ALFA INTERNATIONAL 2018 INTERNATIONAL CLIENT SEMINAR · activist hedge funds are growing in number...
Transcript of ALFA INTERNATIONAL 2018 INTERNATIONAL CLIENT SEMINAR · activist hedge funds are growing in number...
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ALFA INTERNATIONAL 2018 INTERNATIONAL CLIENT SEMINAR
March 1-4, 2018 – Fairmont Scottsdale Princess – Scottsdale, AZ
Shareholder Activists – Barbarians or Benefactors?
Brett Cowell Moderator
COWELL CLARKE Adelaide, South Australia, Australia
The author acknowledges with thanks the contributions to this paper from Robert L R Munden, EVP, General Counsel and Secretary, Harte Hanks.
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Shareholder Activists – Barbarians or Benefactors?
Brett Cowell
Chairman of Partners Cowell Clarke, Adelaide, Australia
Introduction
Much has been written about shareholder activism in the popular, business and legal
media. The title of this paper plays on the Burrough and Helyar book “Barbarians at the
Gate”, the book about the 1989 leveraged buy-out fight for RJR Nabisco in which
Kohlberg Kravis Roberts was involved. One perspective is that shareholder activists are
the new barbarians that are only interested in short-term, quick financial gains. The
opposing view is that some companies are run badly and not in shareholder best
interests and activists shake up complacent boards of directors and drive value for
shareholders.
In light of increasing and aggressive shareholder activists, some of whom run activist
funds with billions of dollars under management, how should boards prepare and how
should they respond in the event that an activist comes knocking? Do directors lock the
gates and man the ramparts or do they engage with activists to discuss whether the
company’s performance can be improved and the activists’ demands can or should be
met.
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Shareholder activism will not go away. On the contrary, investments in shareholder
activist hedge funds are growing in number and investment power. Some would say that
those funds have become an investment class. At the least, they are a class of funds
that have a very particular investment strategy. There are bad stories and there are
good stories, “bad” or “good” often depending upon one’s perspective. Are there
positive elements of the shareholder activist wave from which companies can take
encouragement?
What is shareholder activism?
As long as there have been companies with shareholders, there have been examples of
shareholders disagreeing with their boards or management and urging boards and
management to take action in some form or other.
In more recent times, we have seen the rise of activism which does not specifically have
financial results for the company in focus. Examples of this form of activism include
environmentalists urging companies to get out of fossil fuel production, to adopt
particular employment or business approaches based on ethical, philosophical or
corporate social responsibility grounds and a movement promoting so called ethical
investments. These shareholder movements can fall under the more general banner of
shareholder activism.
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However, in this paper, I will be considering actions taken by shareholders which are
directed to “conduct of business” financial considerations and business strategies.
Some recent, high profile shareholder activist actions provide examples.
BHP Billiton – action by Elliott Management Corporation;
Proctor & Gamble – action by Nelson Peltz of Trian Partners;
Cracker Barrel Old Country Store, Inc – sustained action by Biglari Holdings;
ILG Inc – pressure from FrontFour Capital Group for ILG to merge;
RentaCenter – Engaged Capital LLC action to appoint dissident directors.
Hedge funds have grown substantially in recent years. According to media and other
public information, as at mid-2017, Elliott Management had more than USD32 billion
assets under management, Third Point had built a stake of more than USD3.5 billion in
Nestlé, the world’s largest food company and BlackRock, the world’s largest fund
manager, had well more than USD1 trillion in funds under management. BlackRock’s
chairman and chief executive, Larry Fink, was quoted in the media in November 2017
as saying that the company will dramatically lift its engagement with companies that it
believes are “on the wrong path” and that “we are now actively engaged with more
companies than ever before. … An active manager, if they really hate a company, they
can sell the shares or become public activists. You have 2 choices: sell the shares if
you don’t like it, or really force public change. … We can’t sell the shares, which means
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we have to be more active than an active manager … so, what we have become is
highly active.”1 In the past, BlackRock was more of a passive investor, although it did
support a number of activist campaigns. There may be a range of reasons for Fink
moving BlackRock to a much more active investor role. It may be that he and his team
see companies that are under-performing and are suitable for investment with a view to
inducing corporate action to unlock value for shareholders. It may be that as such an
enormous player in the market, he sees an obligation to exercise the fund’s investment
muscle for the benefit of his investors and shareholders in companies in which
BlackRock invests. Some may say that he sees successful activists making a lot of
money and attracting increasingly large amounts of funds under management and that
he sees the opportunity to actively get into that space.
