Boards and management teams are entering a third era of activism defense and have a lot of catching up to do, according to a paper by CamberView Partners that was released this week.
In an article entitled “The rise of the investor-centric activism defense strategy,” the governance advisory firm suggests it is no longer sensible to use tactics that disenfranchise activists – but that bowing down and settling may open issuers up to further turmoil.
“An unsettled shareholder base can leave companies vulnerable to a follow-on campaign either by the initial activist or another activist with a different agenda,” the article warns. Instead, it suggests, “It is critical that companies view their potential actions through an investor lens, whether three weeks before a meeting or during the off-season.”
Derek Zaba, one of the authors of the piece and co-head of CamberView’s contested situations team, says meeting shareholders regularly to discuss their concerns is something activists were doing as far back as 10 years ago, when companies were more reluctant to engage. The use of “tactics” such as poison pills, bylaw changes, and lawsuits are now on the way out and engaging shareholders year-round is on the way in, even if it means boards inviting shareholders to critique not only their management teams, but the performance of directors.
“You need to walk a fine line when asking for feedback. You don’t want it to appear like you don’t have confidence in your strategy,” Zaba says. “But if you do it in the right way, asking for feedback can be perceived as a strength.”
Underlying the shift is a growing demand for a seat at the table from long-only shareholders, some of which have doubled their governance teams in recent years, and others that have chafed at the influence activists have achieved. After a rash of settlements following 2014’s hard-fought activist battles, some investors have made clear that they expect to be consulted before an activist or its nominees are given board representation – New York City pension funds even opposed the election of Elliott Management’s nominee at NRG Energy earlier this year.
Investor-centric defense “doesn’t preclude a settlement,” says article co-author Pete Michelsen, the other co-head of the CamberView activism team. “It makes a company more confident about its position when an activist shows up saying it has talked to shareholders.”
Focusing on shareholder feedback is “the default these days – much more so than five or 10 years ago – but is less focused on as a framework,” Michelesen explains. “There are still some advisers and companies where the initial gut reaction and approach is tactical – ‘fight, fight, fight.’”
Trust can still be earned during a contest, the pair argue, but Zaba adds that engagement is a necessary rather than a merely sufficient factor in winning support. “You can buy another cycle – until the next nomination window – to execute your plan,” he says. “Those additional 12 months may allow you to avoid prematurely abandoning what otherwise would be a successful long-term strategic plan.”
Practical problems with applying investor-centric defense will still intrude. For one thing, passive shareholders who are more open with management are harder to get hold of. Active managers may still have a residual unwillingness to criticize management, left over from the days when access was king.
Moreover, the Procter & Gamble result shows the sometimes-contradictory nature of disparate shareholder bases – and just how uncertain feedback from shareholders can be. The company revealed Monday that just 0.3% of the shares voted at its annual meeting were the difference between victory and defeat in its proxy fight with Trian Partners.
However, the model stands in contrast to some other considered analyses of how companies should approach activists. In January, famed activist defense lawyer Marty Lipton wrote a 22-page polemic on corporate governance called “The new paradigm,” which argued that, “[I]f a corporation, its board of directors, and its CEO and management team are diligently pursuing well-conceived strategies that were developed with the participation of independent, competent, and engaged directors, and its operations are in the hands of competent executives, investors will support the corporation and refuse to support short-term financial activists seeking to force short-term value enhancements without regard to long-term value implications.”
CamberView’s model teaches management a simpler and less presumptuous framework for thinking about activism defense. “Shareholders are what matter, so go get them,” Michelsen says. The earlier the better.
Plans by RBR Capital to use the Robin Hood Investor Conference to call for a breakup of Credit Suisse were dashed when the news leaked out early this week. RBR, which lost a proxy fight at Swiss hedge fund GAM Holding earlier in the year, has been circumspect about its thesis, but it seems to mirror the criticism of UBS that Knight Vinke Asset Management made in 2013. In that case, Knight Vinke thought that the private wealth management unit was being undervalued. The universal banking model may have few defenders (appropriately, Credit Suisse’s analysts are among them), but advocates of breakups also have questions to answer about liquidity ratios. Even if bank regulation is likely to lighten amid a race for London’s business post-Brexit, it might be a case of buy the rumor and sell the news. Shares in Credit Suisse rose as news of the campaign broke, but pared gains shortly after. Buy the activist, sell the implementation.
Article by Activist Insight