Is your company ready for an activist attack?

A recent program of the Colorado Chapter of the National Association of Corporate Directors (NACD) about shareholder activism raised some interesting points to share about highly engaged activists.

Shareholder activism has come a long way from corporate raider Carl Icahn’s high-profile takeovers in the ‘80s. Beyond the more visible and vocal cause-related activists, today economic activism by agenda-driven agitators, which have specific schedules and exit strategies, is extremely sophisticated and institutionalized. If an activist shareholder has not yet approached your company, no matter its size, the odds are high that it will be.

As in most investment plays, brand and management reputation rise to the top along with the business fundamentals in activists’ deep research in evaluating target companies. Most activists’ plans of attack place the company’s management and directors at a disadvantage due to their surprise and speed.

A consistent, fully functioning, board of directors helps avoid activist challenges. Further, involved oversight by your nomination/governance committee is essential to counter the presentation of a short slate of director replacements from activists. A target company is presumptive if it believes that a short slate of director nominees by activists will not be more competent and engaged than the slate of directors put forth by the company’s nomination/governance committee.

In managing the offensive in an activist campaign, large public companies have the resources for a well-planned schedule of visits with institutional shareholders. Public company contacts with institutional investors intentionally have to explain the reasoning behind their capital and cost decisions, and the outcomes of those decisions, to ensure an audience with those shareholders.

Small public companies with fewer resources, such as many Colorado companies, are at a disadvantage with institutional shareholders. Those activists focused on small and mid-cap companies are often value investors tending toward longer campaigns and longer hold periods. Those activists typically set share “sell” price guidelines that support those longer periods. Because of this, small and mid-cap activists have a chance to gain a deeper understanding and connection with the company. In contrast to some corporate observers who admonish that all activist investors focus on high yields over short periods, these smaller cap activists are more likely over time to create more value for all shareholders.

A key performance metric used by activists in identifying targets and forcing demand for higher performance is the perception of a board’s ineffectiveness. Bad boards of directors create excellent opportunities for activist investing and are often identified by key company indicators such as:

  • an imperial CEO or a board deficient in independence
  • ignoring its shareholder base and not interfacing with its institutional or retail investors
  • large cash balances compared to peers or historical amounts
  • underperforming operations compared to peers or history
  • unengaged or long-tenured directors with no courage to take on difficult subjects and directors without the right skill sets
  • declining stock prices, and
  • poor ROI on investments and acquisitions

Irrespective of these indicators, the risk of activists showing up at your boardroom door is greater when a few large investors hold more than a majority of stock ownership.

“Long before an activist’s attention, companies should consider the need for shareholder engagement committees within their boards of directors,” said Bill Heck, President of the NACD Colorado Chapter. “Shareholder outreach agendas should focus on the ‘whys’ of management decisions and governance considerations, and less on future strategies and business models. A single source, usually the CFO, should lead efforts to speak directly to shareholder concerns about the basis of the board’s investing and capital deployment decisions.”

Identifying the most credible lead director and using various formats for engaging shareholders helps companies provide greater insights into what is motivating shareholders (including activists) to buy, sell or hold their stock. Information gained will help drive the preparation of website content, proxy materials and agendas for annual shareholder meetings. Bunker mentalities of the past prevent directors from acting on intelligence, and may invite activist proxy fights.

The best performing boards think like activists and continually ask themselves questions similar to the following (before activists do):

  • Are our operations broken or performing well enough?
  • Why are cash balances so high and what are its best uses?
  • Is the sum of the companies’ parts more valuable than the whole? Is a spinoff in shareholders’ best interests?
  • Does the company have the right directors in the boardroom from an outsider’s perspective?
  • What do postmortems on company acquisitions show?
  • What are fair criticisms of the company by shareholders?
  • Does the board vet alternatives to strategic recommendations made by management?

When activists approach, make sure there is a single point of contact to deal with them, and that the board of directors is prepared to accept and orient new board members. Have a pre-existing action plan and a team with appropriate members. Enlist shareholders, employees, suppliers, and customers in communications about any activist incursion, and be prepared to address proactively the issues raised by the activists. Realize that major activists have large staffs and tremendous research capabilities, but smaller activists have more of a tendency to employ “terror tactics” as they approach a company.

Economic shareholder activism will continue to grow as an investment strategy by shareholders. Prevent an activist incursion with a fully functioning board and a well-planned corporate agenda, and continually challenge yourself with what engaged shareholders and activists think about major Board and management decisions.

My experience is that activist representatives on boards usually are constructive, bring value to the company and raise new perspectives.  After all, they represent or are shareholders.

Ready or not, activists are likely coming to your boardroom soon, and when they do, change occurs quickly.

Categories: Management & Leadership