Living With Activist Shareholders, As Advertised: Activist shareholders are pushing their agenda in corporate America. Today’s public company can be a target of an activist hedge fund regardless of size, performance or relative success.
Boards now need to be activists, too. How can board agendas address likely shareholder concerns? How should public companies engage most effectively with their stockholders?
The experienced panel, put together by the Silicon Valley Directors’ Exchange (SVDX) discussed what to expect for 2015 in activist campaigns and shareholder engagement, as well as what activism means for board strategy, leadership and culture.
Living With Activist Shareholders: The Panel
Daniel H. Burch is the chairman, CEO and co-founder in 1990 of MacKenzie Partners, Inc. a leading proxy solicitation, corporate governance and investor relations consulting firm. In his role as advisor to issuers, boards and investors, he is responsible for developing and implementing strategies and campaigns for clients involved in proxy contests, tender offers, mergers, shareholder activism, corporate governance, financial restructurings and other complex corporate transactions. The firm also offers its clients stockholder and bondholder identification, beneficial owner analysis and market surveillance.
Abe M. Friedman is the founder and managing partner of CamberView Partners. CamberView advises boards and management teams of public companies on how to succeed with their investors in the context of shareholder activism and engagement. Previously, Abe was a managing director at BlackRock where he served as the global head of corporate governance and responsible investment. Abe lead a team of 18 professionals in 6 offices around the globe. Abe was also the global head of corporate governance at Barclays Global Investors (BGI).
Michael Jacobson is senior vice president, legal affairs, general counsel and secretary at eBay, Inc. Mike joined eBay in 1998 and oversees the company’s legal department and government relations groups. He is responsible for interactions with legislators and law enforcement and for the company’s commercial, compliance, IP, litigation and other legal matters. His group consists of approximately 360 lawyers and other professionals in 22 countries around the world. Previously, Mike was a partner with Cooley Godward LLP where he was recognized as an expert in securities law.
Muir Paterson, CFA, is managing director of Goldman Sach’s New York investment banking office. Muir is a senior member of the mergers & acquisitions group, focused on advising clients globally on how to prepare for and respond to shareholder activism and hostile mergers and acquisitions. Muir also worked at Wellington Management Company, where he served as director of corporate governance and was responsible for governance analytics, proxy voting and company engagement. Before that, he was co-head of the M&A and proxy fight research group at Institutional Shareholder Services (ISS).
George Sard is chairman and CEO of Sard Verbinnen & Co., a New York strategic communications firm he co-founded in 1992 with offices in San Francisco, Los Angeles, Chicago and London. George has represented Fortune 500 companies and
private firms in many industries on long-term investor and media positioning programs and in high-profile crises and special situations. These include mergers & acquisitions, IPOs, restructurings, earnings issues, high-level executive changes and sensitive legal and regulatory matters.
Diane Frankle is a partner in the Silicon Valley office of Kaye Scholer LLP. She represents publicly traded and privately held companies engaged in a wide variety of US and cross-border mergers, acquisitions, strategic alliances and joint ventures. Her clients include companies in the technology, life sciences and health care industries. Diane also regularly advises boards of directors and special committees on fiduciary duties, corporate governance and disclosure issues, crisis management and internal investigations. Diane was recently named the Best Lawyers’ 2014-15 San Francisco Corporate Governance Law “Lawyer of the Year.”
This program, like all SVDX programs, was subject to the Chatham House Rule.
Living with Activist Shareholders: What I Heard
Below I share some informal notes of what I heard at the event. I’m sure everyone in attendance took home somewhat different messages but there were certainly common themes. Dian Frankle did an excellent job introducing the topic and providing several statistics. Sorry I didn’t get those notes. Background: Activist Investors Part One: Is Activism On The Rise?, 2015 Shareholder Activist Landscape: An Institutional Investor Perspective and Georgeson’s Annual Corporate Governance Review.
Good solid performance isn’t enough to keep activists at bay. Activists are going after household names. Having a large market-cap is no longer protection. No company is safe. 2014 may be a high water mark… but probably not. Expect even more activity this year. Half of the Russell 2000 have an activist in their portfolio. Many activists are industry or size focused.
Ackman teaming up with Valeant was new but not totally unexpected. Activism is starting out at a faster pace this year. All the main funds have been building larger coffers. There is a growing shift among institutions looking to have a more active role. Activism, once frowned on, is becoming more mainstream. Now it is viewed as being normal. Valeant comfortable teaming up with an activist was another sign of acceptance.
Activists accumulated more funds because large funds allocated more to them. They had done well. Another impetus was that investors and companies had been thrust into dialog through say-on-pay. Additionally, over the last decade activist funds have been building relationships with large funds and getting to know those who made voting decisions. Companies weren’t doing that. There has also been broader acceptance of having an activist on boards. They are viewed less as bomb-throwers (my words) and more like experts who can make a positive contribution
Companies need to be prepared well in advance of being approached. In addition to focusing on strategy, companies need to hear of potential plan Bs. What would make our company an attractive target? (underperformed, thesis as to what it should do) Assume someone is looking at your company. Get your head around what they might be advocating. Get to know all your large shareholders and get to know what they are thinking. You need to understand them. It is a political campaign… rough and tumble. You have to be a political consultant. Count noses every day.
