Preparing for and Staying Ahead of Activist Investors
Board Perspectives Series
Are you satisfied that your company has a game plan for responding to activists? Given today’s activist environment, has your company increased its level of engagement with its largest shareholders? We posed these questions to the 1,200 audit committee members, directors, and business executives attending KPMG’s Spring 2014 Audit Committee Roundtable series, and while most said their company has increased its level of engagement with its largest shareholders, about half said their company has not developed a game plan for responding to activists.
Investor activism—led by large, well-known activist hedge funds advocating for changes and improvements at the company—is not only on the rise, but appears to be moving into the mainstream, as traditionally passive investors and pension funds are often supporting activist campaigns. In fact, one in three Roundtable attendees said their company has faced an activist campaign in recent years, and experts suggest that activists have likely evaluated most U.S. public companies. All of this points to the importance of having a robust boardroom discussion about how the company is preparing for activist investors. These four questions are a good starting point:
Do we understand the activists’ agenda? Activism has generally moved beyond demands for structural governance reforms—e.g., majority voting, de-classifying staggered boards, independent chairman—and today is often focused more on strategy, operations, and management of the company. As John Madden of Shearman & Sterling has noted, activist hedge funds often bring “a sophisticated analytical approach to critically examining corporate strategy and capital management and…[have] been able to attract the support of mainstream institutional investors, industry analysts and other market participants.” While some argue that this new “strategic/operational” activism has been largely short-term focused—and often at odds with management’s longer-term view—opinions (and research) vary widely. When asked whether shareholders have generally benefitted from recent activist campaigns, 30 percent of Roundtable attendees said “yes,” 22 percent said “no,” and 48 percent said the “results have been mixed.”
How are companies preparing for activism? As one governance observer suggested, the key is to “think like an activist.” Are we a likely target? Only 15 percent of Roundtable attendees said their company has conducted a vulnerability assessment to identify performance gaps and opportunities that activists might focus on. (A number of investment banks now offer vulnerability assessments and advise companies on how to thwart activists.) It’s critical that the company assemble an activist response team—which may include corporate officers, counsel, investor relations, investment banker, proxy advisory firm, and a director—to develop a plan to deal with activists.
Do we know and engage with our largest shareholders?Some 60 percent of the Roundtable attendees said that, as a result of the activist environment, their company has increased its level of engagement with its largest shareholders. Have we clearly communicated the company’s strategy and value creation opportunities? Do we understand the investor’s perspectives? Have we solicited their input? The goal is to establish credibility and gain the investor’s support before an activist arrives.
How should we respond to an activist? Only 28 percent of Roundtable attendees said their company has developed a game plan for dealing with activists, but given the likelihood that an activist will at least evaluate the company, having a plan in place is key. In considering how to respond, understand what the activist wants. Do they have a point? What are their tactics? What are the views of the company’s major investors and the proxy advisory firms? What is our communications and social media strategy?
Finally, determine when and how directors should engage with major shareholders and activists. Which directors should engage? What issues should be discussed? Who else should attend?
Dealing with activists is often more art than science, but the questions and considerations above can help remove some of the guesswork—and avoid unpleasant surprises—in today’s activist environment.