Barbarians or benefactors?
Are shareholder activists the equivalent of a rampaging enemy seeking to storm the
corporate castle to further the evil purposes (a short term “making money fast” focus) of
themselves and their investors? Or are they the benefactors, finding under-performing
companies with long suffering shareholders and driving changes which benefit those
shareholders and incidentally, themselves? The answers to these questions will depend
upon the circumstances of the targeted company and the aims and intentions of the
activist.
1 Quoted by the Australian Financial Review 1 November 2017.
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A range of surveys and studies of the results of activist engagement have produced
significantly different conclusions. Some commentators have concluded on the basis of
surveys and research, that there is no consistent evidence that shareholder activism is
detrimental to company performance or share price over a period of years after an
activism event.2 An FTI Consulting 2015 survey of approximately 100 institutional
investors within the range of $1.7 trillion of assets under management showed that 84%
of those surveyed viewed activists as adding value to companies, being catalysts for
change, aligning the interests of the board with shareholders and forcing boards to
sharpen their focus. However, the opposite view is also held by many, namely that
activists are motivated by short-term gains that do not align with all shareholders,
particularly those taking longer term investment views and that activists promote public
media campaigns so as to achieve free marketing to attract investors to their funds and
to demonstrate to investors that they are doing something. To a degree, I suspect that
much depends upon one’s viewpoint, whether that be as a director of a target company,
a long-term or short-term shareholder or an investor in an activist hedge fund.
In December 2013, the then Securities and Exchange Commission (SEC) Chairman
Mary Jo White described the upswing in activism as “a very good thing” for companies.
The involvement of activists in the market has significantly accelerated since then. In his
March 2017 Harvard Business Review article The Case for Activist Investors, Walter
Frick referred to “research showing that activists apparently make companies more
profitable and productive, on average – not just in the next quarter but 3 years after the
2 See for example, The Long-term Effects of Hedge Fund Activism, Bebchuk, Brave and Jiang, Harvard Law School John M. Olin Center Discussion Paper No 802.
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fact. And although their intervention may be followed by a decrease in R&D spending,
the companies appear to become more innovative in the years following. One study
found that activists often target firms that are lagging in IT and then help them catch up
to their competitors.”
What do activists target?
Particularly in recent years, activists are targeting not only poorly performing companies
but also highly performing companies. However, case studies show clearly that there
are 3 areas of company performance that especially attract the attention of activists.
Those areas may be summarized as follows:
1. Poor price performance. This may be measured in a variety of ways.
Commonly, this trigger for the activists will be seen where a company fails to
improve its share trading price or total shareholder returns over a period or where
a company is consistently trading at market prices or share price multiples which
under-perform in comparison to its peer companies in the market. It may also be
seen where a company has a pattern of trading at a price that is lower than the
sum value of its assets.
2. Ineffective or inefficient capital allocation or capital deployment. This
contention has been seen in a wide variety of guises. On numerous occasions,
activists have argued that target companies have not achieved satisfactory
returns on assets/capital invested/equity and should either sell assets or should
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not proceed with proposed acquisitions and instead, should return capital to
shareholders via special dividends or share buy-backs.
3. Poor corporate governance. Activists frequently cite as reasons for
substandard corporate performance, poor corporate governance practices. The
structure of the board of directors is the most common target, with activists
frequently contending that a company board includes entrenched and non-
independent directors and directors who have participated in and overseen
corporate decisions which led to poor capital allocation and/or poor price
performance. One of the most consistent strategies adopted by activists is to
seek seats on the board of the target company. Activists may also contend that
the board is overseeing excessive or otherwise inappropriate CEO or other
senior management remuneration structures or tolerating senior management
under-performance.
