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 ..
If you are reading this, you are likely familiar with the growth of shareholder activism. Once maligned as “bottom feeders” mainly focused on small-caps and micro-caps, activists are now regularly engaged with even the largest public companies, something the financial media hasn’t missed. And although the S&P Activist Interest Index was down 31% in 2015 and that activist funds saw outflows of $1.5 billion in the fourth quarter of 2015, activists nonetheless have total assets of $123 billion under custody.
Activism is a hot topic among investor relations professionals, the counselors, and investor relations officers (IROs) who represent public companies and compose the National Investor Relations Institute’s membership. We’ve had multiple sessions on activism for a number of years at our annual conference, and it’s a popular subject at local NIRI chapter events across the United States and at investor relations conferences outside the country. Activism is a regular subject in our publications, and we recently released new research on public company experiences with activists.
Compared to the results of a study that NIRI conducted on activist investing in 2007, investor relations professionals have seen a huge increase in activist investor shareholders (80% of respondents to a 2015 NIRI survey acknowledged that they had had an activist shareholder at some point in the year compared to 47% in 2007).
In terms of process, the most common scenario is this: the activist never contacts the company before or even after purchasing its stock, does not launch a “campaign” of any sort, and either remains a shareholder or moves out of the stock with no actions taken. Despite the media attention that surrounds contests and proxy battles related to activist investors, the truth is that most frequently companies and their investor relations professionals have neutral or positive interactions with activists. That said, no investor relations professional is eager to see his or her company’s name next to an activist’s in a headline.
Given the nature of investor relations, the engagement of an activist in a company’s stock never can be boiled down to the convenient label of “good” or “bad.” The charge of investor relations professionals is to set up channels for back-and-forth communications among a company, the financial community, and other constituencies. This is a critical component to achieving fair valuation of a companies’ securities.
Based on NIRI members’ collective experience, what do we recommend in terms of preparing for, engaging, and successfully navigating a shareholder activist investment? Here are a few recommendations that essentially can serve as best practices from an investor relations perspective:
Think like an activist. Take a hard, objective look at your company from the perspective of an activist, and understand where your governance practices line up compared with the voting policies of proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis. As much as possible, address operational and governance weaknesses, develop messaging, and proactively communicate your related messaging to shareholders.
Get your story out there early. Maintain a regular, robust shareholder communications program to create a base of sell-side analysts and shareholders that understand your operations and strategy. Explain your capital allocation priorities, since activists often ask companies to use cash reserves for share buybacks. This interaction will prove useful if and when an activist engagement turns negative and a company needs shareholder support for long-term strategy that might run counter to an activist’s campaign.
Have a response plan. Think through your internal response strategy in advance. Have a strong external team of experts ready in the event of escalation that can quickly assess the situation and mobilize a response. Such a team might include an investor-relations counselor, a proxy solicitor, a legal team, public relations/crisis management firms, and investment bankers.
Be ready and responsive. Our data show that 65% of the time when an activist engages with companies, their first engagement is direct contact via a telephone call, an email, a private letter, or a one-on-one meeting. Waste no time in reaching out to activists quickly to build an understanding of the issues that are driving their interest in your company. Over the past decade, activists have become more sophisticated; many have their own legal, PR, and financial advisers and enough resources to wage a public campaign. They expect you to take them seriously and to have an honest exchange of ideas with management and the board. To that end, a stiff-arm approach is a sure way to turn the engagement negative from the start. Engagement is much cheaper than a proxy fight, which, by the way, activists won about 75% of the time in 2014. Fortunately, many activist situations are settled without proxy contests, so be open to ideas that could address an activist’s concerns. That might well spare the company the cost and distraction of a proxy contest.
Jim Cudahy is president and CEO of the National Investor Relations Institute (NIRI).