No public company is immune to activist shareholder campaigns. Even a company delivering impressive shareholder returns may attract activists who want to modify executive compensation, sell or spin off businesses, change capital allocation, or make structural changes. The best defense against activist attacks is a consistent performance that realizes stated goals. Otherwise, a campaign can derail your equity growth plans.
Develop a Tactical Plan
While companies can never eliminate the possibility of forming different types of shareholder activism and activist attacks, they can develop a playbook to reduce their vulnerability. The first step is to assemble a team that includes management and external advisors who can quickly respond to any threat. A detailed tactical plan should identify roles and responsibilities, with escalation guidelines depending on the situation’s specifics.
The team’s objective is to provide a thoughtful and well-coordinated response. The goal is to demonstrate to an activist that the board is listening and that its strategic plans are achieving critical goals. This approach is more effective than stonewalling, which can encourage activists to escalate their efforts. An activist’s goals and approaches vary but usually focus on governance issues or maximizing shareholder value. They often notice problems that boards and management must address, such as underperforming a key business, a low asset return, or an inefficient balance sheet. Activists also look for opportunities to acquire companies at a bargain-basement price.
Activate the Defense Team
While activist campaigns may seem daunting, they should be addressed. A strategy that includes a team of management and board members, including financial advisors, attorneys, accountants, IR professionals and public relations experts, is essential. Activists often notice things that boards and management may need to pay more attention to, such as an inconsistency between pay and performance or a misalignment of governance policies. The best approach is to engage activists early and actively listen to their concerns. Traditionally, shareholder activism focused on underperforming companies, but in recent years, even healthy businesses with solid financial returns have been targets. As businesses cope with COVID-19 disruptions and the stock market recovers, they can face pressure from investors pushing for operational or governance changes.
The rise of activist investing has also gone global, with four out of five campaigns targeting companies outside the US last year. As such, companies should have a plan to respond to activists regardless of their geographic origins. Activists are using a variety of tactics to disrupt operations and reputations, including leaking or initiating rumors about a potential sale, rallying institutional investors and sell-side research analysts to support their position, leveraging equity swaps and other instruments to secretly accumulate significant positions, deploying sophisticated public relations and social media campaigns, or launching litigation. Regardless of the tactic, savvy activists seek to create opportunities to drive change, and a company that can effectively communicate its strategy to shareholders will deny them such an opportunity.
Establish Rules of Engagement
Whether or not the activist campaign escalates into a proxy fight, it can be costly and distracting for the company. Therefore, in addition to establishing a response team, the board should set clear rules of engagement with external advisors and key management personnel. For example, offering to make a board member available to shareholders for direct dialogue is powerful and can help the company quickly build trust and credibility.
The methods of shareholder activism vary and may include public letter-writing campaigns, filing of Rule 14a-8 shareholder proposals or exempt solicitation materials, full-scale proxy contests, and even securities class actions. While corporate governance problems often spark activism, environmental and social concerns are growing as investors see them as critical to a company’s long-term value creation.
Despite the negative connotations of activist tactics, it is in a company’s best interest to proactively engage with such investors and work together to create a positive long-term outcome for all stakeholders. This is possible with a solid investor relations plan that includes regular two-way communication with key shareholders.
Establish a Communication Plan
A company’s ability to defend itself against activist attacks depends on a strong communication plan. While it is often helpful to prepare and communicate to investors long before activists emerge, the reality is that all companies reveal a chink in their armor from time to time. The best way to prevent an attack is to quickly identify and address the issue, thereby minimizing the risk of a hostile attack. Investor engagement programs are a critical element in this process. They can help management teams understand investor concerns and priorities and provide an opportunity to build and maintain shareholder goodwill. In the face of a potential attack, this goodwill can be invaluable to management’s efforts to defend their actions and strategy.
While professional activist funds may have a greater track record in value creation, the resurgence of activism has been driven by more “activists from within.” These less experienced, occasional activists are often traditional investors who have held positions for longer periods and are impatient for improved returns. Activists often target companies with issues around capital deployment, risk tolerance, and performance. Companies pursuing complex business combinations can also be in the crosshairs because individual businesses often have unique balance sheets and management teams. Developing a response team that includes financial advisors, attorneys and accountants, and IR is essential for these scenarios.