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 ..
Companies are operating in a very challenging environment today, with turmoil in the global stock markets, weak growth forecasts, geopolitical risks, and other macroeconomic pressures weighing on their managements and boards. Another threat companies face today is shareholder activism.
Shareholder activists are targeting companies of all sizes, in all industries, with all reputations and history. They’re asking about company strategies, performance, and where to unlock shareholder value. But activists don’t only go after weak performance and mismanaged strategies. Often, governance issues are front and center in their target range.
In 2015, 46% of all 656 public actions against U.S. public companies were board related, according to Activist Insight, a research firm. What can a board-related public action mean? It can mean that activists think the board isn’t sufficiently independent of the CEO, that the board has sitting “zombie” directors who serve despite failing to receive majority shareholder support, or that there’s no shareholder-engagement program. It can also mean they are questioning the board’s composition.
Boards today are getting older, and they’re staying in the boardroom. The average age of independent directors in the S&P 500 is now 63, up from 61 a decade ago, according to Spencer Stuart’s 2015 Board Index. And while 73% of S&P 500 boards have a mandatory retirement age, 94% of those set that age at 72 or older.
Meanwhile, the average tenure of S&P 500 boards today is 8.5 years, and one in five have an average tenure of 11 or more years. Only 13 S&P 500 boards have adopted director term limits; of those, none has a term limit of less than 10 years.
Now consider the CEO. The average tenure of CEOs is 7.1 years, so most directors will serve under two CEOs during their terms. When you add the average age of board members to this tenure issue, it’s not a surprise how board “staleness” can fast become an issue for an activist.
Diversity can also be a spark plug issue. Board diversity — or the lack thereof — has been a sticking point for many critics of corporate boards in recent years. The average board is made up of about 11 board members, and maybe one is a woman and another is a minority. When you consider this demographic and the company’s strategy, markets, and customers, it may be an eye-opener to think about whether this board is fit for its role.
When an activist questions the board composition often the first thing that happens is an effort to get board representation for the activist’s forces. And activists have been very successful at this: activist hedge funds acquired 138 board seats in 2015, up from 63 in 2011, according to PwC figures.
So What Can Boards Do?
Before the activists start to circle, directors should remember that they have a number of tools at their own disposal to help reset the board renewal balance. For one, boards can take charge of their own makeup through active and strategic succession planning.
While CEO succession planning is a critical responsibility of the board, it’s equally as important for boards to focus on director succession planning. Boards should plan for their own succession as rigorously. As a part of this planning, it’s important to think about the current state of the board, how long board members have been sitting, and whether there are candidates ready to step in.
It’s also crucial to formally gauge the attributes, expertise, and hard and soft skills needed on the board in today’s complex business environment. Boards should think critically about what director skills the board has and how those skills tie to the company’s overall strategic plan. And they should think about diversity in the broadest sense: not just gender and ethnic diversity, but also diversity of thought, personality, experience, geography, and background.
Boards can do a formal gap analysis to help identify any missing attributes and use a matrix to compare current board members’ skills and experience to those the board determines to be necessary to achieve the strategy. Boards may even consider adding a board seat to get the right mix of skills.
But be careful: Adding a board seat isn’t always the solution. Boards may be able to find the right mix through refreshment. Having a formal board assessment process is a best practice, but it takes real leadership and discipline to address some of the matters that are raised in the process.
Simply having the right board in place doesn’t mean an activist won’t come knocking. But it could mean the conversation will focus on the real issue at hand—shareholder value—and the activist might be more comfortable working with the current board and management team with an eye on the future.
Paula Loop is the leader of PwC’s Center for Board Governance.