Board members want to know directly what investors think and investors want to know what directors think. Invite big investors into the boardroom. Institutions are urging the activists on and suggesting which to go after. Companies need to develop good relations with their investors before any contests, outside of the proxy season. Understanding the teams that make voting decisions. At some, they are integrated with portfolio management. In many cases funds are indexed or essentially indexed, so there is no portfolio manager to go to. Build relationships and learn how those voting proxies think. They are often much different than portfolio managers. They aren’t watching 15 companies; they might have 12,000. With that many, you can’t know the company as well, not even the business fundamentals. Is the board independent of management, might be a bigger concern than company strategy.
Trust, board culture. Once an attack happens there will be a lot of distraction. Boards need to develop a culture and relationships among board members. It comes down to trust and honesty, addressing the issues. Poorly functioning boards can easily become really nonfunctioning when under attack. If cohesive before, they will do better. It is really helpful to have a strong board chair or lead director who can ensure everyone is comfortable, independent of management.
The range of responses is very broad. For a growing number of firms, activism is just part of everyday risk management. Where are we on the vulnerability cycle? How do we reduce that risk over time? Not so much how do we respond, but how do we the reduce risk of attack. Take action before attack happens.
When would institutional shareholder bring activist in? When they see underperformance… when management is sticking to a theory of how they will fix but it doesn’t seem to be working. Maybe the shareholder thinks they should disaggregate businesses. Conglomerations often viewed as bad. Focus might be on operational activism, where one side on a business underperforming or a request to buy-back stock. Investors generally tolerate more leverage than management.
12,000 companies can’t meet with BlackRock or Vanguard. Funds generally get involved when their is an economic issue AND a governance hook… of course, you can find a governance hook just about anywhere. It basically comes down to you can’t trust these people to get it done. Maybe the board is captured by management and they don’t have annual elections. Investors have reached the conclusions that you can’t trust these guys. So, they might put pressure on way the CEO is being paid. If you can take the governance hooks off the table, your will be less vulnerable.
You have to do your homework ahead of time. Half the time the activists know what you are doing. You may plan to do something in 18 months; they want it done in 12. Hard to counter with we don’t want to spin off business when you are already working on it.
Some activists are notorious for negativity and publicity. Others work quietly behind the scenes. Today, there is greater receptivity for compromise and greater reception from shareholders. Companies need to understand the allegations. Make sure the board is part of the analysis and comfortable with conclusion. Asymmetry between board and activism. Doesn’t look good for board to be at the same level.
Media circus. Bring in top editors for background. Hard to take the cheap shots without returning them. Good to get to know the reporters that cover your company but often the lead reporter that follows a company is not the same as the one who covers activist campaigns. Get in the same news cycle. Counsel people to have thicker skin. Battle for hearts and minds of other shareholders. Social media being used by activists. Now Carl Icahn loves to move the market with a Tweet. It is becoming more and more mainstream. Condenses the news cycle.
Often shareholder nominees are noisy and showy before they get on the board but often fairly sharp and less aggravating once on. Sometimes disconnected if they come with an agenda. Board can break into silos. Assume it will be constructive… until it isn’t. Informal policies might have to become formalized.
Need to be able to anticipate what is coming. You don’t have to respond to every jab. Should replace 10% your board every year to ensure refreshment. Industry person. Trend – increase in quality of nominees by activists. How does the activist incentivize the nominee is another question.
Spectrum of motivations. All are not the same. Some are trying to build a name; some don’t care about publicity, they just want to create value. Yes, greenmailing types are still out there. For all the complaints about short-termism, activists are likely to be into the stock longer than most of your shareholders. Compromise or no compromise, you are living with activists. They usually are not going away for a long time. You can’t dismiss them. You may have to deal with them for years.
Board engagement is becoming more normal. Shareholders are demanding to talk with the board about pay issues regarding the rationale. The would rather talk with the head of the comp committee than IR. Lead directors and independent chairs are spending more time talking to investors. Make sure they have the time and capabilities.
Look at your company the way an activist would. Do our businesses fit together, look at plan Bs and how we would respond. We might want to get out ahead and do it. Understand top shareholders. Need to have CEO and CFO and some board members in touch with shareholders. Activists at the gate has become a right of passage. Educate them. Listen. They may come in with agendas but might also have valuable industry experience. They might bring a valuable perspective. Attack brings out stresses that are already there. Developing the board’s culture is critical — one that is respectfull of tough questions.
Mark your calendar for Near Death (Corporate) Experiences, February 19, 2015. It isn’t just the program titles that grab your attention, its the whole experience. Following video courtesy of SVDX and WMSMedia.com