CDF Key Takeaways – Shareholder Activism: Long vs. Short-Termism

CDF Key Takeaways – Shareholder Activism: Long vs. Short-Termism

  • Activist investors often target companies where they identify a value gap. An undervalued company makes their investment safe.
  • Markets are fairly efficient in reflecting an organization’s value, though boards and management sometimes fail to articulate the real value of a company.
  • Activism is often seen as a bad thing, but that is not necessarily the case. Some activists come in to reinvigorate a company over the long-term. However, there are others who are looking for short-term returns or changing a company from a growth model to a cash-flow model.
  • Some boards need to be reformed, which is another place where an activist may come in.
    • Directors that don’t know what to do, require education.
    • Directors that know the right thing to do but choose not to do so, should be removed.
    • Directors that are in it for themselves or are co-conspirators with management in not doing the right thing should be removed.
  • One of the goals of activism is to drive net present value.
  • Different types of investors have different needs and expectations. Mutual fund investors, for example, put the greatest pressure on liquidity. They are the most myopic in their views.
  • Boards need to be honest about the type of company they are and should match investor needs to their company. Accountability to everyone, is accountability to no one. You cannot meet investor needs if everyone has different needs.
  • Activism can be a catalyst for boards and management to have better communication and transparency and to identify what kind of company they are.
  • When investing for clients, the goal is to get the highest rate of return with the least amount of risk.
  • Large investment companies gather information on corporate governance, executive compensation, risk, strategy and board composition to determine where to invest their money. Smaller firms may not have the staff to conduct such research.
  • Activists want to maximize performance. If a board can be transparent, defend their position and articulate their needs, activists may be their biggest supporters.
  • Activists focus on capital allocation. Follow the money. Is it being allocated appropriately? Are they buying and selling stocks at the right time? Are they acquiring strategically or are they acquiring to build an empire to grow certain compensation?
  • Capital allocation should be front and center at every board meeting. The management team should know everything most intimately, but it is also good to bring in outside advisors to get a different perspective on an annual basis.
  • Directors have a duty of loyalty and duty of care. This means directors have a duty to be informed. To have this information come from only one source (i.e. – management) can be a liability.
  • Outside advisors can also help to determine what defenses are in place if activism comes to a company and how to engage with activists to prevent thwarting a strategy already in place.
  • Many activists aren’t trying to buy the company anymore. Things like poison pills are being seen less frequently.
  • Bankers can help companies to navigate alternatives to prevent them signing up for a sale of the company.
  • Activism has created an increased awareness among management teams and directors. They are thinking more about process, governance, strategy, etc. It requires far more engagement on the part of directors.
  • Activism is about winning over hearts and minds of the shareholders. It is a political campaign.
  • Investors have different fee structures. Some can create a conflict with clients.
  • Volatility creates opportunity. If all money was passively indexed, we wouldn’t have a capitalist market.
  • Activism is down 25% in the first six months over last year, which was an historically high year.
  • In the boardroom, you will have to determine what “short-term” means for your board. You want to provide value to your investors over the short-term, but that timeframe may differ.
  • The balance of providing short-term and long-term value to investors goes back to the capital allocation discussion and requires stellar communication regarding strategy and the choices made. What is the vision? What is the timeframe of an investment in the company? What will the payoff be?
  • There is a great use of forecasts, which can often be problematic. If a company aims high and fails to achieve this, based on a quarterly or annual forecast, it can dramatically affect investor perceptions. It may be prudent to avoid the pressure of too many forecasts. The downside impact is usually much greater than the upside impact.
  • Allowing for flexibility rather than providing hard numbers can make for better communication with shareholders, if the main strategy is still clearly communicated.
  • What is the best way to communicate to shareholders?
    • It is a holistic package. Companies who only rely on earnings calls and filings to communicate are creating trouble for themselves.
    • Communicate in conferences, in 1-on-1 meetings, in all your messaging on your website.
    • Include the strategy. Is it consistent with the corporate purpose and messaging?
    • Incorporate human capital needs, the risk to your business and your environmental stewardship. What is the downside if you don’t achieve something?
    • The IR function is critical. They need to understand the investors and the analysts that will be reporting.
    • Make sure the management team, the IR team and the board are all on the same page.
    • Messaging should be consistent and clear.

Words of Wisdom:

Dale Yahnke: The industry is making good strides in making better communication, enhancing shareholder value, holding boards accountable. Between management and activist investors, there are pros and cons on both sides. The large institutional investors are creating improved industry standards to hold everyone accountable.

Denise Jackson: As a board member, be prepared. Think like an investor, as if it were your money on the line. What would you want to know? What do you want to do? Get the necessary information. It is your responsibility as a board member.

Andrew Shapiro: Andrew shared a quote from Martin Lipton, well-known as an anti-takeover defense attorney.

“Corporations that implement governance best-practices with an amplified emphasis on engagement, transparency and ongoing collaboration with investors, to demonstrate they are diligently pursuing well-conceived strategies developed with the participation of independent and engaged directors and executed by a competent management team, should be assured that in exchange, investors will be patient and support the corporation in resisting short-term pressures.” – Martin Lipton

Then he shared his own words of wisdom.

All things being equal risk wise, even ordinary working people looking for their investment strategies to grow, would prefer to grow that retirement account in the first decade rather than over several decades. We have to accept that nature. So, when an investor has a high level of confidence in the management and board, they are going to favor reinvestment in the long haul. It is when they have a low level of confidence that they will favor shareholder distributions. People shouldn’t have to be forced to vote with their feet.

Josh Dubofsky: As directors, be thoughtful, be active in the boardroom, speak up, think about what you’re being told and get advice from people who have maybe seen more than you have. It will pay off.

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