Dealing With Activist Shareholders

Dealing with activist shareholders

Making a Pre-Emptive Strike Against Shareholder Activists

Shareholder activism is about instigating change: change in how an organization is run, change of management style and structure – but also change in where a company is going. Activists have targeted companies in one of three ways: a governance standpoint, a financial standpoint or an operational standpoint.

 

How a company handles potential threats and exposures to activism may make or break an organization. There have been numerous cases of activists trying to squeeze their way onto company boards to effect change. Some of the top examples include Nelson Peltz’s short but punchy attempt to gain a seat on the board of Disney.

 

It was argued that having Peltz on the board would help ‘bring back the magic’. Despite a very public activism stance, he bowed out after a key show of support, with some 75% of Disney’s large retail shareholder base backing the company’s slate. Disney has a few big institutional investors but 40% of the stock is owned by individuals, and keeping them onside was a big swing factor here.

 

Who prepares, wins

 

How firms prepare for rising tensions among shareholders and avoid future activist activities comes down to careful planning and a great Financial PR / IR program.

 

Of course, you want the break-glass plan in place and you want to understand your vulnerabilities, but if you are constantly in touch with the sentiment of your current investors (and potential investors), and you are evolving the message and engaging with investors to make sure you ward off concerns or issues that might be brewing, your company will be better off.

 

The most important part of any preparedness plan is to ‘put yourself in the shoes’ of shareholders.

 

The best way to engage with shareholder activists is to think about the company as they would. Ultimately, the underlying theme across all activism preparedness activities is to think about the company as those shareholders would.

 

When I look at the vulnerability of a potential client, there are a couple of questions to ask. The first and most obvious is what’s happening with the stock price and shareholder return. If people are happy because the stock price is up, you (unsurprisingly) tend not to have a shareholder activism problem.

 

Understanding your weaknesses

 

The other piece of the puzzle is understanding the weaknesses of each company and where the vulnerabilities are from a governance and board standpoint.

 

If you have directors who have been there for 15 + years, that is immediately apparent to your shareholders, advisers and any activists that may want to bring about change.

 

Think about shareholder activists and how they approach things: one thing they all have in common is understanding what the plan for the company is and how it differs from what’s going on now. Another is that they must have a reasonable belief they can get their plan implemented.

 

If an activist is approaching your company, it is likely not the only one that shares at least some of its beliefs. Companies need to think about what is good for the company and the board, as well as what is needed for other shareholders, and try to understand the activist perspective and take it seriously.

 

It doesn’t mean you have to do everything – or even anything – the activist says, but you should think about it because there may be some things that make sense.

 

Activism does not occur in a vacuum; it occurs because the activist has a thesis that a company has a problem, whether financial, strategic, operational, governance-related or environmental, and the activist believes it has a solution that will create shareholder value.

 

The More Profitable Marketing(MPM+) preparedness plan starts with regular communications with top shareholders to understand their views of the company’s strengths and areas for improvement.

 

Best practices

 

Working with a stock surveillance firm can become of utmost importance in identifying an activist before news of its position enters the public realm. Understanding real-time shareholder movements can give companies a ‘first mover’ advantage and make them more aware of activists in the stock months in advance.

 

Because many activists build their positions with derivatives, filings may not show this position for several quarters but stock surveillance will flag it immediately.

 

Beyond engaging a stock surveillance firm, MPM+ will monitor the investors logging into its earnings calls and investor presentations. We’ll also be looking at a firm’s investments and investment history, which can provide context around the investing style of a particular institutional investor.

 

While it may sound simple, the best way to manage activism starts with the management being transparent to the market on the company’s strategy and financial outlook, then delivering against that vision.

 

Activists engage with companies because there is some form of perceived poor performance, so the best way to manage them is transparency and delivering against the expectations of your current shareholder base.

 

The rise of ESG issues (environmental, social and governance)

 

When an activist shows up, if it pushes a company into a proxy contest or significant challenge, it will have one of two types of argument. The first will be economic arguments, which look at the share price; the second separate set of arguments will focus on a range of ESG issues and compensation.

 

For compensation, ESG issues are important because your other shareholders care about it. But, it’s also important because a lot of these other shareholders, especially those on governance teams, are more expert on ESG issues than on economic issues.

 

It’s worth understanding what people who own a stake in your company think

 

If it looks like you are not listening to shareholders on ESG and compensation issues, it hurts your credibility when you’re trying to tell people about the economic issues and why the business is right and the strategy is right.

 

Your response in your ability or willingness to take ESG issues seriously plays into your credibility on the things you say about the business and strategy. If your shareholders care about an issue, regardless of what it is, you should take it seriously.

 

If an activist shows up and has put money into your company and has some perspectives, you should care what it has to say.

 

It’s worth understanding what people who own a stake in your company think. Activism can occur at any public company, regardless of market size or sector. Over the last few years, many of the largest companies in the world have faced activist campaigns.

 

Activism is here to stay

 

One thing is clear: there will always be shareholders willing to stand up and press their points and push companies if the firms are not listening. That is not going to go away.

 

When an activist comes calling, you must engage with them, despite the gut reaction to keep your distance. That would be the worst thing a company could do. When an activist threat comes calling, talk to it, engage with it like any other shareholder.

 

Engaging with it to hear its point of view – and gain some really great intelligence as you think about how it might move forward – is critically important.

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Alexander Bentley-Sutherland is the visionary founder behind More Profitable Marketing (MPM+). With a dynamic career spanning over two decades in the digital marketing and Financial PR sector in the United States, SE Asia and the UK. More Profitable Marketing help clients in all sectors at every stage of their business journey: from start up firms to large International businesses. Our growth-focused initiatives, bespoke media relations and content-rich campaigns. MPM+ powers significant growth and delivers exceptional Return on Investment.