Article By Rui Videira, Account Director, Instinctif Partners
Shareholder activism is on the rise and has reached Europe at full speed.
Though often associated with U.S. boardrooms, activists’ pushes to force strategic and corporate management change have meant that so far this year, USD7.2 billion have already been spent on campaigns – with Europe now seen as a primordial target, according to Lazard’s 1Q 2018 Activism Review.
The figure, which suggests 2018 may surpass 2017’s record numbers, underpins the efficiency with which activists spend capital, leveraging their credibility with traditional investors to get corporate boards to reshuffle their proposed business strategies in order to improve returns.
Yet, looking beyond sums, the data reveals a much broader picture of what is taking place in boardrooms and at AGMs around these shores.
A key finding is that shareholder activism in Europe is on the rise, with the UK being the most targeted country.
For example, the likes of Whitbread, Hammerson, Barclays, Sky, GKN and Micro Focus have recently been placed under activists’ radars and have either been the target of campaigns, or seen activists build a stake in their businesses.
According to the research, the majority of shareholder activism actions in Europe have been driven by U.S. activist Elliott Management, Sherborne Investors and Cevian Capital.
These groups have been looking to break into the European landscape in their drive to find attractive valuation entry points and opportunities to enhance shareholder value.
But there are ‘home grown’ players in the UK as well, which are contributing to shaping up this landscape. Perhaps the one that got the most media visibility recently is The Children’s Investment Fund (TCI), which got involved in the governance crisis at the London Stock Exchange Group (LSEG) at the end of last year.
Whether its involvement led to the aimed result or not is almost secondary, as other shareholders groups took part in the fray. The takeaway from it is that wittingly or not, the whole issue was played out in the pages of the national media.
This placed an unwanted spotlight on LSEG and saw its reputation challenged in the face of the investor pressure. But what could it have otherwise done to avoid it?
Proactivity is the Best Form of Prevention
As is frequently the case, not just the LSEG but companies of all sizes and sectors need to consider the impact sudden challenges can have on their business’s reputation and, ultimately, value.
Activist moves by interest groups at any given time are not something that is always avoidable, but unpreparedness to face them is.
The main reason boards acquiesce to listening to activist groups is not only to increase the level of engagement with their shareholders but, more importantly, because by paying attention to the concerns of investors directors avert future trouble.
If for no other reason, such strategy helps boards better analyse management’s actions at the companies they oversee.
This, however, is not enough.
Planning will do it
To effectively tackle an activist campaign, companies must have a contingency plan that anticipates and prepares them to quickly respond. To achieve this, companies should evaluate all their business’ lines, looking for underperforming components and evaluating risk factors.
Having a structured communications strategy not only helps, but is key to ensure corporate messaging aimed at both internal and external stakeholders is aligned with previously announced strategies — relaying a sense of continuum, rather than disruption.
As PWC points out, a good exercise is for companies to place themselves in the position of an activist, considering their ideas and identifying areas of common ground between the company’s position and the activists’ demands.
Above all, companies should have a comprehensive understanding of their shareholder base and a tailored engagement plan that shows management and the board are aligned in their commitment to delivering shareholder value.
A very well structured and thought-through reactive strategy is, therefore, paramount for businesses to swiftly respond to activists’ moves before too much damage has been done to their brand’s value.
No company, listed or private, is impervious to the possibility that someday its shareholders will question its management decisions publicly, rather than privately. To have on your side a team of well-versed corporate and capital markets communications advisors, with experience in tackling crises is important.
Businesses might know not when challenges will arise, but a lack of preparedness should never be the excuse that justifies why activist shareholders succeed in steering businesses in a different direction to that set out by management in the most public way.