Activists and Boards Agree on Need to Communicate
October 11, 2016 Maureen Wolff Comment
When it comes to corporate governance, board members and shareholder activists do not often agree. But there is at least one opportunity for common ground: better communication.
"Activists share a common trait with the rest of us," wrote Dan Romito in the Harvard Business Review.
"They prefer the path of least resistance. The frenzied, fast-paced, and nerve-racking universe of the engagement becomes manageable, methodical and, in some cases, avoidable, when vulnerabilities are dealt with proactively."
Open communication is critical, and it is less contentious than other options. In many cases, fruitful dialogue works best when you are trying to achieve a settlement. When faced with an activist shareholder, a proactive dialogue between the board and the investor is integral to a mutually beneficial outcome.
Here's an example.
A company responds to an activist shareholder's decision to accumulate shares in the company. Rather than retrench, the company's management engages in a dialogue that includes personal visits to the investor's offices by the CEO and CFO, corresponding visits by the investor to the company's headquarters and operating locations and face-to-face meetings between the investor and the company's independent lead director.
The interaction provides management and the board invaluable insight into how the investor perceived the company and its performance. It also clarifies the investor's agenda, which includes board declassification, separation of the chairman and CEO roles, the addition of new board members with industry experience, conversion of multi-class shares and a stock repurchase program.
The company, which had been considering some of these changes prior to the investor's decision to boost its stake, proposes a number of these initiatives to its shareholders, who approve them at the company's forthcoming annual meeting. Within several months, the company's valuation has increased significantly, and the investor liquidates its position in the company.
How's that for open and honest communication?
While this scenario may seem optimistic, it's a real-life case study in how proactive, positive interactions can remove much of the angst often associated with activist tactics. It also is instructive, because shareholder activism is not going away anytime soon. According to Activist Insight, in the first half of 2016 in the U.S., 306 companies were publicly targeted by activists, up 10 percent from the same period in 2015. Activism has become so common that it was prevalent among all market-cap categories.
What is changing is the activists' objectives. Some activist firms remain focused on operational inefficiencies and opportunities for quick shareholder returns in the form of stock buybacks or increased dividends. But there is a growing trend toward "governance" issues. According to Activist Insight, governance has been the focus of 68 percent of activist campaigns in the U.S. in the first six months of this year. That includes board composition, board independence, staggered boards, remuneration or combined chairman and chief executive roles.
Whether financially or socially motivated, the behaviors of dissident shareholders have never been easy for boards and management teams to deal with. Contending with activism is even more challenging today, now that many companies have adopted shareholder friendly provisions, such as proxy access, majority voting provisions or elimination of staggered boards and poison pills.
Boards and activists may find that communication is a bridge linking divergent perspectives. Actually engaging with dissident shareholders seems to be leading an increasing number of boards to the realization that dialogue is preferable to confrontation. At the same time, interacting with boards and management teams – and gaining an appreciation for the constituencies they have to serve – could be drawing activists to the same conclusion.
Maureen Wolff is president and partner at Sharon Merrill. She is a National Investor Relations Institute Fellow, Senior Roundtable Member and Honorary NIRI Boston Director. She is a trusted advisor to CEOs, CFOs and boards of directors on critical communications issues including corporate governance, shareholder activism and proxy contests, CEO succession planning and disclosure issues.
Board Communications, Shareholder Activism, Board of Directors, Crisis Communications, Shareholder Communications, Investor Relations