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How To Prevent a Shareholder Blowup

Companies should anticipate and respond to shareholder concerns before they come to a head.
Marielle SegarraJune 4, 2013

In February, Greenlight Capital brought a lawsuit against Apple, demanding that it return some of its then-$137 billion in cash holdings to its shareholders. Although the hedge fund dropped the suit in March, its president, David Einhorn, has continued to pressure the tech giant. Apple isn’t the only prominent company that has recently come under fire from activist shareholders; others include Herbalife, Hess, and Transocean.

“If you’re an activist investor, your job is a lot easier now than ever before,” says Michael Robinson, executive vice president at public relations firm Levick. “You have more information and more tools than you ever had. [Public] companies that are in business in 2013 are going to have to deal with these kinds of issues.”

How can a company keep shareholder activism from turning into a full-fledged revolt? For one, it should stay in close communication with its major investors, making sure they understand its strategy and that the company in turn understands their concerns, says Alex Khutorsky, managing director at The Valence Group, an M&A advisory investment bank.

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“When a shareholder activist surfaces, the substance of the critique should rarely be a surprise,” Khutorsky says. “A board and management team should understand where they may be vulnerable to an activist. And if the board is doing its job, it should be meeting quarterly or semiannually with bankers to understand their vulnerabilities.”

Certain financial conditions will raise red flags with shareholders, according to Khutorsky. “Every company is different, but shareholder activists tend to come back to the same themes,” he says. In Apple’s case, the size of its cash holdings was at issue; another company’s red flag might be an asset or business unit that could be worth more if it were sold or spun off. In the latter case, a company should be able to tell shareholders why it is preferable to keep the asset or unit.

“If companies are continually evaluating [their] alternatives, anything a shareholder activist can conjure up in their critique will already have been considered by management and the board,” Khutorsky says. “If it’s already been considered, that same rationale should also be an effective defense against shareholder activists.”

To keep on top of trends, companies should regularly monitor all the tools activist shareholders might use, says Robinson, including digital and social media, traditional media, and analyst reports.

“Watch for people popping up in more than one place with the same message and saying things like, ‘Gee, I really wish I’d received some of that cash,’” Robinson says. “That type of trend analysis would be very helpful as an early warning system.”

Part of that analysis is common sense, Robinson says. “If you’re Apple and your share price is that high and you have that much cash, it’s pretty evident that somebody is going to come after you and say give it back,” he says.

Finance chiefs should play a role in responding to activist shareholders, Robinson says. “They have to be part of the equation, because they know a lot about what the analysts are saying,” he says. “But it takes a cross-functional team to knit this all together. It is something that affects the entire company by definition.”

They should think of the process as risk management. “Part of your enterprise risk management of the company is thinking about things that you hope will never happen,” Robinson says. “It’s like saying, ‘I really hope our backup inventory doesn’t get taken out in an earthquake, but how will we respond if it does’? Or ‘I really hope we don’t have [a blowup with] activist shareholders, but if we do, what are we going to do’?”

Are companies already preparing in this way? “I think it varies,” Khutorsky says. “I think there are some companies that are very good about looking at themselves in a critical way and there are other companies that are in a sense of denial and insulate themselves from a rigorous critique of what they’re doing.”