13 Dec CDF Key Takeaways: Shareholder Activism: The Ins and Outs
- Build relationships with index funds (Vanguard, Blackrock, Fidelity, etc.) to get to know the shareholders and their corporate governance group.
- Invest in stock surveillance. This service can proactively identify issues and potential activist investors.
- Adopt an early warning system to track and monitor what is happening. This task should not be on the shoulders of the CFO.
- “If you haven’t had an activist investor, just wait!” Be prepared for WHEN, not IF!
- If you are a diversified company, you are more likely to be targeted. No public company is immune.
When dealing with an activist investor, there are three main stages:
- Proactive/Preparation Stage: How can you be your own activist to anticipate activist activity? Determine how you want to engage.
- Approach of Activist Stage: How you respond to this engagement is important. Non-engagement is a negative form of engagement. Activists may have ideas worth considering. Collaborate with them to avoid this activist investor moving into the public phase. You want to try to avoid getting to step #3. Listen to what the activists are saying.
- Public Phase: Now your shareholders are going to evaluate whether they trust you and the current board more or less than they would trust a new board and CEO. This phase takes a lot of time and takes away from your work and the business, and a lot of effort is put into dissuading the activist investors. Once the 13G/D is filed, other shareholders will pay attention. If you have already anticipated and strategized around activist involvement, you can respond more appropriately and with a plan in place.
Activist Defense Teams:
- Should be interdisciplinary and integrated (should include IR, PR, Management, and Directors)
- WILL dominate a lot of the CEO’s time
- Need to be “on” all the time
Managing Your Reputation (with activists and shareholders):
- Do not give them easy targets (company jets with easily trackable tail numbers, etc.)
- Get the pulse on what your shareholders feel. Ask for feedback and use this as your guide to manage moving forward. Recurring themes should be treated as early warning signs.
- Never let your CEO speak with an activist investor without someone else in the room. Witnesses are paramount.
- Respond quickly and professionally!
- Be transparent and collaborative.
- Engage early.
Questions to ask:
- Is it possible the activists are right? Do changes need to be made? Be honest with yourselves.
- Is there a reasonable path to victory?
Eight Recommended Steps:
- Develop a Communication Plan
- Curate and optimize your shareholder base
- Have a strong team: What is your ongoing board refreshment process? What is your diversity plan? Specialist firms are concerned about board diversity. Have strong relationships with top recruiting for boards.
- Determine the strength of your standalone plan: What are your shares worth? What are your strategic opportunities? What is your return on capital plan?
- Analyze your vulnerabilities: Simulate activist situations and escalate it to see who responds and what they say. Identify who you want and do not want as part of an activist investor situation. Write a white paper on an attack for your company (role play, training, etc.). Map your shareholders (who are they and who are the ultimate decision makers?)
- Hold off-season investor meetings
- Monitor your stock: Monitor stock particularly in periods of volatility when it is not clear who owns your stock. Know who trades through you.
- Tailor situations: Every one of these situations is unique and must be tailored to your activist investor, your company, your performance and the particular situation at hand.
Media Messaging and Interaction:
- Direct communication is incredibly important. It is more and more challenging to have companies tell their stories correctly right away.
- Activist investors are working with the media. They will leak.
- Do not expect advanced notice when being called to comment. Have your story ready. Be preaching it over time.
- Have a solid message.
- Message consistency and relationship building is very important.
- What are the other platforms that can be leveraged to have your story ready? What is your message to industry analysts? Employees?
- How are you responding and doing the right thing?
- Numbers can be twisted to communicate the message that activists want to tell. Be prepared to respond to this.
- The quality of journalists covering business can vary and not all have a clear understanding of business results. Steer these conversations directly or they will be steered for you.
- Your employees may be reading things in the media that are not true. Monitor what is happening on social media and respond appropriately.
- Strategically target the activist message and use the weaknesses in their arguments to go door-to-door to count votes.
Create an ecosystem of professionals:
- Surround yourself with professionals who have the long-term interest in mind for the company.
- Ensure interests and values are aligned.
Guidance to CEOs:
- If it feels good, don’t do it!
- A lot of preparation work is required to be ready to respond to hard questions dispassionately on television.
- Be wary of extreme responses.
- Ensure NDAs are signed with activists.
- Be careful about what you are saying to the activist investors and other shareholders in order to avoid a “material” situation.
Activist Investor Profile:
- Looking to get directors elected and provide influence (return on capital, selling of assets, mergers and acquisitions, etc.).
- Activists will return cash to shareholders quickly (many are not in the stock more than 30 days at a time). They do not have the long-term interest of the company in mind.
- Often hard to “find.” They work in the shadows and have no disclosure. A very aggressive IR campaign can help ward off short attacks.
Final Words of Wisdom (WOWs)
- Larry: You can and should be prepared in a number of ways when an activist shows up.
- Carol: This is a political campaign. Understand your weaknesses and strengths.
- Eric: Healthy paranoia is a good thing. Take peacetime to analyze what can be done better (operations, sales, etc). Simulation is a great opportunity to role-play something that very well could happen.
- George: Make use of the 8 recommended steps. Conduct a preparedness exercise in order to use the results of the vulnerability analysis to make the company stronger over time.