By Maureen Wolff, President and Partner, Sharon Merrill Associates
For many companies, a looming activist shareholder is no longer the exception – it’s the rule. One reason is that an increasing number of hedge funds are using activism as a standalone strategy. Assets managed by activist hedge funds increased 42% in 2013 to $93 billion from $65.5 billion in 2012, according to Hedge Fund Research, Inc.
The swirl of activism has the C-suite and the board concerned. In a poll of executives for its recent Capital Conference Barometer, Ernst & Young reported that nine of 10 executives acknowledged that issues raised by shareholders have influenced boardroom agendas, with cost reduction and operational efficiency identified as the most pressing concern over the next 12 months.
The threat of activist investors encircling your company can be intimidating – unless you understand how to engage, respond and communicate. Here are 10 strategies to help you prepare.
1. Understand the triggers that could make your company a target
- Underperforming stock price.
- Change in strategy to one not supported or understood by shareholders.
- Available cash that is not being returned to shareholders or used to improve profitability.
- Dormant stock repurchase plan despite declining stock price.
- Excessive compensation of management/board of directors.
- Core operations performing poorly vs. competition/peers.
- Unhappy long-term shareholders.
2. Know your shareholder base
- Track the firms buying and selling your stock.
- Prepare your management team by providing intelligence briefings on each investor prior to all conferences, one-on-one meetings and calls.
- Do not wait for a 13-D filing to start preparing – the battle begins as soon as an activist contacts you or listens to one of your earnings calls.
- It is not uncommon for “wolf packs” to emerge after an activist enters the stock. Be aware of which firms could be buying in close proximity and perhaps working together.
3. Respond promptly to all investor inquiries
- Activists frequently call investor relations departments first to gauge a company’s approach and philosophy to shareholder engagement.
- Remember that ignoring requests from activist investors for calls and meetings with management does not make them go away.
- Engage the activist investor – listen carefully and ask questions. Discussing the activist’s goals, perspectives and agenda may reveal their plans or strategy and enable the company to prepare a defense if necessary.
4. Know who among your investors is unhappy and develop a dialogue
- Activists are encouraging each other to capitalize on the quarterly conference calls to identify other “kindred spirits” – and they will use them to their advantage.
- Activists align with institutional investors, private equity firms and others to wage a contest against a company if they are not satisfied with its performance. The company may never know who actually initiated the campaign.
5. Prepare yourself before speaking or meeting with an activist investor
- Activist investors are well prepared and have conducted extensive research on your company. Some even develop white papers. Actively listen to their ideas and be open to new perspectives.
- Be respectful, not defensive and don’t give them sound bites to use against you in a fight letter later.
- Make sure the company’s strategy and prospects are well understood:
- Corporate growth
- Capital allocation
- Current and future value drivers
- Financial and operational performance metrics and targets
- Ensure messaging is credible, consistent and transparent
6. Be proactive when it comes to good corporate governance
- Review the company’s annual proxy analysis and vote recommendations from firms such as ISS and Glass Lewis to determine:
- Governance risks that may have been identified that might need to be addressed
- The company’s governance scores or ratings in comparison to those of peer companies.
- Keep in mind that proxy advisory firms tend to support independent, open-minded candidates for board seats.
- If appropriate, aggressively make the case to investors that the company’s board is engaged and has the right strategy to grow the company and create shareholder value over time.
7. Be careful in making governance changes
- Stay current on corporate governance trends and regularly evaluate the company’s bylaws and policies before it becomes a problem at your company.
- Every governance change you make after an activist has been involved with your company can have a cascading effect and make you more vulnerable to further activism.
8. Know the proxy voting guidelines of your investor base
- Build strong relationships with the investment community, including corporate governance groups at institutional shareholders, key media, proxy advisory firms, and regulatory agencies.
- Stay informed about your institutional investors’ specific voting guidelines as well as their voting history relative to governance recommendations from proxy advisory firms.
- Portfolio managers may not necessarily be the decision makers on proxy voting. Consequently, it is important to meet with the institutional compliance officers early on to communicate management proposals or changes in policies, or to identify shareholder concerns.
9. Seek common ground to avoid a public proxy fight
- Large institutional shareholders do not like management paying for a proxy fight and would prefer the two sides settle early in the process before significant time and resources are expended.
- Remember that companies can spend millions of dollars and significant resources defending themselves.
10. Performance is priority number one once a campaign begins
- While governance issues might appear to have triggered the initial concern, it is all about performance when the battle starts.
- Be open, be prepared and be focused.
Maureen Wolff is president and partner at Sharon Merrill, an investor relations strategic advisory firm that includes among its services Regulation FD, disclosure and Wall Street 101 training for employees, management and boards of directors. Maureen leads the implementation of the firm’s strategic vision and provides high-level strategic counsel to clients. She is a past chairman and board member of the National Investor Relations Institute (NIRI) and a current member of NIRI’s Senior IR Roundtable. 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.
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