Normalizing The Activist In The American Boardroom

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In today’s environment, no company is immune from challenges of shareholder activists. It’s a challenge that boards must be ready to meet (and sometimes embrace).  Activists have likely become a permanent fixture in today’s capital markets, forcing boards to ask themselves some of the following questions: What are the most likely activist investors in a current shareholder base? Where is our company most vulnerable? How do we prepare for an attack from one of our shareholders

While activism is a longstanding practice, the growing influence of activist campaigns has grown and gained media attention over the last few years. They have become more sophisticated in their analysis and are now more closely scrutinizing the role and effectiveness of corporate boards, often seeking to gain director control by occupying board seats. Today it’s critical that boards not only think like activist but in some ways be one step ahead of the activist.  For years, the National Association of Corporate Directors (NACD) has been educating boards on effective investor engagement and more recently on the preparation for and response to shareholder campaigns.  The 2016–2017 NACD Public Company Governance Survey found that despite the significant increase in activist activity among both large-cap and small-cap companies, only 20% of respondents pointed to investor activism as a key issue affecting their businesses in the next year, likely signaling a false sense of comfort.  Similarly, a 2015 NACD survey indicates that levels of preparedness are inadequate. Only in NACD’s previous survey, 20% of respondents whose companies who were approached by an activist within the prior 12 months, 46% of respondents did not have a plan in place to respond.

It is incumbent upon boards to lead on the front foot and anticipate activist behavior evaluate their own performance and that of the company by looking at their organizations through the lens an activist investor. By understanding the mindset of an activist, directors can prepare a plan of response and lead with confidence.

Although the severity of each activist’s objectives will vary, their ultimate goals can be characterized into the following four areas:

  • Improve financial performance through operational changes and/or corporate restructuring;
  • Return cash to shareholders through share buybacks or dividends;
  • Change corporate policies on social and/or environmental issues; and
  • Change governance practices or the composition of the board itself.

It’s critical for the board to assess the company’s degree of vulnerability to each of these goals. In the current environment, a pending activist campaign should be looked at as a when, not an if.

[1] In the event that an activist engages with the company, NACD has outlined 10 steps a board can take to address and respond:
  1. Before an activist challenge occurs, the board should prepare in advance by assessing company vulnerabilities, assembling a response team, and creating an activist-response plan.
  2. Upon receiving a call from an activist, listen to the activist’s input and recommendations. Leave the door open for continued communications with the activist.
  3. Communicate the company’s long-term business strategy to the activist and other shareholders. Be open to meeting with institutional shareholders and proxy advisory firms.
  4. The board should meet with the team designated to respond to activism (e.g., key officers, counsel, bankers, proxy soliciting firm, consulting firm, and a PR firm).
  5. Select a spokesperson from the response team who will serve as the point of contact with the activist. This may be the independent chair, the lead director, and/or a committee chair, depending on the grounds of the activist’s challenge.
  6. Evaluate the activist’s demands, throughout the process. Recognize that a public campaign is both costly and distracting to everyday business and consider possible alternatives to a proxy fight (e.g., giving the activist board representation or altering business strategy according to the activist’s proposals). Determine whether you will challenge the activist, negotiate, or acquiesce to his or her demands.
  7. Understand the positions of institutional shareholders and proxy advisory firms and whether they align with the activist’s position. Their stances may indicate the type of fight you will be up against.
  8. Ensure that the board and management present a unified front regarding your company’s strategy.
  9. Maintaining high performance throughout the engagement period is critical. If company performance declines, this will only give the activist more ammunition.
  10. Recognize that even if you win the contest, the battle may not be over if the activist maintains his or her ownership position.

Post by Peter Gleason, CEO and President of the National Association of Corporate Directors (NACD)

[1] NACD Director Essentials: Preparing the Board for Shareholder Activism

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