Engagement to Trust With Shareholder Activism #AGL

Introduction.

So chances are if you’ve been paying attention in 2022, you’ve come across the term ‘shareholder activism’ a few times in your newsfeed. It’s typically accompanied by a solemn profile shot of Mike Cannon-Brookes against an unflattering caricature of the AGL Board.

The failed AGL demerger has placed a spotlight on the growing importance of company awareness towards shareholders' attitudes (and reaction to activism events) and how they affect key strategy decisions and outcomes. How did AGL get this so wrong and why are shareholders now left with approximately $160m in demerger costs?

A global paradigm shift.

Given the increased global focus towards addressing climate change, shareholder preferences have been progressing towards companies that demonstrate effective ESG frameworks and a forward-looking net zero strategy. Not only do these companies demonstrate a commitment to climate neutrality, they maximise (or insure) shareholder value by joining and participating in a global transition towards sustainability via renewables.

AGL did not prepare adequately for this transition. Instead, shareholders experienced a 65% decline in stock prices over the past 5 years as an increasing level of renewable electricity entered the national electricity market and eroded AGL’s earnings. Check out some of the examples below!

1. A lack of direct investment in clean energy with renewable output increasing by only 3.5% (from 8.5% to 12%) in 4 years of operation (FY18 — FY21)
2. A failure to address shareholder concerns for climate change, resulting in a majority shareholder resolution in 2021 for stronger demerger carbon reduction goals aligned with the Paris Agreement
3. A failure to address the previous shareholder resolution in 2021, alienating shareholders ahead of the proposed demerger vote.

As shareholder preferences ultimately inform where they invest their capital, institutions are highlighting their own ESG credentials in response via an accelerating level of engagement on ESG implicative transactions to signal their forward-facing (and hopefully market-leading) strategy. Several institutional investors publicly engaged with the AGL demerger including HESTA (0.36%) who explicitly announced their intent to vote against the demerger via a media release to their stakeholders when Cannon-Brookes was campaigning for shareholder support.

This director-engagement guide emphasises that true shareholder engagement should equal shareholder trust, and is something that grows gradually through an ongoing commitment to transparency. In the same sense, shareholder distrust that leaves companies vulnerable to periods of adversity (like AGL) isn’t attributable to a single event but rather an extended period of continuous shareholder neglect reflected in price performance or strategy.

So what happens next?

Given the demerger outcome for AGL, with half the board resigning or stepping down, and a strategic review to be undertaken for the future of the company; it’s clear that a lack of awareness (or care) on the gravity of shareholder trust was a key driver in AGL’s vulnerability and something that was exploited by Cannon-Brookes to drive an activist outcome that better resonated with shareholder preferences.

Going forward, it’ll be an interesting case study to see whether the company does pivot more heavily towards renewables and sustainability, and the flow on trust effect from satisfying shareholder preferences. The application of a transparent shareholder engagement strategy paired with a genuine commitment to finding a place in the decarbonised economy could transform AGL into one of the best stories of the next few decades.