Dirk Lever, AltaCorp Capital Inc.
“And three people do it, three, can you imagine, three people walking in singin’ a bar of Alice's Restaurant and walking out. They may think it's an organization.” Lyrics from Alice’s Restaurant by Arlo Guthrie
If you are old enough to know the song, you are likely humming it in your head. If not, the social significance of protestation of the Vietnam war draft is lost on you, but you can still get the drift of the lines. Arlo’s point was that to change things you needed organization, and then you have the movement for change. Consider that shareholder activism comes about because some shareholders are unhappy with the status quo, they get organized and they start a movement. But the reality is, shareholder activism should never be a surprise to management.
Listening as Well as Presenting
The subhead above has a dual meaning. When presenting on your Company, you need to listen to the audience – and when listening, you need to listen as carefully as when you prepared the presentation. Questions or comments can give you great insights as to what shareholders or potential shareholders are thinking, and shed light on their concerns. By listening carefully, you can establish a list. If enough people harbour the same concerns, you likely have an issue that needs to be addressed. Remember, in the public market, perception is everything.
What is the Form of Complaint?
Complaints can take many forms but can be broken down into two types: inaccurate assertions and subjective ones. Inaccuracies signal a perception issue that must be addressed through better communication or improved disclosure. Identify and fix. Subjective complaints are a different matter that must be considered carefully.
Is the Complaint Material in Nature?
Complaints that are material in nature can affect a stock negatively or positively. Experience and a good knowledge of the business can help an IRO understand the ramifications. If complaints are material, this must be brought to the attention of management early.
Who is Complaining?
Just as important as materiality is the origin of the complaint. Is there a single source, or are others singing along 'in four-part harmony'? Is there potential for organization and movement? Are the complainants influential, or could they become influential? And do not dismiss people out of hand. The IRO’s role – just as important as helping to tell the company story – is to relay to management what is going on in the market. You are not just the mouth, but also the eyes and ears. Keeping track of who is saying what and other aspects of your shareholder base (in a monthly report to management and the Board) is a smart idea.
Impossible, Feasible, Doable?
Is what others are suggesting impossible, feasible or doable? Determining this will require some analysis, internal consultations and consensus, but more importantly, it will require future communication. If acting on a complaint is impossible, the market ought to know why. If action is feasible or doable – but the company chooses not to proceed – the market needs to understand why. The reasoning must be sound and should be delivered in a manner that is not dismissive and conveys careful consideration. It also makes sense to sit down for a discussion with key relevant parties but be very aware of disclosure laws.
The Most Common Complaint: Allocation of Capital
Typically, complaints that lead to shareholder activism relate to the allocation of capital; one could argue that selling a division, splitting up a company, or paying a dividend can all be forms of capital allocation. From time to time the market’s view may be short-term compared to management’s and the Board’s but it’s up to management to show how a course of action is in shareholders’ best long-term interests. However, sometimes the market is right, so management and the Board ought to consider recommendations very carefully. The key is to hear the winds of change early and providing that service is one of the key jobs of investor relations – to be the eyes and ears of management and Directors.
Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.