Activist campaign snapshots
Shareholder activists approach target companies in a range of different styles and
target companies similarly have a range of responses from outright rejection to
constructive discussion and the implementation of some (or less frequently, all) of the
activist proposals. We could pick a huge number of examples of how activists approach
companies and how companies respond but the following few case summaries are
instructive.
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The Elliott Management action aimed at BHP, the world’s largest mining company,
which commenced (at least in public) in 2017, picked all 3 areas. Elliott contended that
BHP should collapse its dual Australian-British listed structure into a British company3,
should sell or spin off its US petroleum assets into a New York established company
and should return in the order of AUD44 billion in capital to its shareholders. Elliott
argued that BHP has under-performed compared to industry competitors in recent
years, while acknowledging that it had taken some steps in streamlining its portfolio.
Elliott people were reportedly in discussions with senior BHP personnel about the Elliott
plan for 8 months before Elliott went public in April 2017. One assumes that BHP would
not agree to implement the Elliott plan and Elliott, presumably becoming frustrated with
BHP’s unwillingness to adopt that well-worn adage “be reasonable – do it my way”,
sought to dramatically increase the stakes by going public.
Cracker Barrel presents an alternative picture of shareholder activism. In December
2013, Sardar Biglari of Biglari Holdings wrote to Cracker Barrel’s chairman saying that
the company should be sold. In April 2014, Biglari said that it believed that Cracker
Barrel’s strategy was not working. There were 4 successive proxy fights and a range of
other maneuvers. Biglari had acquired a 19.7% stake in Cracker Barrel but Cracker
Barrel continued to resist Biglari’s demands. In the process however, Cracker Barrel did
renew its board and management structure. While Biglari was not successful in getting
board seats or having the board sell the company, Biglari remained a shareholder and
3 A demand I suggest that, apart from the high execution cost, is virtually impossible for BHP to execute in a political sense given that BHP is arguably Australia’s greatest corporate icon. This proposal was not news to the BHP Board, which has reportedly over the years considered collapsing the dual listed structure but has not yet found the business case to do so.
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had a big win. Cracker Barrel has been a market segment leader in total shareholder
returns and it is estimated that with Cracker Barrel’s dividends and special dividends,
Biglari collected an estimated USD37 million over the 2016/17 year alone.
Daniel Loeb’s hedge fund, Third Point, made a USD3.5 billion investment in June 2017
in Nestlé, the world’s largest food company. Third Point’s June 2017 letter to Nestlé said
that “Third Point intends to play a constructive role to encourage management to pursue
change with a greater sense of urgency…We have offered our views in productive
conversations with management, which we expect will continue.” That “greater sense of
urgency” included demands that Nestlé: sell its approximately 23% stake in French
cosmetics company L’Oreal; set specific operating margin targets, which Nestlé had not
previously done; review its more than 2,000 brands for possible value-delivering sales
and consider “accretive, bolt-on acquisitions”; and increase share buy-backs. Since
then, Nestlé introduced a USD21 billion stock repurchase plan, introduced operating
margin targets, has sold its US confectionary business and embarked on a purchase of
niche brand, Blue Bottle. As at November 2017, there was no indication that Nestlé
would sell its L’Oreal stake. Other than the sale of L’Oreal, it appears that Nestlé has
implemented the Third Point proposals at least to a significant degree. At a Nestlé
investor seminar in London in October 2017, Third Point was quoted as saying that
Nestlé was showing “a new approach of greater investor responsiveness”.
