This article is a sidebar to Dealing with Problem Directors.
Thanks to the rapid rise in shareholder activism in recent years, activist directors have become a mainstay of publicly held company boardrooms. Just how disruptive—or potentially helpful—that director will be depends on who the activist is, how the director got on the board, “and whether they want to play nice in the sandbox,” says Igor Kirman, partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz.
“My experience is once they get on the board, they usually do give collegiality a go. But in many cases, they have issues.” In part, this is because activist directors have a clear agenda: to make changes to increase the value of the activist’s holdings. To that end, says Kirman, “they will dive deeper into the details than most directors. That creates scrutiny and discipline, but also a lot of work for the CEO and others.”
“what’s even more ruinous are the behind-the-scenes whispers where the activist directors have information and they want to push an agenda that they can’t get done in the boardroom, so they push it to analysts, shareholders or even the media.”
It also creates conflict on the board. While the very public blowups play out in the media, such as the 2013 battle between activist director Bill Ackman and the board of J.C. Penney, “what’s even more ruinous are the behind-the-scenes whispers where the activist directors have information and they want to push an agenda that they can’t get done in the boardroom, so they push it to analysts, shareholders or even the media. That happens often,” says Kirman, adding that confidentiality and conflict of interest are two of the biggest challenges. He advises boards to be explicit with the new director about not speaking to investors, analysts, the media, or others on behalf of the company unless authorized by the board; to adopt a board confidentiality policy; and to be aware of whether the new director is an employee of, or receiving any kind of compensation from, the activist fund.
Perhaps most important, Kirman advises boards to have their eyes open and not to shy away from confrontation if an activist director isn’t following the rules. “Many activists are charming. But there’s often an iron fist inside the velvet glove,” he says. “You’ll only see it when he doesn’t get his way.”