Corporate Governance and Climate-Related Shareholder Activism: A Call for Reform

Climate change has emerged as one of the most pressing issues of our time, with far-reaching implications for businesses, investors, and society at large. As the urgency to address this global challenge intensifies, there is a growing recognition that corporate governance plays a crucial role in driving sustainable practices and mitigating climate risks. Institutional investors, armed with trillions of dollars in assets under management, are increasingly viewed as potential catalysts for transformative change in corporate behaviour. However, the path to effective climate-related shareholder activism is not without obstacles, particularly in the realm of corporate law and governance regulations. This tension between the need for urgent action on climate change and the legal frameworks governing shareholder activities presents a complex challenge that demands innovative solutions.

In our recent ECGI Working Paper, “Climate-Related Shareholder Activism as Corporate Democracy: A Call to Reform ‘Acting in Concert’ Rules,” we examine the potential for climate-related shareholder activism to drive significant changes in corporate governance, particularly in promoting sustainability. However, we argue that the current legal framework governing “acting in concert” poses substantial barriers to effective climate-related shareholder activism.

Our research highlights the growing influence of institutional investors and initiatives like the Principles for Responsible Investment (PRI), which now represents over $120 trillion in assets under management. This shift, coupled with the evolution of stewardship codes worldwide to focus on environmental, social, and governance (ESG) factors, sets the stage for potentially transformative green activism in corporate governance.

However, we identify a critical obstacle: the legal rules concerning “acting in concert” were designed primarily to regulate takeovers and contests for control, not to address modern forms of shareholder activism focused on issues like climate change. These rules can disincentivize or even functionally disenfranchise institutional investors from using aggressive tactics to drive environmental agendas, even when such agendas are supported by a majority of shareholders.

Our working paper provides a comparative analysis of “acting in concert’ regimes across several jurisdictions, including the UK, EU, US, and notably in the context of this Asian focused ECGI Blog series, Japan. In the Japanese context, we discuss the emergence of anti-activist poison pills and their recent judicial scrutiny. We highlight a case involving Mitsuboshi, where an institutional shareholder, Adage Capital, challenged a shareholder rights plan with an expansive concept of acting in concert. The Japanese courts, including the Supreme Court, ruled against such broad definitions of concerted action, criticizing the overly expansive and nebulous nature of the group definitions and prohibited acts that would trigger the poison pill.

This Japanese example illustrates a broader trend observed in other jurisdictions, where courts rightfully are becoming increasingly sceptical of overly broad definitions of acting in concert, particularly when they may impede legitimate shareholder activism. We note that ESG activism, including climate-related initiatives, is becoming increasingly influential in Japan and is a source of concern for Japanese managers.

We argue that the current legal landscape, exemplified by cases like Mitsuboshi in Japan and similar developments in other countries, creates a situation where institutional investors are caught between their growing commitment to address climate change and the legal risks associated with collective action. This dilemma often results in what we term “faux green activism,” where investors engage in soft forms of engagement but avoid more aggressive tactics that could lead to real change.

To address this issue, we propose a novel model for reforming “acting in concert” regimes. Our model aims to distinguish between climate-related activism campaigns and traditional takeover contests. Key elements of our proposal include:

1. Recognizing the distinction between shareholder activism and control changes, allowing for more aggressive forms of engagement, including the threat or execution of board changes, when aimed at achieving specific environmental objectives.
2. Creating a safe harbour for intermediary-led climate-related activism, acknowledging the role of organizations like the PRI in coordinating shareholder actions.
3. Focusing initially on climate activism rather than broader ESG issues, given the universal importance and clearer definition of climate-related objectives.

We argue that such reforms are crucial not only for promoting effective corporate governance but also for addressing the existential threat of climate change. We suggest that the failure to adapt “acting in concert” regimes may miss a significant opportunity to leverage the collective power of institutional investors in driving sustainable corporate practices.

Our insights are particularly relevant for corporate governance in Asia, where countries like Japan are grappling with the intersection of traditional corporate structures, emerging shareholder activism, and growing ESG concerns. The Mitsuboshi case in Japan exemplifies the tension between established corporate defenses and the evolving landscape of shareholder rights and the potential (or lack thereof) in the future for environmental shareholder activism.

Due to the more dispersed shareholder structure in Japan than in any other country in Asia and its high level of institutional investor ownership compared to the rest of Asia, the implications of “acting in concert” rules are likely to be particularly salient in Japan – the world’s fourth largest economy. However, even in Asia’s concentrated shareholder environment, the reform of “acting in concert” rules could have important implications as institutional investors exercise their voice as important minority shareholders. Moreover, as the shareholder landscape of Asia’s largest economies continues to evolve, countries like China – Asia’s largest economy – have seen a significant increase in the percentage of shares owned by institutional investors. In this context, empowering institutional investors in Asia as either important minority blocks or even collective majority owners to more effectively engage with companies on climate issues by reforming their acting in concert rules may potentially lead to significant improvements in corporate sustainability practices across the region. This much is certain: given Asia’s size, population and economic power, climate change cannot be effectively addressed without Asia . 

In conclusion, we present a compelling case for reevaluating and reforming “acting in concert” regulations globally, including within Asia. By aligning these rules with the realities of modern climate-related shareholder activism, there is potential to unlock a powerful force for positive change in corporate sustainability practices, both in Asia and worldwide.

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By Dan W. Puchniak (Yong Pung How School of Law (YPHSL), Singapore Management University and ECGI) & Umakanth Varottil (National University of Singapore and ECGI)

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