One of Australia’s largest publically listed department store retailers, Myer Holdings
Limited (Myer) has been under attack from veteran rag trader and corporate raider,
Solomon Lew, via his listed Premier Investments Ltd. Premier is Myer’s largest
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shareholder, with 10.8% of Myer’s shares and is also a major competitor of and supplier
to Myer. Again, the same issues arose, namely Myer’s poor performance and Lew’s
demand for board seats. In 8 months to late November 2017, due to Myer’s share price
decrease, Premier lost about AUD40 million of its AUD101 million investment. Lew said
the Myer board had lost its way and its turn around strategy was not working. Myer said
that putting Lew and his nominees on the board would create massive conflicts of
interest, would be completely disruptive to the operations of the board and company
and would amount to Lew taking over Myer without paying Myer shareholders a control
premium. Relevantly, 4 major proxy advisor firms agreed with Myer and recommended
shareholders vote at the company’s annual general meeting to re-elect the 3 current
independent directors including the recently appointed chairman, rather than Lew’s
replacement slate. At the AGM on 24 November 2017, shareholders convincingly re-
elected the sitting directors and rejected Lew’s nominees. However, at the date of this
paper, given Lew’s tenacious track record, one would not expect that the war is over. A
shareholder class action may be his next strategy.
Symbiotic activism – pairing with shareholders
In recent years, many activist funds have paired up with a target company’s institutional
or other large shareholders in “symbiotic activism”. Shareholders may be dissatisfied
with the performance by their company and its board and may want change, but do not
have the appetite, expertise or funding to mount an activist push. Activists may do the
hard work to speak with shareholders, especially key shareholders who are dissatisfied
with the target company’s performance. If a relationship of support can be established,
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the activist gains the support of large shareholders for its demands. While the
shareholders do not necessarily agree with all of the changes proposed by the activist,
they get a party that has funding capability and deal execution experience to drive
change in the company. In this scenario, shareholders want to see some action rather
than no action on the part of companies and their boards. The Californian Teachers
Pension Fund has regularly supported activist campaigns, as did BlackRock in its more
passive investment days.
In addition to getting shareholders onside, activists also frequently communicate with
the large proxy advisors, seeking their support in the proxy fights which frequently form
part of activist campaigns.
The recent Ardent Leisure Limited activist campaign in Australia was instructive for both
target company boards and shareholder activists. Experienced Australian corporate
players Gary Weiss and Kevin Seymour combined to campaign to have themselves and
2 other independent directors elected to the Ardent Leisure board at a shareholders’
meeting scheduled for 4 September 2017. The election of the 4 new directors would
have taken the total board numbers to 10. Weiss and Seymour represented Ardent
Leisure’s single largest shareholder, holding 9.86% of Ardent Leisure’s issued capital.
Weiss and Seymour published their plan for Ardent Leisure but the Ardent Leisure
board did not release that presentation to its shareholders and nor did it issue its
response or rebuttal to the Weiss/Seymour plans. Weiss and Seymour reportedly met
with Ardent Leisure’s chairman, George Vernardos. The Weiss/Seymour contentions
ticked all of the typical activist attack boxes:
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Ardent Leisure had poor corporate governance, leading to poor corporate
performance compared to its peers;
the company had poor capital management in that it was paying too much to
grow its business via the acquisition of Main Event venues in the US, thereby
diverting capital investment from Australia and lowering franked dividends to
investors; and
the company was paying its CEO two times the amount paid to his predecessor
and had other senior management issues.
The Ardent Leisure board took the view that Weiss and Seymour were seeking to exert
undue influence over the company’s affairs and were trying to destabilise the company.
During the course of the campaign, Weiss and Seymour showed some flexibility in their
board representation demand in that they scaled back their requirement for 4 directors
to the 2 directors, Weiss and an experienced American executive, Brad Richmond. It
appears that they worked very hard to engage with key shareholders. Via their very
substantial investment in Ardent Leisure shares, they showed that they had skin in the
game. In contrast, the Ardent Leisure board continued to reject Weiss and Seymour. It
appears that the board considered that its shareholders would not support the election
of Weiss and Richmond. That errant view was supported by 2 of the 3 leading proxy
advisory firms, both of which advised shareholders not to support the election of Weiss
and Richmond. On Sunday, 3 September 2017, the day before the shareholders’
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meeting was due to be held, the company cancelled the meeting. Presumably, the
proxy votes had been tallied, showing that Weiss and Richmond would be elected to the
board. Vernardos invited Weiss and Richmond to join the board and advised that they
“can bring assistance and additional insight to the board”.
