In today’s environment, no company is immune from challenges of shareholder activists. It’s a challenge that boards must be ready to meet (and sometimes embrace). Activists have likely become a permanent fixture in today’s capital markets, forcing boards to ask themselves some of the following questions: What are the most likely activist investors in a current shareholder base? Where is our company most vulnerable? How do we prepare for an attack from one of our shareholders?
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While activism is a longstanding practice, the growing influence of activist campaigns has grown and gained media attention over the last few years. They have become more sophisticated in their analysis and are now more closely scrutinizing the role and effectiveness of corporate boards, often seeking to gain director control by occupying board seats. Today it’s critical that boards not only think like activist but in some ways be one step ahead of the activist. For years, the National Association of Corporate Directors (NACD) has been educating boards on effective investor engagement and more recently on the preparation for and response to shareholder campaigns.
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The 2016–2017 NACD Public Company Governance Survey found that despite the significant increase in activist activity among both large-cap and small-cap companies, only 20% of respondents pointed to investor activism as a key issue affecting their businesses in the next year, likely signaling a false sense of comfort. Similarly, a 2015 NACD survey indicates that levels of preparedness are inadequate. Only in NACD’s previous survey, 20% of respondents whose companies who were approached by an activist within the prior 12 months, 46% of respondents did not have a plan in place to respond.
It is incumbent upon boards to lead on the front foot and anticipate activist behavior evaluate their own performance and that of the company by looking at their organizations through the lens an activist investor. By understanding the mindset of an activist, directors can prepare a plan of response and lead with confidence.
Although the severity of each activist’s objectives will vary, their ultimate goals can be characterized into the following four areas:
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Improve financial performance through operational changes and/or corporate restructuring;
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Return cash to shareholders through share buybacks or dividends;
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Change corporate policies on social and/or environmental issues; and
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Change governance practices or the composition of the board itself.