When the Activists Attack
The increasingly aggressive and rising level of investor activism leveled against corporations has been both a cause of concern to managements and boards and a sign of greater corporate responsiveness to investor stakeholders. Among the major companies recently targeted are Amgen, Apple, Microsoft, Sony, Hess, P&G, eBay, Transocean, ITW, DuPont, and PepsiCo. Yet even as critics decry such moves as an encouragement to short-termism, advocates contend they can lead to greater corporate effi ..
Why do exploratory meetings with activist investors reveal so little about the investor and so much about CFOs and their colleagues’ fears? If the objective is to increase the value of the business, then finance chiefs should first increase their own probabilities of identifying and welcoming activist investors. That is not usually done with a Politburo handshake and a frosty reception.
The common belief is that activist investors are the only ones with an agenda. That is plain rubbish. CFOs and their colleagues in the management team and the board will have an agenda about any number of things.
Many finance chiefs think that every single strategic growth issue can be addressed by hiring Bain, McKinsey, or a Big Four professional services firm to perform an exhaustive study. It is nothing more than Maslow’s Hammer. Others will begin a discussion with investors about the fastest way to accomplish their growth objectives while balancing their key constituents’ demands for both short and long-term growth as though the answers are cast in stone.
CFOs and their colleagues approach almost any issue with a certain, personal worldview, created by their education, cultural upbringing, successes/failures, experiences, family, associations, and so forth. I see that as quite normal. However, healthy people are flexible, willing to learn, and enhance their ability to apply knowledge to critical organizational issues in concert with the firm’s strategic direction through interactions with a wide array of investors including activists. Not merely hang out with, and offer a warm welcome to, benign investors, who pander to their ego and support their beliefs.
Activist investors find it tough to argue with an entrenched CFOs and their colleagues’ growth agendas. Typically, the management team has a list of points that must be covered, a tight parameter around the growth issues, and a religious adherence to their strategic principles. Sparks often fly out of the meeting room windows as a result of the management team’s stubbornness, although popular opinion often attaches that charge to the activist investor.
Many activist investors look at value creation through a different lens. They challenge the board and management’s widely-held beliefs about business outcomes, alternatives, risks and rewards, and the optimum course of action. They are on balance a force for good, although some of their approaches might feel like riding shotgun with Butch Cassidy and the Sundance Kid.
Look at Sotheby’s, where activist investor Dan Loeb strode into a venerable institution with entrenched beliefs. Loeb has taken on a huge challenge to transform the firm’s future. The situation is indeed grim: Sotheby’s publicly quoted business is engaged in a no-win duel with privately-held Christie’s for market share in an environment of wafer-thin margins and increasing market volatility.
Resistance to Loeb’s immediate ideas created a bonfire of claims and counter-claims. The turnaround is long and painful (the stock is currently trading 50% below July 1, 2015). But the prior management were largely unwilling or, more generously, unable, to chart a profitable growth path beyond tinkering at the edges in a high-stakes poker game they were increasingly losing.
My advice to CFOs at stodgy organizations who yet retain a “growth agenda”: It is a situation demanding admirable rigor and discipline, but rarely one with much fresh air or intellectual heft to see it through. Open your mind to activist investors’ ideas in the opening meeting.
Focus on taking your emotion out of the discussion and use your logic to match their logic. Rationally examine the often hard evidence and strong anecdotal information supporting their thinking. Park your ego at the door and don’t take it personally. If you insist on walking into the meeting desperately seeking validation and wanting to be liked, the chances are you will have nowhere to run when your ego gets whacked.
You might just surprise yourself about how blind you have been by your own convictions of what the future will look like.
James Berkeley is managing director of Ellice Consulting in London.