It appears that the Ardent Leisure board and its 2 proxy advisors had completely
misread the mood of the shareholders, specifically in terms of board representation but
more generally in terms of the performance of the company.
In dealing with other shareholders, activists are careful to navigate regulatory issues,
especially regarding public disclosures and required tenders. For example, in the US,
when a shareholder secures more than 5% of a public company’s voting shares (or is
coordinating with such a shareholder), the shareholder may need to make a public filing
if its intent is (or may be perceived to be) to seek fundamental changes in a company.
Passive investors benefit from more lenient disclosure timing and requirements than
truly active investors and linking up formally with activists can present them with risks or
costs to their preferred disclosure approach. In addition, failure to properly disclose
coordination can bring independent sanctions from the SEC and give the company
ammunition in its fight against the activists.4
Many countries have laws which oblige a shareholder that gains control of a specified
threshold percentage of voting shares in a company to formally notify the company that
it is a substantial shareholder or (at a higher percentage threshold) to make a formal
4 Nevertheless, there is some perception that much informal coordination amongst activists and their fellow-travelers takes place, which stands to reason given the shared motivations, target company characteristics and relatively small bar that represents the activist community in the US.
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take-over offer for the company. Those laws may also say that in a range of
circumstances, where shareholders are related parties, are associates or agree to vote
or otherwise act together in relation to the affairs of a company, their respective
shareholdings may be aggregated for the purpose of determining whether a substantial
shareholder notice must be given or the takeover threshold has been exceeded, thereby
triggering the obligation to launch a formal takeover bid.5 An activist may not want to tip
its hand by having to give a substantial shareholder notice earlier than intended and
very infrequently will an activist want to be obliged to make a formal takeover bid for its
target company.
Activist friendly laws
Australia has some activist friendly laws. In particular, shareholders holding at least 5%
of the company’s voting shares can requisition a meeting of shareholders, at which,
amongst other things, they can put resolutions to the meeting for the removal and
appointment of directors.6 Those shareholders can require that a company circulate to
all of its shareholders a statement prepared by the requisitioning shareholders, subject
to some limitations such as no defamatory content. Member countries of the European
Union have similar laws.7
5 See for example the Australian Securities and Investments Commission (ASIC) Regulatory Guide 128, in which ASIC gives guidance about when it will treat co-operating shareholders in listed entities as associates for the substantial shareholder and the takeover provisions. Refer also to EU Takeovers Directive 2004/25 EC and corresponding laws of Member States. 6 Australia does not have any director classification provisions. A majority of votes by shareholders can remove any one or all of a company’s directors at any time regardless of director rotation provisions. This applies to all Australian public companies and to the great majority of private companies. 7 In Spain for example, the threshold is a holding of 3% of a company’s voting shares.
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Australian listed companies are also subject to a shareholder “say on pay” process
except that in Australia, if a listed company incurs a 25% or more remuneration report
disapproval vote8 at 2 consecutive annual general meetings, at the second meeting
virtually the whole board of directors9 will face a “spill” resolution to be removed from
office. If that resolution passes by simple majority, those directors are out of office and
within 90 days the company must hold another meeting at which there will be an
election for directors. The dumped directors can decide to stand for re-election but in
the context of 2 years’ remuneration report disapproval and the passing of the spill
resolution, other nominees may stand an improved chance of election. Realistically,
while the disapproval resolutions only need to be passed by a 25% vote, the spill
resolution needs to be passed by a greater than 50% vote and that is more difficult for
dissidents to achieve. While this “2 strikes” process was designed to make boards
responsive to shareholders in relation to board and senior management remuneration
policies, there are many instances where the process has been used by activists and
other minorities to pressure boards in areas other than remuneration.10
8 That is, 25% or more of the votes are cast against adoption of the remuneration report. 9 Other than the managing director (if one is in office) and any directors appointed to the board since the remuneration report was approved by the board before being put to the AGM. 10 Under the USA “say on pay” shareholder process (Dodd-Frank section 951 and regulations), shareholder resolutions are non-binding and critics say, do not have any real teeth. Proxy advisory firms impose some accountability through their voting policies with say on pay votes below a certain threshold (70% for ISS) resulting in recommendations to vote against some or all directors unless “the board adequately responds.” In both Australia and the USA, regulatory requirements for listed entities regarding remuneration reports are such that reports put to shareholders are highly detailed and complex to the point that retail shareholders often have difficulty in fully comprehending them.
