By Zach Kouwe
Activist investors just wrapped up another record year shaking up companies across the globe. But as anyone in professional sports will tell you, with success comes the spotlight, and criticism of activist investors has ratcheted up and begun creeping into the mainstream.
In November, The Atlantic Monthly ran a lengthy article with the headline: Can America’s Companies Survive America’s Most Aggressive Investors? It ponders whether activist investors are damaging the economy and hurting American workers by pushing companies to embrace strategies for short-term stock boosts instead of long-term sustainability. Aside from Harvard professor Lucian Bebchuck, the story is devoid of a single voice from the activist world, even though the journalist presumably tried to contact at least a few prominent firms. Reps for some activist investors declined to comment for the article.
As the broader public becomes increasingly aware of activist investors (one of the most well-known—Carl Ichan—has even been appointed as a special advisor by the President-elect Trump), they should reevaluate their communications strategy toward those outside the financial world. That includes working harder to explain how activists help create long-term value at the companies they target, why that is good for the economy and how they work with boards and management to effectively execute on the strategies they suggest.
Transparency is paramount in this effort to communicate. Hedge funds are all too often seen as “secretive” and “unregulated”. That prompts the public to view them with a high degree of skepticism and to reflexively believe there’s always a hidden agenda. Last May, several activist funds teamed up to form the Council for Investor Rights and Corporate Accountability (CIRCA), which was described at the time as a lobbying group. CIRCA’s website is scant on details about who backs the organization, what it does exactly and who is in charge. It has no social media presence (odd for an advocacy group) and doesn’t list an address, phone number or general email. It’s not surprising that they’ve been largely silent since the announcement.
Going Beyond the Fight
Enhancing transparency is important, but activists, especially the most vocal ones, also need to do more to highlight their successes after a campaign. Overall, activists have been very effective at communicating their message on individual campaigns. They don’t always win, but they seem to make the most noise. Proxy fights and activist presentations are covered prominently by financial television and major news outlets, especially when the target company is a well-known brand. Sometimes these campaigns even make it onto HBO.
Whether the campaign is successful or not, once it’s over most activists and the media move on to the next one, and their communications strategies should continue on as well.
But recently there’s been a growing focus on long-term sustainability and growth in corporate America and a shift away from meeting quarter-to-quarter financial targets. Some large asset managers including Blackrock and Vanguard have said they want CEOs to focus on the next decade instead of the next 3 years. The recent New York Times DealBook Conference was dubbed “Playing for the Long Term.” Some institutional investors have spoken out against funding dividends and share buybacks by taking on more debt.
PepsiCo CEO Indra Nooyi told activists at the DealBook Conference that “companies don’t run on spreadsheets” and she pressed activists to avoid making management and boards “look like fools” in the media. “I don’t get up in the morning and say ‘how can I destroy shareholder value today?” she added. Activists should “use the media constructively.”
Along those lines, activist engagement with the public should continue beyond individual campaigns. Firms should highlight the important work they’ve done since joining the board. After a particularly bruising proxy fight, activists need to demonstrate how their representatives are now working constructively with existing directors to achieve positive long-term value. To the extent possible, activist directors should become brand ambassadors for the company on social media and other public outlets. Firms should “display” their portfolio companies prominently on their websites and activist hedge fund managers should be seen with the CEOs of those companies as much as possible.
The narrative not only helps activists build more credibility for their next campaign, but helps answer criticism that activists are bad for the economy, only interested in the short-term and unable to run companies.
Salt the pasta water
The aforementioned campaign that ended up on HBO’s Last Week Tonight with John Oliver was Starboard Value’s proxy fight against Darden Restaurants, owner of Olive Garden and other restaurant chains. It was a bruising battle for the company, which ended up losing its CEO and all of its board members to Starboard. The activist waged a highly effective public campaign that included new strategies for the company that were financial in nature and as well as simple and easily digestible (pun intended). Their most famous suggestion was the time-honored trick of adding salt to the chain’s pasta water.
But Starboard didn’t stop talking about Darden once the campaign ended. Board members went to work and even waited tables at Olive Garden. Starboard’s CEO Jeff Smith went on Bloomberg TV to talk about the experience and detail other moves Darden made to turn things around. The firm continuously talked about the company’s turnaround, leading to a prominent story in the Wall Street Journal that garnered a lot of attention on social media and made its way onto Vanity Fair’s website.
That’s how you wage an effective long-term communications strategy. If activist investors want to earn the benefit of the doubt from the public—and win the hearts and minds of investors, they not only need to have a long-term view for the companies they target, but also for their own reputations.