What To Do When An Activist Targets Your Company
Shareholder activism is on the rise in Canada as institutions increasingly see it as a legitimate and meaningful form of value creation.
However, few IROs have experienced the sustained pressure that comes with activist agitation. In this article, we provide practical tips on what to do when an activist comes calling, and how to avoid activist attention in the first place.
Before the Die is Cast
Although it is considered a given in contemporary IR, identifying your shareholders (and their motivations for ownership) and keeping your management team fully engaged with shareholders are foundational steps in inoculating your company from a possible activist attack.
Companies that are aloof from their shareholders suffer from two problems:
- One, shareholders perceive management to be indifferent to their needs, which (along with overpromotion and underdelivery) damages management’s credibility – the most powerful currency your company has if a proxy battle (the blunt instrument of shareholder activism) is ever waged.
- Two, without frequent and direct shareholder contact, management (and the Board) often fail to fully appreciate shareholder views on the effectiveness of the company’s value creation strategy. Lack of comprehension creates two nasty side effects: management (and the Board) do not see the need to alter the strategy to better reflect the needs of shareholders; or management does not see the need to better communicate the value of the strategy.
IROs often encounter difficulties in explaining to management why the strategy is not accepted by shareholders. This conundrum is exacerbated when management (and the Board) do not fully understand shareholder motivation for owning the stock, choose to ignore the metrics by which shareholders evaluate value creation performance, or justify the strategy – and resulting corporate performance – by saying it is the only way for the company to remain competitive and balance customer/shareholder/employee/community needs.
This final justification goes to the heart of corporate governance and the Board’s fiduciary duty to the company as a whole, not just the shareholders. Leaving this final and very legitimate consideration aside, there are various ways to break through the other barriers. The most direct is to ensure shareholder voices are heard by management through regular meetings. Board engagement with shareholders is also becoming increasingly important – and expected by shareholders – as the Board has responsibility for critical items including management compensation and the audit function. Board meetings with key shareholders can be a valuable adjunct to the IR program.
It is also necessary to recognize that in large institutions, proxies are voted by one team and investment buying and selling are done by another. Understanding the views of the entire shareholder audience within an institution, as well as its sell-side influencers, is a tough but rewarding job for the IRO.
Indirect or filtered communications are also important in keeping your team informed between shareholder meetings. That is, IROs can provide written reports to management and the Board, not just on quantitative ownership data, but also shareholders’ most frequently asked questions.
In addition, shareholder perception surveys can help management and the Board to gauge owner sentiment, and better determine the motivations behind ownership. As well, this tool is seen by those surveyed as an indication that management is not indifferent to their needs.
A well-thought-out communications and outreach program is critical at all times, but especially when companies take decisions that run counter to short-term value creation, such as raising dilutive equity with no specific plan in place for deployment, or holding what shareholders consider excessive amounts of cash on the balance sheet. These actions should be justified, although if management has a track record of effective capital allocation, shareholders – even activists – may give your company the benefit of the doubt.
Shareholders, not just activists, are also looking for better – and more honest –disclosure. It is not unusual for an activist to focus on poor disclosure and to be extremely critical of management for obfuscating. A recent (and successful) proxy battle waged by a shareholder activist saw management receive lengthy letters citing, in part, the use of “MBA-speak” in quarterly conference calls. The activist said this was an indication that management was incapable of being honest and direct with shareholders. Negative surprises are also fuel for activists, so be careful about setting and managing expectations.
Bottom line: to avoid being an easy target for an activist, listen to shareholders, understand their motivations, thoughtfully communicate the shareholder value plan, manage your management’s credibility and err on the side of plain language disclosure. In short, do everything possible to maintain the best relationships with your shareholders so they don’t feel compelled to try to replace your management or Board.
When an Activist Strikes
Advisory fees in a contested proxy fight alone can range from $500,000 to several million dollars. Due to the cost and disruption – not to mention the possibility of losing – or perhaps belatedly recognizing the partial validity of some complaints, many companies opt not to wage a proxy battle, preferring to acquiesce to activist demands. In situations where this is not an option, here are three tips to help you navigate the activist minefield.
1) Ensure you have IR bandwidth. It is not unusual for an activist to come knocking at an inopportune time like December 24. Catching a company off-guard and keeping the management team off-balance through the duration of a multi-month battle are part of an activist’s playbook. For this reason, capacity is important. Ideally, second your most senior IR team member to work on the proxy battle full-time. This will require confidence in the rest of your IR team to flawlessly perform normal course IR and disclosure activities. For small cap companies with limited capacity, the only solution may be to hire IR consultants. Just because your company’s management team or Board may be in the fight of their lives doesn’t excuse you from meeting your regular duties and responsibilities. Failing to fulfill these will simply provide fodder to the activists.
2) Integrate your legal, IR and public relations teams. An activist attack will be disquieting to your company as a whole, putting customers, suppliers and your fellow employees on edge, particularly when activists make claims – some outlandish – about what they are capable of doing to create value, including cutting costs and exiting business lines. Remember, activists don’t have to play by the same rules you do in making future claims. A joint IR-PR campaign to quell the fears of your company’s stakeholders will be incredibly important – and you will need legal support to make this happen.
3) Surround yourself with third-party experts. No two proxy battles are the same – and proxy contests are not the only form of shareholder activism. So it pays to engage third-party experts with broad experience in the field. Sometimes, though not always, this involves going beyond your normal circle of proxy solicitors, legal and IR advisors. Proactively assessing your advisors for their expertise – before an activist strikes – is recommended given the short notice you may receive. Trusted advisors who have significant and varied experience will help your Board and management keep their emotions in check so they can choose the right strategic and tactical responses to the personal attacks that are often at the centre of shareholder activism.
Learn from Others
Although being a sideline spectator will not make you an expert in the field, closely following proxy battles at other companies as they play out will help you to understand some of the techniques that are used. For example, the ‘fight’ letter or fight ad directed at shareholders, and single purpose advocacy websites, are common tools used in proxy battles. Activists such as Carl Icahn also use Twitter; so keep an eye on social media as well. Companies with a large retail following will invariably resort to large-scale roadshow strategies during a proxy battle, whereas those with a large institutional following will prefer one-on-one meetings. Watch, too, for how management teams under fire articulate their value creation plans to see how they differ from the plans espoused before the attack erupted. And browse law firm websites, as they often contain valuable research.
Ultimately, a proxy contest is similar to a political contest: the candidate with the most votes wins. What matters is getting those votes out – and in your favour – because you have the most credible plan for value creation. Between elections, how your company governs itself will make a big difference in whether your Board will confront an activist or be acclaimed.