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Risk and reward
Shareholder activism is by no means a straight forward and riskless exercise. Bill
Ackman’s Pershing Square combined with Valeant Pharmaceuticals International in
February 2014 to try to take over Allergan. While the takeover bid was unsuccessful
(Allergan escaped by signing a merger agreement in November 2014 with rival,
Actavis), the Allergan stock price significantly increased, giving Pershing Square a very
handsome return. However, Pershing Square’s buy into Valeant has done the opposite,
with Valeant’s stock price cratering. Pershing Square sold out of Valeant in March 2017,
incurring a loss of more than USD3 billion. On a positive note for activist engagement
with its investee company, it is reported that in May 2014, Pershing Square gave liquor
manufacturer, Beam, some private research advising that it was a good time for the
company to sell itself. A few weeks later, Beam sold itself to Japan’s Suntory. The
transaction closed in May 2015 and on its 12% holding in Beam, Pershing Square
netted in excess of USD1 billion.
Takeaways for company directors and their advisors
1. If boards know that the key spurs for activist attention are poor company price
performance, ineffective or inefficient capital allocation or deployment and poor
corporate governance and if a company is checking one or more of those boxes,
it sounds trite and perhaps almost insulting but boards, with their advisors, must
seriously, deeply examine what is going on and be prepared to implement tough
and even radical options, and quickly.
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2. Boards must understand their shareholders register – who is on the register and
why. Changes in the register – especially who is coming onto it - and the timing
of those changes may be important to alert boards to impending issues. Are
major shareholders in particular in the company for financial or strategic reasons,
are they long-term or short-term holders and are they active or passive? If they
are passive, with the right/wrong encouragement or motivation, might they
become active in agitating for change?
3. Boards must maintain a real dialogue (that is, two way) with their shareholders. It
is particularly important that boards especially maintain a dialogue with and stay
close to their major shareholders. Boards should talk openly about their capital
allocation strategies and growth strategies and if relevant, how they will deal with
performance deficits and over what period. They should clearly explain their
director selection process and their director and senior management
remuneration policies. When they conduct meetings with shareholders, analysts
and proxy advisors, they should listen more than they speak. One challenge can
be to stop the CEO and CFO talking too much and listening too little. Depending
on the size of the company and the makeup of its board and share register, the
chairman may need to be substantially involved in the dialogue process.
4. Obviously, it is not always smooth sailing for companies and there may be
periods where companies need to carefully manage the flow of information to
shareholders. It will help companies if they have good, trusting relationships with
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their shareholders so that shareholders do not feel undue pressure to veer
towards thinking their independent action is needed to protect their interests.
5. Boards must constantly review their capital allocation and capital deployment
policies. It is a feature of many activist approaches that companies are said to
have allocated their capital in an ineffective manner that is generating returns on
capital below market peers and that companies should re-deploy capital,
frequently via asset sales and the return of capital to shareholders by way of
share buy-backs or increased dividends.
Companies will sometimes acquire or hold assets, including cash, that generate
less than optimal present returns in order to give the company greater optionality
in terms of sources of revenue, market share protection, future growth potential,
debt management or for other reasons. Directors must constantly be asking “Do
we have the right assets? Are we generating at least market level returns on our
assets and should we be generating better returns? We have some comfort in
our balance sheet but what is our dividend policy and could shareholders better
employ the company’s capital than we are doing?” Board deliberations around
these questions should, subject to commercial confidentiality, be the topic of
dialogue with shareholders. As in many areas of life, if you think you have done
plenty of communication, you probably haven’t.
