares and how that ownership is changing over time. Companies need to become better informed about their investor composition by understanding the percentage of their shares held in retail vs institutional hands. That kind of work is both art and science and requires a sophisticated program as opposed to a cookie-cutter approach. Companies should use the results of a good surveillance program to determine whether they have a sufficient proportion of individual shareholders to justify an aggressive retail outreach program. 

Bottom line: retail investors should not be ignored or overlooked at any time – and certainly not when the company’s future is on the line in a proxy fight.

Bruce Goldfarb is president and CEO of proxy solicitation and investor response firm Okapi Partners