6. The composition of the board and the board selection process should be
constantly reviewed and explained to shareholders. If a company is not
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performing and an activist makes an approach, it will frequently involve the
composition of the board. Companies need to exercise great rigor and due
diligence in selection of board members. It may be for example that if there has
been a transaction or a group of transactions in which the company has been
involved, which have led to company performance impairments (eg less-than-
successful acquisitions) and which may be anticipated as a spur for activist
action, directors who approved or were associated with that transaction or those
transactions in particular may become the focal point for an activist attack.
Most boards take the view that for them to work effectively, there needs to be
individual rigour and an avoidance of group-think mentality but at the same time,
the members need to be able to operate in a collegiate fashion. Boards often
have concern that the introduction of directors proposed by activists will bring
disharmony and disruption to the board and its processes and will be damaging
to the business of the company. That may well be so. But rather than have an
automatic (some may say, knee-jerk) reaction to deny activist board
representation demands, boards should carefully assess the real and objective
benefits and detriments that may result from the addition to the board of an
activist’s proposed director/s.
7. Boards must constantly review senior management team performance and
remuneration structures. Large pay but poor performance is an easy activist
campaign point and allegations of compensation mis-alignment or excess will be
made regardless of the directors’ views. Boards must be in a position to explain
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their compensation policies and to answer well, questions that shareholders may
ask.
8. Boards should carefully consider and prepare a playbook if there is any chance
at all that they may be approached by an activist. Anecdotally, many companies
are surprised when they receive the first activist communication. With their
advisors, boards should consider ahead of time how an activist would think about
the company and how the company would respond.
9. Boards should be prepared to genuinely consider the actions recommended by
activists, including changes in board members. Battling activists is costly both
financially and in board and management time (money and time each better
spent on improving the business), so boards should evaluate whether
settlements (or concessions) are the best approach. However, just as reflexive
opposition to activist demands is ill-advised, settlements themselves should be
evaluated with their long-term costs in mind. Adding one or more activist
representatives to the board will almost certainly result in increased time
demands for the board and management for induction and responding to
requests for information, not to mention addressing ongoing activist demands.
10. Engagement with and use of media and increasingly, social media, is an area
calling for experience. Activist campaigns are often waged in large part in public
with a growing reliance on social media. It is crucial that boards have expertise in
this area available to them.
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Many of the above takeaways apply to the everyday business of a company and not just
when a company is facing an approach by an activist. Strong attention to these matters
(amongst others) will not entirely insulate a company from an activist approach but will
put a company in a stronger position to address that approach.
Are shareholder activists the barbarians at the gates or the benefactors of
shareholders? From a survey of activist campaigns over recent years, one would have
to conclude “it depends”. Research indicates that activists’ objectives have been
successfully or partially successfully achieved or that company compromises with
activists have been worked out in more than half of all activist campaigns, with benefits
to the company and its shareholders. Activists have frequently done a great deal of
research and analysis before they approach a target company. Cracker Barrel is an
example of a company that steadfastly resisted the activist campaign and in the
process, generated very substantial benefits for its shareholders, which included the
activist. On the other hand, the RJR Nabisco story (if now quite old) is a prime example
where the dramatic shaking up of the company by the raider resulted in great benefits to
RJR Nabisco’s shareholders.
Many directors who have been engaged by activists will confirm that a serious activist
campaign can be highly stressful and very expensive and diverts Board and senior
management time from business operations. Activists are very well funded and this is
their business model – they “do activism” for a living. The failure by boards to engage
with activists can be a mistake. Apart from the cost to the company and the risk of an
activist being completely successful in an “overturning” strategy, a company
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stonewalling an activist risks missing out on learning or doing something positive about
the company. There is also a risk of an adverse perception in the market that the
company simply did not engage. That may be in stark contrast to the activist, who quite
possibly has already been engaging with the company’s shareholders and potentially,
proxy advisors to convince them of the merits of the activist’s position. The company
manning the ramparts rather than engaging, even if the outcome is a “no thanks” to the
activist, may not only galvanize the activist to go aggressively public but may also get
both shareholders and proxy advisors offside.